Kroll Bond Rating Agency assigned preliminary ratings to six classes of Invitation Homes 2014-SFR1 mortgage pass-through certificates.

IH 2014-SFR1 is a single-family rental securitization that will be collateralized by a $1 billion loan secured by mortgages on 6,537 income-producing single-family homes.

This is Invitation Homes’ second securitization.

The loan backing the securitization will be a non-recourse, first lien, floating rate mortgage loan originated by German American Capital Corporation on the securitization closing date and funded with proceeds of the sale of the certificates.

The floating rate loan will require interest-only payments and have a two-year term with three 12-month extension options. The underlying properties are one to four unit residential properties located in ten states, with the top three representing 70% of the portfolio: Florida (32.0%), California (26.8%), and Arizona (10.8%).

The top three MSAs represent 30%, and include Phoenix, Ariz. (10.8%), Sacramento, Calif. (10.0%) and Atlanta, Ga. (9.2%).

The portfolio is comprised primarily of homes with three or more bedrooms, two or more bathrooms and an average estimated square footage of approximately 1,788 square feet.

“Large-scale institutional ownership and management of SFRs is a fairly new business model and securitizations of these assets in the U.S. are still evolving,” Kroll’s report stated. “While this is the fourth transaction of its kind, and the second issued by Invitation Homes, performance data for the sector is limited. KBRA accounts for the limited historical data by utilizing relevant elements of its commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS) methodologies, and by employing conservative assumptions with respect to defaults and loss severities in its rating analysis, as described herein.”

There are also two distinct differences related to tenancy in the IH 2014-SFR1 as compared to the prior SFR transactions, Kroll said.

For starters, all three prior SFR deals had fully occupied collateral at the time of the related securitization’s closing date; however, 5.1% of the properties in the IH 2014-SFR1 portfolio are currently vacant. Vacant homes create a burden on the borrower because these homes generate no income to offset fixed expenses such as real estate taxes, insurance and HOA fees, if applicable. However, KBRA’s analysis assumes that the portfolio will operate with some level of ongoing vacancy, which is typical for income-producing commercial real estate, including multifamily. In performing its analysis, KBRA applied a 10% vacancy rate assumption to the in-place gross revenue generated by each property, which is approximately double the actual vacancy rate of the portfolio.

Secondly, in all prior SFR transactions, each tenant was required to satisfy the requirements for an “Eligible Tenant”. The concept related to tenant quality and the criteria included, in the case of IH 2013-SFR1, the satisfaction of a minimum rent-to-income ratio and confirmation that the tenant was not subject to a current bankruptcy action prior to the execution of the lease. Failure to comply with the eligible tenant requirement would cause the related property to become a “disqualified property” that must be removed from the collateral through prepayment or substitution (unless the borrower deposited 100% of the allocated loan amount for such property in a reserve account).

“In the current transaction, the eligible tenant concept was removed; however, the property manager continues to employ a screening process that includes a review of credit and income, rental history and prior evictions and a background check for criminal activity,” the report states.

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