After launching its first single-family rental securitization in September 2014, Progress Residential is prepping its second such offering, which will be larger than the company’s first securitzation.
Progress Residential 2015-SFR1 is collateralized by a $563 million loan secured by first priority mortgages on 4,028 income-producing single-family homes. The company’s first offering was a $473.4 million deal secured by first priority of mortgages on 3,142 income-producing single-family rental properties.
The current loan is a floating rate loan that will require interest-only payments and have a two-year initial term with three 12-month extension options.
Kroll Bond Rating Agency and Morningstar each weighed in on the securitization and both warded $286.53 million in AAA ratings to the offering’s Class A tranche.
In its presale report, KBRA noted the asset class’ limited performance history as a potential concern, as this offering is just the 15th single-family rental securitization and Progress Residential’s second.
KBRA also noted the limited operating history of Progress Residential as a drawback of the deal. “The company is in the process of internalizing the property management functions,” KBRA said in its report. “As of December 31, 2014, approximately 50.0% of the company’s total portfolio is internally managed, while the remaining 50.0% is managed by third-parties. In cases where external managers are utilized, their scope of responsibility is limited. The firm’s internal managers are responsible for day-to-day property management services, including determining rents, lease terms, and marketing the homes in the portfolio, while local property managers are responsible for executing these strategies.”
In its presale report, Morningstar suggested that this transition could lead to some issues. “As Progress expands its internal property management footprint via its Haven National subsidiary, there is the opportunity for operational disruptions as property managers currently working for Progress Residential opt out of Progress’ acquisition strategy to remain an independent entity,” Morningstar said.
Progress 2015-SFR1 will be will be the tenth of 15 SFR transactions to be collateralized by an interest-only loan. “The remaining five securitizations are each backed by a loan that provides for monthly amortization,” KBRA said. “All else being equal, KBRA believes that IO loans are riskier than amortizing loans, which provide for natural deleveraging over the loan term that results in lower risk of maturity default. In addition, should an IO loan default later in its term, it will experience a higher loss given default relative to an amortizing loan owing to its higher outstanding principal balance.”
On the positive side, there are no upfront vacancies or delinquencies in the current pool, and there are also no assumed tenants. “All of these are strong credit attributes that contribute towards a stable stream of cash flows to the trust,” Morningstar said. “The Progress 2015-SFR1 transaction has 41 tenants on month-to-month leases, which is approximately 1% of the properties in the transaction.”
Also in the positive column is the age and size of the underlying properties. “The homes underlying Progress 2015-SFR1, on average, are newer builds and have greater square footage than those included in many of the prior SFR transactions,” KBRA said.
“The subject pool has an average home age of approximately 13 years,” KBRA added. “It is worth noting that only 137 properties were built before 1990, while 259 of the homes were constructed in 2012 or thereafter. The remaining SFR transactions were collateralized by properties with average home ages that ranged from approximately 12 to 33 years, with an average age of 22 years.”
The average size of the properties in the subject transaction is 1,978 square feet, which is the fourth largest compared to the prior securitizations. Home sizes for all previous transactions ranged from 1,698 square feet to 2,045 square feet, with an average of 1,871 square feet. According to KBRA’s research, the securitization with home ages and square footage most similar to Progress 2015-SFR1 is Progress’ first offering.
The properties are single-family homes located in ten states, with the three largest state exposures representing 58.4% of the aggregate broker price opinion value of the portfolio: Florida (26.5%), Georgia (16.2%), and Arizona (15.7%).