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SFR deal activity remains active despite COVID-related rent worries

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Far from being slowed by COVID-19, single-family rental securitizations have gained momentum over the past month as that segment of the housing sector maintains stable cash flows plus low vacancy and delinquency rates.

This week, Tricon American Homes launched plans to securitize a new six-year, $601.4 million commercial mortgage that itself is backed by a portfolio of 3,540 leased homes being financed through the loan.

Tricon American Homes 2020-SFR1 is the fifth such SFR transaction since mid-May, following a two-month drought of deals during the onset of the novel coronavirus outbreak in the U.S. and its subsequent macroeconomic fallout.

So far in 2020, these securities offerings from institutional owners of single-family rental housing have amounted to $2.4 billion across seven priced deals (excluding Tricon) and are outpacing 2019's deal volume when a dozen SFR asset-backed transactions closed totaling $3.92 billion, according to data from road-show firm Finsight.

SFR MBS sponsors have continued to bundle together deals amid continued high rates of current-pay lease contracts, and despite the economic tremors in rising unemployment levels that have resulted in rising worries over short-term tenant and homeowner delinquencies in rents and mortgages.

One partial benefit to SFRs was early May's sharp drop in for-sale housing listings, spawning higher rental demand from would-be home buyers unable, or unwilling, to take on mortgage obligations as COVID-19 began its spread across the U.S. (Although the increase in average home rental prices in April was the smallest month-over-month surge since 2017, according to Zillow, it still represented a 2.9% bump from March.)

Tricon 2020-SFR1 is Tricon's first asset-backed offering of 2020, and the sixth since 2015 for the affiliate of Toronto-based Triton Capital. Tricon's loan is being syndicated via Deutsche Bank, BofA Securities and Morgan Stanley.

Tricon reports only 1.6% of the tenants (by property count) in its pool are more than 30 days behind on contractual rent over 30 days, a figure that potentially includes a small portion of renters who have enrolled in TAH’s recessionary relief programs. According to a research note from Deutsche, rent collections in April and May were between 95%-97% for management companies of single-family rentals such as Tricon, American Homes 4 Rent and Invitation Homes.

The new Tricon transaction features housing stock that Tricon (which has plans to be renamed Tricon Residential) has largely acquired over the past year, with an average broker price opinion of $215,635 per house — among the highest level of any prior Tricon securitized portfolio. The homes are younger than those Tricon has historically invested in (average age of 16 years) and have an estimated annual rental cash flow of $26 million based on average monthly rents of $1,585, according to Kroll Bond Rating Agency.

Kroll estimates a debt yield of 8.4% for the Tricon 2020-SFR1 deal.

The homes are managed by Tricon, but the properties are owned through a joint venture involving Tricon, the Teacher Retirement System of Texas and the government of Singapore’s sovereign wealth fund. The residential properties included in the pool are primarily in Tennessee, Georgia and Texas, fitting with the joint venture’s strategy to invest in homes outside of the West Coast region.

About 6.3% of the properties were vacant as of the cutoff date for inclusion in the pool, according to Kroll.

Like Tricon American’s last several securitizations, the new transaction permits the issuer to substitute up to 10% of the underlying homes by property BPO value (and 5% by property count), as subject to certain conditions.

The transaction itself involves the issuance of seven classes of senior and junior pass-through notes representing a principal component of the loan — the largest being a $267.9 million Class A senior tranche with preliminary AAA ratings from Kroll.

Kroll estimates a debt-service-coverage ratio of 1.64x for the transaction, and a loan-to-adjusted BPO value of 88%.

A primary risk for the transaction is the six-year loan term that exposes investors to long-term potential disruptions in the nascent single-family rental market. Last September, Kroll affirmed the ratings of four of Tricon’s seasoned SFR portfolios issued between 2016 and 2018, noting the deals have successfully deleveraged because of the rising prices of the underlying collateral.

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