Leverage on single-family securitizations continues to creep up as the industry becomes more comfortable with the asset class and issuers consider structuring deals with an added risk retention tranche.
The most recent example, Colony American Homes 2015-1 — the third SFR deal from Colony and the 20th single-borrower deal) — carries a 77.6% LTV, which is significantly higher than previous deals.
“There’s clearly been an evolution,” Daniel Tegen, associate director with Kroll Bond Rating Agency (KBRA) told Real Estate Capital. “Initially deals had 70% LTVs, but more recently the leverage of several deals has been 75% or higher.”
JPMorgan Chase Bank is originating the fixed rate loan behind CAH 2015-1, a $673.8m two-year, interest-only (IO), non-recourse loan secured by the 3,879 single-family rental homes (with three one-year extension options).
The 77.6% LTV on the securitization compares to just 70% on the two previous Colony deals, an increase due in part to the addition of a risk retention (5%) tranche that allows the securities to be sold in Europe. That structural change was first introduced by Blackstone on its Invitation Homes SFR securities, the only deals with a higher LTV than the latest Colony deal.
In addition, CAH 2015-1 is exposed to similar risks as previous deals, including limited performance and operating history, refinance risk, pricing inflation and the backing from — in this case — an interest-only (IO) loan, considered riskier than amortizing loans.
KBRA and Morningstar both issued preliminary ratings to the top five classes of CAH 2015-1, awarding a ‘AAA’ rating to the $317m top tranche. Eight classes of certificates will be issued: six entitled to monthly interest and principal distributions, one principal-only, and the final residual class.
To compensate for higher leverage the rating agencies apply stresses to account for the greater probability of default (PD), as higher leverage implies less borrower equity, greater refinance risk and, potentially, higher overall loss severity.
“At the end of the day, the risk retention tranche is debt that has to be repaid,” said Nitin Bhasin, a managing director with KBRA. “It gets reflected in our levels with a higher likelihood of default and more stress at refinance.”
The geographic diversity of the properties underlying the CAH 2015-1 however is above average compared to transactions issued over the last year, according to KBRA.
The underlying single-family residential properties are located in or near 28 Core Based Statistical Areas (CBSAs) across 8 states. The top three state exposures are Florida (27.9%), California (22.1%), and Georgia (13.2%).