Colony American Homes has returned to the securitization market with a second deal backed by single-family rental homes.
The issuer first came to market with a deal backed by the asset class in March. The current deal, Colony American Home 2014-2, will offer $558.5 million of securities that are backed by a single loan secured by a pool of 3,727 single-family rental properties.
J.P Morgan and Credit Suisse are the lead managers on the deal.
Morningstar and Kroll Bond Ratings assigned preliminary ratings to the six tranches to be issued from the trust. The $291 million, class A notes are rated AAA’/ AAA’; the $62 million class B notes are rated AA+’/ AA+’; the $50.9 million class C notes are rated A+’/ A’; the $47.8 million class D notes are rated BBB+’/ BBB+’; the $85 million class E notes are rated BBB-/ BBB-’; and the $21.5 million class F notes are rated BB+’/ BB+’.
The deal is backed by a floating rate, interest-only, loan that has a two-year term with three 12-month extension options.
The first three SFR securitizations issued from November 2013 to May 2014 (including Colony’s first deal) were collateralized by amortizing loans. CAH 2014-2 is similar to the most recent SFR securitization, Invitation Homes (IH) 2014-SFR1, in that it is collateralized by a loan that requires interest only payments throughout its term, according to a KBRA presale report.
Interest-only loans tend to be riskier than amortizing loans, because they don’t deleverage over the life of the loan. Amortizing loans on the other hand provide for “natural deleveraging over the loan term that results in lower risk of maturity default,” explained KBRA. In the event of a default, interest only loans also will experience a higher loss given default relative to an amortizing loan because of its higher principal balance.
Colony also removed its cap on the aggregate percentage of “eligible tenants” (defined as tenants who pay no more than 40% of their income in rent) in the latest transaction. The CAH 2014-1 transaction required 95% of the aggregate number of tenants to satisfy the 40% rent-to-income ratio test.
The underlying properties are one- to four-unit homes located in seven states, with the top three states representing 73% of the portfolio (California (33.0%), Florida (27.2%), and Georgia (12.6%).
According to the Morningstar presale report, the average cost basis per property is $196,499 and the average current value, as determined by a broker price opinion, is $214,076. The average age of the properties is approximately 24 years and the majority of the properties have three or more bedrooms (96.1%).
Since 1991, Colony has invested approximately $54 billion in various investments and currently has about $20 billion of real estate assets under management. It owns over 16,700 properties across nine different states as of May 31, 2014.