Colony launches second US family homes securitisation

Colony American Homes’ second single-family rental securitization, the $558.5m Colony American Homes 2014-2, is on the market, becoming the fifth such offering in the rapidly growing asset class. Despite inherent risks in this and other SFR deals, such as house price volatility, managers with limited operating history, and the  geographic concentration of the assets, analysts tell […]

Colony American Homes’ second single-family rental securitization, the $558.5m Colony American Homes 2014-2, is on the market, becoming the fifth such offering in the rapidly growing asset class.

(Photos: Kroll)
(Photos: Kroll)

Despite inherent risks in this and other SFR deals, such as house price volatility, managers with limited operating history, and the  geographic concentration of the assets, analysts tell Real Estate Capital the increasing depth and size of the asset class will bode well as more players enter the market.

“Frankly, the bigger the market, the more players, the deeper the market, the more comfort it gives me,” said Nitin Bhasin, a managing director at Kroll Bond Ratings Agency who worked on a presale report for the Colony deal.

“If you have one market participant that goes away in a distressed scenario, someone from the seven or eight other businesses can pick up the assets and the bonds can continue to perform… it’s beneficial for the market.”

Colony issued a similarly sized $513.6 million offering in March, and Colony American Homes 2014-2 marks the fifth such offering ever. The non-recourse loan is secured by the borrower’s lien on 3,727, three-plus bedroom single-family homes across seven states, with a two-year term and three 12-month extension options.

Kroll and Morningstar have  issued presale reports for the CMBS, awarding AAA ratings to a $291.18 million (36.5%) tranche.

SFR1“At 36.5% advance rate relative to the BPO value of the collateral, the AAA bonds have significant amount of protection and the risk of loss is remote,” Bhasin said.

The rating of the AAA top tranche took into account significant declines in current value in order to ensure its safety, analysts said.

“Our AAA stresses in this deal incorporated a 40% home price decline scenario, which provides significant amount of insulation to those bonds from property value declines,” said Michele Patterson, a senior director at Kroll who also worked on the presale report.

The risks associated with the offering are similar to those in the previous four SFR deals, with Kroll analysts noting the fact that it’s a relatively new asset class among concerns, along with home price volatility, managers with limited operating history, and the tight geographic concentration of the assets.

The top three states in the five SFR securitizations so far have ranged from a low of 69.5% to a high of 89.0%, with an average of 75.3%, often with managers who have limited experience in the space.

In line with that, in Colony American Homes 2014-2, 73% of the assets are situated in just three states (California with 33%, Florida with 27.2% and Georgia with 12.6%), which according to the Kroll report “exposes the transaction to increased risk should a regional downturn occur.” And property manager CAH Property Management has been in business for less than 36 months.

“This is a new and evolving asset class without a significant amount of direct performance history… they’re new businesses,” Patterson said.

But, she added, “That is factored into the analysis.”

The loan seller for the latest Colony securitization is JPMorgan Chase, with lead managers J.P. Morgan Securities and Credit Suisse Securities.

Colony declined to comment.

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