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The dichotomy between single- and multi-borrower SFR

| March 5, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

While the agency multifamily sector has seen Covid-19 set off a wave of loans in forbearance along with delinquencies and some scattered defaults, single-family rentals so far appear to be doing much better. Losses in single-borrower deals due to performance issues so far are non-existent. Several multi-borrower deals, which have more diverse collateral, have started chalking up modest losses with servicers working through some problem loans. But to date, only one deal has seen performance erode enough for non-investment grade classes to go on credit watch, though so far there have been no downgrades.

Solid performance in single-borrower deals

Single-borrower SFR deals are getting a lift from strong operators and the size and diversification of the underlying property portfolio. The loan collateralizing the deal is secured by hundreds to thousands of single-family rental properties—most often clusters of detached homes across diverse locations. The depth of experience of the operators, geographic diversity of the properties, and locations typically outside urban cores has so far provided considerable protection despite some portion of tenants certainly struggling to pay rent. No loan in the 39 single-borrower deals outstanding is in special servicing for any reason, and many classes of deals have been upgraded by rating agencies due to improvements in credit metrics since issuance. This has primarily been due to the high demand for single-family homes, which has resulted in significant home price appreciation. This has lowered aggregate LTVs and increased rental income, raising debt service coverage ratios for the properties.

Multi-borrower collateral can look more like multifamily

There are 12 multi-borrower deals currently outstanding, all of which have been issued by Colony American Finance (CAFL) currently known as CoreVest American Finance (Exhibit 1). Five of these deals have cumulative losses ranging from 1 bp to 42 bp of collateral at origination. Ten of the deals have multiple loans currently in special servicing. Deals with loans in special servicing due to payment default have delinquent amounts that range from 0.2% to 7.0% of the original collateral balance.

Exhibit 1: Multi-borrower single-family rental deals outstanding

Note: *Total outstanding balance of specially serviced delinquent loans; excludes foreclosed, REO and matured loans. The CAFL 2015-1 deal paid off in October 2020 with no losses. Number of loans listed is current, not at origination.
Source: Bloomberg, Amherst Pierpont Securities

CAFL 2019-2 has seen the largest deterioration in performance with 7.0% of collateral currently delinquent in special servicing and another 2.5% current in special servicing. Kroll Bond Rating Agency in October 2020 put three classes of CAFL 2019-2 on credit watch negative (Exhibit 2). These were all the non-investment grade classes, which could suffer losses if the loans in special servicing defaulted and triggered losses large enough to wipe out the unrated H class, which comprises 4.5% of the deal.

Exhibit 2: CAFL 2019-2 rating status by class

Note: The * next to the rating indicates watchlist status.
Source: Bloomberg, Amherst Pierpont Securities

The collateral for the CAFL 2019-2 transaction is comprised of 83 loans secured by mortgages on 2,275 single-family, 2-4 family and multifamily rental properties. The eight loans currently in special servicing appear to be a mix of detached single-family rentals, 2-4 multifamily properties and 5+ multifamily properties (Exhibit 3). The multifamily properties in particular clearly appear to have been impacted by Covid and the stress placed on tenants. Though it’s not clear what percentage of loans in the deal are for multifamily properties, the performance is consistent with the dynamics seen in the agency multifamily space. Small balance properties with fewer units have come under the most stress when tenants have lost income due to the pandemic, which has in turn put financial stress on borrowers.

Exhibit 3: CAFL 2019-2 loans in special servicing

Note: All data as of February 2021 tape date.
Source: Bloomberg, Amherst Pierpont Securities

The average loss severity for loans in multi-borrower SFR deals that have gone into foreclosure has been 35%, according to KBRA analysts. There is not a huge sample size, but that is well within the range of historical loss severities of Freddie Mac multifamily (30%) and Fannie Mae multifamily (39%). It is worth noting that single-family rental loans that enter special servicing and ultimately default tend to spend close to two years in special servicing before being paid off. That is possibly due to the additional complexity of foreclosure and liquidation of multiple properties.

Conclusion

Overall the single-family rental sector, in particular the single-borrower segment, continues to perform quite well. The amortization of loans combined with increases in home price appreciation has gradually deleveraged transactions resulting in numerous upgrades of deal classes. The three classes on negative watch in the one multi-borrower deal are due to a handful of loans in special servicing. These appear to have several characteristics similar to multifamily loans also in distress.

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