Kroll Bond Rating Agency has issued a pre-sale report on Blackstone’s third securitisation of single family rental homes, noting that the $720m Invitation Homes 2014-SFR2 has the highest LTV of any of the five previous SFR transactions.
Kroll assigned the $322.6m top tranche a “AAA” rating (see chart for full ratings), in addition stating that based on the portfolio’s aggregate brokers' valuation the securitisation has a 79% LTV – higher than the previous 65% to 75% range among five previous SFR deals.
The LTV based on KBRA’s stressed valuations is 85.3%, well above the previous 72.1% to 81.9% range and 79% average.
“Higher leverage generally implies less borrower equity, greater likelihood of default, and higher overall loss severity in the event of a default,” according to the report.
Blackstone included Class G certificates as a risk retention class (by increasing the overall size of the loan with an interest-free component) in order to comply with European Banking Authority regulations, requiring the sponsor to retain 5% of economic interest in the capital structure.
But “while risk retention can be viewed as a credit positive, KBRA does not believe it mitigates the impact of increased leverage, as the entire loan proceeds will need to be refinanced at maturity,” Kroll said.
Nitin Bhasin, a Kroll managing director on the team that prepared the report, said the stresses applied to the securitisation -- 95% default stresses and 50% home decline stresses at the AAA level -- account for the increased leverage.
"It's very common to have different LTVs based on borrower preference," he said. "Our models are built so that every particular nuance or change in metrics is taken into account."
Though a number of metrics beyond LTV would be taken into account, Bhasin didn't rule out the possibility that significant further upticks in LTVs on subsequent SFR securitisations could lead Kroll to not rate the securities. In this case, he noted that Kroll did not rate Class G.
The Kroll report was issued just days after Jonathan Gray, Blackstone’s global head of real estate, reportedly said at a New Jersey State Investment Council meeting that Blackstone plans to exit the business through an IPO in the coming years. The company had alluded to this in the past.
Invitation Homes 2014-SFR2 marks Blackstone’s third SFR securitization, the most recent being May’s $993m Invitation Homes 2014-SFR1, which is the largest SFR deal to date.
There have been six total SFR securitizations so far including Invitation Homes 201-SFR2, between Blackstone, American Homes 4 Rent and Colony American Homes, with a number of additional SFR owners looking to enter the market soon.
Major institutional buyers spent as much as $25bn plucking some 200,000 properties out of foreclosure since the recession. Blackstone began buying when home values were down between 35% and 40%, acquiring more than 40,000 properties in markets that were well positioned for a strong recovery, the company has said.
Deutsche Bank may reportedly start marketing 2014-SFR2 to investors this month.