Progress Residential is refinancing its first securitization of single-family rental properties.
The deal, Progress Residential 2016- SFR1, is backed by a single, $657.3 million floating-rate loan secured by mortgages on 4,068 homes, the bulk of which (70.2%) were previously securitized in a 2014 transaction, according to Kroll Bond Rating Agency.
Progress will use the proceeds from the underlying loan to retire Progress 2014-SFR1, which will be the first single-family rental deal to pay-off in full. Most deals in this asset class are backed by loans with initial two-year terms that can be extended several times. Other sponsors have chosen to extend the terms of the loans as the come due.
Refinancing allows Progress, founded by former Goldman Sachs partner Donald Mullen, Jr., to cash out on additional equity. The 2,762 homes that were initially securitized in the 2014 transaction had an aggregate value, as measured by broker price opinions, of $549 million. Last month, the issuer obtained updated third-party broker price opinions on the rollover properties, which, in total, had increased in value by $58.5 million, or 10.6%, to $607.5 million.
In its presale report, Kroll noted that the vacancy rate on the properties has remained stable at around 4.9% since securitization, which it considers a credit positive. However, cashing out on the additional equity results in a new transaction that is more highly leveraged, with a loan-to-value (LTV) ratio of 76%, up from 73.7% from the initial securitization.
This is higher than the average LTV of 73.3% for the six single-family rental securitizations issued during the past 12 months, and is also higher than the average LTV (72.9%) for all 24 of the transactions issued to date, according to Kroll.
The rating agency also pointed to the relative lack of geographic diversity in the portfolio as a potential concern.
Progress Residential 2016- SFR1 will issue eight classes of certificates, six of which are entitled to monthly distributions of interest and principal, one principal-only class, and the remaining class is a residual interest. Kroll expects to assign an ‘AAA’ to the senior tranche.
Although there have been 24 single-borrower SFR securitizations to date, they are seasoned, on average, only 17 months. As such, long-term credit performance data spanning multiple economic cycles is not available for the sector.
As of March 31, 2016, Progress had invested approximately $2.9 billion in its portfolio of more than 17,000 homes. The portfolio is comprised exclusively of single-family homes located in 26 markets across 11 states, with the top-three markets consisting of Atlanta, Phoenix, and Tampa.
Progress will have four securitizations outstanding with an aggregate principal balance of $2.3 billion.
Krol noted that the two floating-rate loans each have a fully extended term of five years and each of the two fixed-rate loans has a term of five years, all of which will come due between February 2020 and September 2021. “This concentrated debt maturity profile may result in increased financial stress for the company,” it noted.