Multi-borrower single-family rental securitizations officially arrive

FirstKey Lending and B2R Mortgage both offering new asset class

[Correction: A previous version of this article incorrectly identified the amount of AAA ratings awarded to B2R Mortgage Trust 2015-1. The article is now updated with the correct information.]

It appears that a new asset class is quickly developing, borne out of the single-family rental asset class, which itself is less than two years old.

Speaking at a panel at ABS East in September 2014, Ryan Stark, managing director at Deutsche Bank, predicated that the single-family rental asset class would morph over time, with several forms of securitizations made available for investors.

Stark said he anticipates the vast majority of the unsecuritized homes to be securitized in the coming years in one way or another. “Over time, you’ll probably see a couple different flavors (of SFR mortgage bonds), where you see the large loans pooled together and the small ones pooled together,” he said in September.

Two new offerings from FirstKey Lending and B2R Finance represent one of those new flavors, multi-borrower single-family rental securitizations.

B2R’s offering was first out of the gate. Last week, details of B2R’s offering began to leak out. The transaction was expected to consist of $230 million aggregate principal balance pass-through certificates rated by at least two rating agencies.

The pool consists of 144 loans secured by 3,160 properties; including single-family residential properties, two- to four-unit properties, condominium properties, townhomes, multifamily properties and mixed-use properties.

On average, the loans are cross-collateralized by 22 properties. The 10 largest loans represent 37.1% of the pool, which represents greater loan diversity than recent commercial mortgage-backed securitization transactions and comparable diversity to 2014 Freddie Mac transactions, Fitch Ratings said in its newly released presale report.

“B2R is pioneering the first securitization of residential investor mortgages in the U.S. to grow its platform, increase the amount of capital available to our clients and enable us to continue our leadership position in growing the asset class,” Jason Hogg, B2R Finance’s CEO, said last week.

Additionally, Kroll Bond Rating Agency published a presale report on FirstKey Lending’s first multi-borrower single-family rental securitzation, called FirstKey Lending 2015-SFR1.

The FirstKey offering will be collateralized by 16 loans secured by mortgages on 3,628 single-family, 2-4 family, and multifamily rental properties and carries a total aggregate principal balance of $240.79 million.

Both offerings received AAA ratings for the Class A tranche. For B2R Mortgage Trust 2015-1, Fitch awarded $112.838 million in AAA ratings to its Class A-1 tranche, which features a 33.75% credit enhancement. Fitch also awarded $39.23 million in AAA ratings to the A-2 tranche, which also features a 33.75% credit enhancement.

For FirstKey Lending 2015-SFR1, KBRA awarded $149.892 million in AAA ratings to its Class A tranche, which features a 37.75% credit enhancement.

In its presale report, Fitch cites B2R’s origination practices as a positive.

“Although established as a relatively new lending platform in 2013, many of B2R’s origination practices adhere to the best practices identified by Fitch,” Fitch wrote in its report. “Some of B2R’s practices include: property-oriented cash flow underwriting; market analysis highlighting demographic trends; review of third-party appraisal reports; funded reserves for taxes, insurance and capital expenditures; and verification of tenant lease terms, property taxes, and insurance coverage.”

Fitch also notes the structure of B2R’s deal and its methodology in rating it.

“Single-family residences make up the largest property type in the pool at 75.8%, followed by two- to four-unit residences at 12.7%, multifamily at 5.8%, condominiums at 4.2%, and townhomes at 1.5%,” Fitch wrote. “Given their income-producing residential nature, all of the properties in this pool were classified as multifamily for modeling purposes. However, Fitch considered similar treatment for single family, condominiums, and townhomes when assessing the different loan collateral attributes.”

For the FirstKey offering, the five largest loans, American Homes 4 Rent (21.3%), Gorelick (13.3%), Lafayette (11.5%), AVR (10.2%), and Gorelick 2 (7.9%), represent 64.2% of the initial pool balance, KBRA noted in its report.

“The loans are secured by the related borrower’s fee simple interests in 3,628 single-family rental properties and each loan has a five-year term,” KBRA wrote. “The transaction collateral is predominantly comprised of amortizing balloon loans (14 loans, 94.3%). Four of these loans (37.3%) amortize on a monthly basis in an amount equivalent to one percent per annum of the loan’s initial principal balance, while the remaining 10 such loans amortize on 22 to 30-year schedules. The balance of the pool consists of interest-only (IO) loans (2 loans, 5.6%).”

KBRA also noted the neophyte nature of the asset class.

“Although there have been 16 single borrower SFR securitizations, there has been limited seasoning of the transactions and the sector lacks long-term credit performance data,” KBRA wrote. “Furthermore, no information is available for multi-borrower SFR transactions secured by multiple loans.”

According to KBRA’s report, FirstKey Lending 2015-SFR1 has a weighted average loan-to-value ratio of 63.1% based on the portfolio’s aggregate broker price opinion value, which is lower than the LTVs for the 17 previous single borrower SFR securitizations, which ranged from 65.0% to 78.9%, with an average of 72.7%.

In addition, FirstKey Lending 2015-SFR1’s LTV is lower than the appraisal LTVs for the last 37 KBRA-rated CMBS conduit and 18 RMBS transactions, KBRA added.

“The weighted average appraisal LTVs in those transactions averaged 65.8% and 68.4%, respectively, and ranged from 61.2% to 69.2%, and 55.9% to 73.7%, respectively,” KBRA said. “Lower leverage generally implies greater borrower equity, lower likelihood of default, and lower overall loss severity following an event of default.”

FirstKey is a subsidiary of FirstKey Holdings, which is indirectly majority-owned by funds managed by Cerberus Capital Management.

KBRA cites FirstKey’s corporate structure as a strength.

“Cerberus has significant experience investing in residential mortgage-backed securities and related investments. Furthermore, since inception, FirstKey has originated approximately $599 million of single-family rental loans to approximately 99 borrowers,” KBRA noted.

“It operates with a team of over 40 employees in four offices across two states, and the senior management team has an average of approximately 15 years of relevant experience,” KBRA added. “KBRA met with FirstKey’s management team on several occasions, and believes it has adequate experience and staffing to originate loans within the guidelines of its policies and procedures in this new and rapidly evolving sector.”

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