The third-ever securitization of single family rental properties is backed by newer properties and has a higher debt service coverage than the first two deals.
American Home 4 Rent's $482.7 million deal is being rated by Kroll Bond Ratings Agency, Morningstar and Moody's Investors Service, all of which assigned triple-A ratings to the senior tranche.
It follows on the heels of a deal that Colony American Homes completed in April and one from Invitation Homes, a unit of the Blackstone Group, in November 2013.
The three deals have similar capital structures — each deal is backed by a single loan secured by both the mortgages on a pool of rental properties and a pledge of 100% of the equity in the borrower. In the case of American Homes 4 Rent 2014-SFR1, this loan has a two-year term and three 12-month extension options. It is secured by 3,871 single-family homes located in five states: in five states: Florida (30.2%), Texas (23.7%), Georgia (18.5%), Arizona (15.8%) and Nevada (11.8%).
Tranching of the notes issued by the three deals is also similar.
However the loan underlying the American Homes 4 Rent deal pays Libor plus 25 basis points, giving it a debt service coverage ratio of 2.62x, as calculated by KBRA. That compares favorably with 2.10x for Colony American Homes’ deal and 1.60x for the Invitation Homes deal. The better debt service coverage means that there is a lower risk of default risk in the current deal compared with the last two single family rental securitizations.
KBRA noted in the presale report that the coverage levels for all three deals are higher than typical debt service coverage of multifamily fixed-rate loans in KBRA-rated Freddie Mac K-series and CMBS transactions in the last 12 months, which have averaged at approximately 1.50x.
However, American Homes 4 Rent bought an interest-rate cap for the initial period of the loan to ensure that the trust has sufficient cash to pay the bondholders should Libor increase. If the deal is extended, future extensions also require the purchase of an interest-rate cap. With a Libor cap, the debt service coverage in the transaction “are much lower at 1.20x, and in line with previous SFR (single family rental) securitizations,” the presale report states.
The loan pool in the latest deal also generates higher debt yield. The issuer debt yield for the underlying loan in the American Homes 4 Rent transaction is 7.9%.; debt yield in the least two transactions average at 6.0% and 4.9%, respectively for CAH and Invitation Homes.
There is another difference that contributes to better cash flow projections: the homes backing American Homes 4 Rent’s securitization are larger than those backing the first two transactions. The average property size for this transaction is 2,026 square feet, which is significantly greater than in IH 2013-SFR1 (1,698 square feet) and CAH 2014-SFR1 (1,807 square feet). Larger home sizes appeal to a broader segment of potential reters, which should enhance the marketability of the assets.
The homes in the American Homes 4 Rent pool are also newer, with the weighted average age of 12 years, compared with 30 years for IH 2013-SFR1 and 28 years for CAH 2014-SFR1.
“These are larger homes so the issuer can potentially charge more rent, and all else being equal if there are two home sitting next to each other, a renter will likely be willing to pay more rent for the newer home. Newer homes may also translate into lower cost of maintenance on an ongoing basis,” said Nitin Bhasin, CFA, managing director at KBRA. “Both combined can translate to higher net cashflow.”
Properties backing rental securitizations are valued via broker price opinions (BPOs), which essentially represent the opinion of a real estate broker and work in the both the market value of the home and the expenditures of rehabilitating a property. The BPO values of the AH4R 2014-SFR1 portfolio reflected an average appreciation of 45% from the purchase price. The average BPO in AH4R 2014-SFR1 is approximately $178,141, which is lower than in IH 2013-SFR1 ($199,205) and in Colony American Homes’ 2014-SFR1 ($215,581).
The BPO appraisals are connected to the market value of the home and not the amount of rent, explained Michele Patterson, senior director at KBRA. “The BPO value is an estimate of what you may be able to sell the property for,” said Patterson. “These are single-family homes. If they are going to be sold they aren’t necessarily going to be sold to investors but possibly home buyers.”
Seven classes of certificates will be issued, six of which are entitled to principal and interest and one of which is a residual class.
The graph below shows how the deal was tranched and rated by KBRA.