Progress Residential enters $5bn-plus SFR securitization arena

Progress Residential is the sixth major residential home owner to securitize part of its housing stock through the bond markets.

The 10th offering of its kind, Progress 2014-SFR1 builds the total SFR asset class, backed by income-producing rental homes, to a nearly $5.4bn business.

Like a majority of the previous deals, the $473.4m bond is backed by an extended five-year loan – a two-year loan with three one-year extension options – and in this case it is secured by 3,142 income-producing single-family homes.

Kroll Bond Rating Agency assigned preliminary ratings to six classes of the bond last week (see chart), awarding its nearly $241m top tranche a ‘AAA’ rating (as did Morningstar).

The bond’s LTV, at 73.7 percent, is the fourth highest so far, KBRA said in its pre-sale report, noting that the LTVs for the previous securitizations range from 65.0% to 79.0%, with an average of 71.4%.

It is the sixth out of 10 deals backed by an interest-only loan, which KBRA noted are riskier than amortizing loans. And, in addition to its comparatively high leverage, it features lower debt service coverage and debt yields compared to “typical multifamily securitized loans and loans underlying prior SFR deals.”

Among favorable qualities, the underlying properties exhibit the second highest level of geographic diversity yet, KBRA said.

Last week Fitch Ratings issued an article suggesting that none of the SFR securities issued so far deserve anything greater than an ‘A’ rating, citing risks that would make refinancing challenging.

The same day, KBRA issued a report giving American Homes 4 Rent’s second deal’s $314m top tranche (out of $513.3m) a ‘AAA’ rating, which happened to be the only deal with a 10-year loan and one percent of amortization per year, meaning that the 68% LTV would ultimately amortize to 58% – by-far the lowest to date.

Though that may have signaled a potential diversion in the way issuers would structure deals going forward, the Progress deal’s loan terms marked a relative return to normal. KBRA said it accounts for the securities’ risks in part through a “hybrid” CMBS/RMBS analysis used to determine the probability of default (PD).

“Losses at each rating category are derived through the application of KBRA home price decline stresses to the defaulted loan balance that is determined using KBRA’s modeled PDs,” KBRA analysts wrote.

The analysts noted that price fluctuations combined with “evidence of stress on the portfolio’s net cash flow,” creating a less-than-“stable” environment, could warrant further rating action (see chart).

“KBRA will monitor the ratings assigned to Progress 2014-SFR1 through the life of the transaction. If home prices exhibit a sustained trend (either higher or lower), KBRA will consider taking rating action, as appropriate.”

Blackstone Group – which launched the first SFR deal in November – has led the asset class with three deals totaling around $2.2bn. American Homes 4 Rent and Colony American Homes are next in line with two deals each, accounting for $1bn per issuer, while Silver Bay Realty, Starwood Waypoint and now Progress Residential have each issued one securitization each to make up the balance.