Progress Residential’s third single-family rental securitization is getting ready to hit the market, which will be collateralized by a $438.7 million loan secured by first priority mortgages on 3,317 income-producing single-family homes.
The company announced its first single-family rental securitization in September 2014, and then a second in January of this year.
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, while the second one was collateralized by a $563 million loan secured by first priority mortgages on 4,028 income-producing single-family homes.
Progress 2015-SFR2 will be the 19th single-borrower SFR securitization, and the third to be issued by Progress.
The underlying single-family residential properties are located in or near 21 Core Based Statistical Areas across nine states. The top three states represent 63% of the portfolio and include Florida (36.2%), Georgia (14%) and North Carolina (12.8%).
Kroll Bond Rating Agency and Morningstar each weighed in on the securitization and both awarded $229.94 million in AAA ratings to the offering’s Class A tranche.
One concern according to KBRA’s presale is that large-scale institutional ownership and management of SFR properties is a relatively new business model and U.S. securitization structures of the assets are still evolving.
“While Progress 2015-SFR2 will be the 19th single-borrower SFR transaction issued since November 2013 and the third to be issued by Progress, 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 utilizing stressed assumptions with respect to defaults and loss severities in its rating analysis, as described herein,” the KBRA report stated.
Morningstar’s presale report created a list of the bulls and bears case for the securitization.
The bulls say:
- Actual gross rents are close to market rents.
- Gross rental yield measured by gross potential rent / issuer BPO value is 9.2%. Gross rental yield using Morningstar’s annual gross potential rent/ issuer BPO value is 8.5%. Gross rental yield is higher than some of the previous single-family rental transactions. This trend holds even within similar MSAs.
- Higher expected renewal rates compared to multifamily rental properties. As of Q2 2014, Progress had a tenant retention rate of 82% on their entire portfolio. This is substantially higher than Progress’ 73.5% own underwritten assumption and Morningstar’s 60.0% conservative assumption.
- BPO value is provided by GRC, who is ranked ‘MOR RV1/Stable’ as a residential vendor (REO Asset Management) and is assigned a ranking of ‘MOR RS1/Stable’ as a residential component servicer (Short Sales).
- The collateral is 100% single-family residential houses. There are no condos, townhomes, or other multifamily properties in the pool.
- At an average of 10 months, the average remaining lease term is longer than in other recent single-family rental transactions.
The bears say:
- As Progress expands its internal property management footprint via its Progress Residential Property Manager 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.
- The average actual rehab cost for the entire pool was only $13,119, which is substantially lower than most issuers. However, the total cost basis is higher at an average of $168,351 and the properties have a more recent average year built of 2002.
- Use of multifamily MSA-level cap rates as a proxy in the absence of historical single-family rental cap rate data. This risk was mitigated by adding an upward adjustment of 50 basis points to the cap rate for this portfolio.
- The eligible tenant provision is not defined under the Loan Agreement. Lacking credit measures such as income-to-rent ratio in the eligible tenant provision resulted in a qualitative adjustment of 1.0% gross rent reduction for this transaction. Similar adjustments have been made by Morningstar on prior single-family rental transactions. As a reference point, a sampling of 2,900 Progress properties reflected an average income to rent ratio of 5X, and Progress generally doesn’t allow a ratio of less than 3X.
- Underwritten capital expenditure is lower than Morningstar’s amount. Morningstar assumes higher capital expenditure (over 2.5x higher than the underwritten capital expenditure reserve) based on observed sample of performance data.