Every single-family rental deal is a snowflake
admin | March 12, 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.
Since the inaugural deal came in late 2013, there have been nearly 80 public single-family rental securitizations raising $43 billion in financing. Investors in specialized market sectors are used to doing deep-dive analysis on collateral pools to gauge credit metrics. What is perhaps surprising is that despite fairly consistent issuance over the past seven years, there is little standardization of the deal structures themselves. Collection and allocation of prepayment penalties, a borrower’s ability to replace or substitute collateral, and triggers for interest deferral on subordinate classes can all vary significantly from one deal to another.
Exhibit 1: Quarterly and cumulative public SFR debt issuance
A blend of features common to CMBS and MBS
Single-family rental (SFR) securities are often described as a hybrid of CMBS and MBS. The securitization structure and rental cashflows are similar to those of CMBS, but the underlying collateral is a portfolio of single-family homes (Exhibit 2).
Exhibit 2: Example collateral and securitization structure (single-borrower deal)
The publicly issued deals tend to have plain vanilla sequential pay structures without the bells and whistles of interest-only classes, tranching of the collateral or support classes to control prepayment or duration risk. Some deals have loans with one or more maturity extension options, similar to those found in CRE CLOs. But primarily, the underlying loans have little or no amortization, with balloon payments at maturity like loans in CMBS.
Exhibit 3: A recent single-borrower deal, AMSR 2020-SFR3
A typical single-borrower deal will have a single loan covering a pool of several hundred to a couple thousand single-family rental properties (Exhibit 3). The disclosed collateral characteristics will include many of those normally associated with residential single-family or multifamily properties: loan to value ratios (LTV), debt service coverage ratios (DSCR), occupancy rates, rental income and expenses, lease terms and the like.
Transaction features that can vary widely across deals
There are also several features included in SFR that are common to either CMBS or MBS, but these can vary considerably across deals. Most deals do have some call protection. The loans may have lockout periods, yield maintenance premiums or spread premiums (for floating-rate deals) to protect against prepayment.
Prepayments can come in the form of voluntary releases of properties or required substitutions or replacements of properties due to disqualification. Voluntary releases of properties usually require payment of release premiums – these can range from 105% to 120% of the allocated loan amount of the property. Prepayments that occur due to required substitutions or replacements of properties as a result of condemnation or casualty will typically only require that the net amount of the condemnation award or insurance proceeds be applied to prepayment of the loan.
There are also in many deals conditions under which a borrower can voluntarily substitute a property or portfolio of properties as long as the substitution conditions listed in the mortgage documents are satisfied. Broadly speaking, these conditions try to ensure that the substitution does not result in a deterioration of credit quality of the deal or of the collateral pool, though the list of conditions and tests that the new properties are required to satisfy are not standardized. A voluntary substitution may be capped by property count, by collateral amount, or limited to a specific time-period of the deal.
Yield maintenance premiums and property release premiums may or may not be used to pay down the notes. It tends to be deal specific. Many deals will allocate yield maintenance premiums on a pro rata basis across each class of the regular offered certificates.
A few notes additional on how the priority of payments can be handled:
- Some deals have voluntary prepayments of principal on the loan from the borrower applied in reverse sequential order to the classes. This will delever the deal by lowering the outstanding loan balance while the collateral value remains fixed. Despite the lower LTV some investors may not want the credit enhancement eroded in this fashion.
- There are triggers in some deals that allow deferral of interest payments on non-investment grade classes if, for example, the DSCR falls below a particular threshold. This is not considered an event of default and the deferred interest is paid when the trigger event is cured. If there is a voluntary prepayment of principal to cure a low DSCR trigger than that payment is typically made in sequential, not reverse sequential, order.
None of the above transaction features are particularly unusual, but investors need to carefully read through offering circulars to determine what features are included and the conditions they impose on borrowers. Reports from credit rating agencies will also typically reveal the impact the features may have on the credit quality of the deal.
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