Tricon American Homes joins burgeoning single-family rental securitization market

Initial offering receives AAA ratings from Morningstar, KBRA

There’s a new face in the single-family rental securitization market – Tricon American Homes.

Tricon American is a wholly owned subsidiary of Tricon Capital Group, which is publicly traded on the Toronto Stock Exchange under the symbol TCN. According to a report from Kroll Bond Rating Agency, Tricon Capital was founded in 1988 and completed its initial public offering in May 2010.

Kroll notes that Tricon Capital has “substantial experience in the residential sector in North America,” and began acquiring U.S.-based single-family rentals in April 2012.

According to Kroll’s report, Tricon American focuses on the acquisition, renovation, leasing, and management of single-family rental homes for rental income and long-term capital appreciation.

The firm has invested more than $700 million in its portfolio of approximately 6,400 homes, with 1,385 of the properties acquired via a bulk purchase completed on April 15, 2015, according to Kroll’s report.

Now, Tricon American is preparing to launch its first securitization backed by single-family rental homes.

Tricon American Homes 2015-SFR1 will be the 18th single-borrower single-family rental securitization since Invitation Homes launched the first REO-to-rental securitization in October 2013.

TAH 2015-SFR1 will be collateralized by a single $380.8 million loan secured by mortgages on 3,509 income-producing single-family homes.

Both Kroll and Morningstar issued presale reports on TAH 2015-SFR1, and both issued AAA ratings to the offering’s $170.532 million Class A tranche.

Kroll cites the deal’s structure as a potential concern. “TAH 2015-SFR1 will be the 12th of 18 single-borrower SFR transactions to be collateralized by an interest-only loan,” Kroll said in its presale.

“The remaining six deals were each collateralized by a loan that provides for monthly amortization,” Kroll added. “All else being equal, IO loans are riskier than amortizing loans, which provide for natural deleveraging over the loan term that result in lower risk of maturity default. Further, should an IO loan default later in its loan term, it will experience a higher loss given default than an amortizing loan due to its higher outstanding principal balance.”

Morningstar also cited the deal’s higher concentration of month-to-month leases as a potential concern as well. “High concentration of month-to-month, or MTM, leases: 366 properties, or 13.7% of the properties is currently leased on a MTM basis,” Morningstar said in its report.

“Residents who do not renew their leases are generally allowed to move to an MTM lease for an additional premium of $100,” Morningstar continued. “The proportion of MTM properties within the current pool is higher than previous SFR transactions. A high proportion of MTM leases causes unpredictability in the rental cash flow streams. In order to mitigate this concern, Morningstar increased its vacancy assumption for the MTM leases. Also, 71 of these MTM properties are carry-over tenants.”

According to Morningstar’s data, 60.5% of the portfolio is concentrated in three states: California (25.7%), Florida (18.6%) and Nevada (16.2%). The average cost basis per property post renovation is $127,550 and the average current BPO value is $147,268. The average age of the properties is roughly 35 years old. The majority of the properties have three or more bedrooms, Morningstar said in its report.

Kroll cites the amount that Tricon American spent per property as a positive of the deal.

“Single-family homes that are vacant for extended periods of time or occupied by borrowers in financial distress are often subject to deferred maintenance and suffer occasional vandalism,” Kroll said. “In the subject portfolio, TAH has invested an average of $22,957 per home on rehabilitation in addition to the purchase price. The rehabilitation costs equate to an additional 23.1% investment, relative to the purchase price. This percentage is the highest compared to previous securitizations, which averaged 12.6%.”

Kroll noted the age of the properties as a reason why the renovations were so costly. “The underlying properties are older builds and have less square footage compared to previous transactions,” Kroll said. “The average property size for TAH 2015-SFR1 is 1,535 square feet, while the average square footage for 17 previous securitizations ranged from 1,698 square feet to 2,045 square feet, with an average of 1,884 square feet. All else being equal, KBRA generally views smaller, older homes as being less marketable than larger, newer homes in the event of a default.”

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