Fitch Ratings, which has had a hard time getting comfortable with the risk in the single-family rental securitizations, has assigned top marks to a new deal from B2R Finance.
B2R’s transaction is backed by numerous loans to landlords with a longer operating history than previous deals, which have all been backed by a single loan to the owner of thousands of houses acquired in the recent past. The loans being securitized by B2R are also more geographically diverse than those of prior deals, which have been concentrated in a handful of states and metro areas.
As a result, Fitch has lifted its A’ cap on the asset class, assigned an AAA’ rating to the senior class A notes to be issued by B2R Finance 2015-1.
"Certain multi-borrower single family rental transactions have features and characteristics that mitigate some of the risks present in early single-borrower SFR deals," Fitch managing director Dan Chambers said in an e-mail.
In its presale report, the rating agency notes that B2R Finance’s deal provides a deeper level of historical investor loan performance relative to single-borrower deals. Single family rentals, in and of themselves, aren’t a new asset class. What’s new is the access to the capital markets and the institutional sponsorship common in single borrower, SFR transactions.
However, borrowers in the B2R transaction are smaller investors and more representative of “the majority of SFR ownership as institutional sponsorship largely emerged post financial crisis,” according to Fitch.
According to figures reported by Keefe, Bruyette and Wood, which are based on the 2010 Census (the most recent data available), single-family rental inventory totaled 13.8 million units, of which institutional owners represent less than 1%.
Smaller investors, representative of the B2R Finance transaction, because they've been in the market longer, are able to provide reasonable historical context for the performance of smaller single family rentals through economic cycles.
Fitch is also more comfortable with the leverage in B2R Finance's deal. A common measure of leverage and refinancing capability for income-producing real estate is debt yield. This is a measure of a loan's maximum interest rate compared with its cash flow. A low debt yield can negatively impact a borrower’s ability to refinance at maturity, particularly in less liquid, higher interest rate environments.
Fitch calculates the debt yield on B2R Finance’s 2015-1 at 8.7%.
First Key Lending is also marketing a multi-borrower deal this week that will be rated by Kroll Bond Ratings Agency; this deal has a debt yield of 7.1%.
By comparison, Kroll calculates the debt yield for the most recent single-borrower, single-family rental securitization, Invitation Homes 2015-SFR2, at 4.4%. The multi-borrower single-family rental debt yields are more comparable to those of Freddie Mac K Series transactions, which have debt yields of approximately 9% (for the 12 months through March 2015), according to Fitch.
Another improvement in the multi-borrower structure is increased diversity of both loans and borrowers. B2R Finance’s collateral pool consists of 144 loans secured by 3,160 properties; on average, loans are cross-collateralized by 22 properties. The top three states represent 41% of the pool relative to the average of 68% for singleborrower, SFR. Similarly, the top three MSAs represent 28% of the pool relative to the average of 43% for single-borrower SFR.
By contrast, institutional buyers behind the single borrower, SFR deals tend to concentrate their investments in a handful of states and metropolitan statistical areas (MSAs), which, make the transactions “highly vulnerable to unknown variables that could potentially impact the cash flows and yields,” according to a October 2013 Fitch report.
"Single-family rental transactions that Fitch will consider for 'AAA' ratings will likely have the benefits of lower leverage, borrower diversity, and relevant proxy data," said Chambers.