Starwood Waypoint’s next SFR deal backed by older homes

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Starwood Waypoint Homes’ seventh single-family rental securitization is backed by the oldest properties to date — but also features the highest rents.

The $771.2 million transaction, dubbed Starwood Waypoint Homes 2017-1, includes single-loans secured by the income generated from the monthly leases for 4,443 homes in 18 states. The two-year loan with multiple options pays only interest of Libor plus 161 basis points, and no principal, for its entire term, according to Kroll Bond Rating Agency.

A total of six tranches of notes will be issued; the senior, $408.1 million Class A notes carry preliminary triple-A ratings from Kroll, Moody’s Investors Service and Morningstar Credit Services.

The deal is Starwood Waypoint’s first of the year, and arrives just weeks after the company announced a merger with Blackstone Group-owned Invitation Homes, the largest institutional landlord for single-family residences in the nation. The combined firms (both currently structured as real estate investment trusts) will manage 82,000 homes and operate under the Invitation (NYSE: INVH) brand; the resulting firm will have a net book value of nearly $11 billion when it is scheduled to close at year’s end.

Starwood Waypoint (NYSE: SFR) itself was built up through a January 2016 merger between Starwood Waypoint Residential Trust and Colony American Homes.

The homes included in SWH 2017-1 have an average age of 30 years, well above the average 21 years for other KBRA-rated SFR transactions. (Other SWH transactions had an average age of 26 years, per the agency). However, the weighted average monthly rent for the portfolio is $1,778, the highest among KBRA’s rated deals since January 2015 which averaged $1,505 monthly.

Both figures are subject to change as the result of a new feature for the deal: an allowance to make voluntary substitutions for up to 5% of the homes in the existing pool.

The portfolio of homes includes 1,787 properties that were rolled over from Starwood’s 2014-1 transaction that was fully repaid in July.

The $771.2 million loan, originated and sold by Deutsche Bank subsidiary German American Capital Corp., represents 68.5% of the aggregate broker price opinion values of the underlying properties, making it one of the lowest-leveraged-rated SFRs to hit the market. The homes have an aggregate value of $1.13 billion, after a collective purchase price of $994.2 million. The figure does not including nearly $40 million in rehabilitation and other related costs to the homes, most of which are concentrated in California, Florida and Texas.

(BPO valuations are currently being investigated by the Securities and Exchange Commission over concerns they could be overinflated by assessors hired by private-equity sponsors.)

KBRA states that 31 single-borrower SFR securitizations have occurred since November 2013, with eight having been repaid through refinancing or other sources. While still a fledgling asset class, none of the 23 outstanding securitizations have experienced a delinquency or default of the underlying loans in the deals — which ratings agency warn could result in a problematic resolution.

“Due to the loan and related collateral being of a customized nature, there may be a limited universe of buyers willing to purchase the loan in a distressed situation, and substantial workout negotiations may be required to restructure the loan,” the ratings agency’s presale report states.

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