NEW YORK CITY—Fitch Ratings will rate single-borrower single-family rental transactions as high as A, but no higher, the ratings agency said last week. It cited elevated cash flow leverage, refinance risk and dependence on property liquidation for debt repayment as key factors.

“Presale reports for recent SFR transactions justify elevated leverage with current property values and the likelihood of repayment through the foreclosure and sale of the properties, particularly to owner occupants,” according to Fitch. “In our view, this line of thinking may persuade market participants to materially underestimate maturity default risk and the issuers' ability to refinance.” 

Unlike traditional RMBS loans, Fitch notes, SFR transactions do not fully amortize, which exposes issuers to term as well as maturity risk. Although term default risk is mitigated by the currently low interest rates and interest rate caps, loans with balloon payments will default at maturity if not refinanced. In order to refinance, secured lenders expect property cash flow to cover expected principal and interest payments. 

A common measure of leverage and refinance capacity for income producing real estate is debt yield. For three recent SFR transactions—Silver Bay Realty 2014-1, American Residential Properties 2014-SFR-1 and Invitation Homes 2014-SFR2—other rating agencies have calculated debt yields in the 5% range, says Fitch. In contrast, debt yields for Freddie Mac K Series transactions are approximately 9%. 

“Given the leverage on SFR transactions, it is unlikely a secured lender would refinance the current debt, absent significant improvement in property cash flow,” Fitch says in a report. The ratings agency further believes that “debt repayment predicated on foreclosure and liquidation is contrary to sponsor plans to build SFR portfolios, and is inconsistent with high investment-grade ratings.”

An article late last month in the International Financing Review sugested that SFR bonds have reached a crossroads. It noted that rising home prices mean large institutional buyers in the SFR market, currently valued at about $2.7 trillion, “may have only a few more rounds left of securitization on the homes they already own” Added to which, acoridng to SFR, is “the uncertain outlook for future trades seeking to finance properties picked up at steeper prices.”

Daniel Lisser, senior managing director at Johnson Capital, told IFR that “The early-stage advantage is gone. As an asset class, it seems to be here to stay, but people keep going back and forth on what it will look like.”

Since the Blackstone Group's Invtation Homes issued the first SFR bond deal last November, a total of eight such securitizations have raised $4.07 billion. The tally could reach $8 billion by year's end, according to IFR data.

“We expect one [SFR] deal every month or two: that pace will continue perhaps into the first half of next year,” Nitin Bhasin, managing director at Kroll Bond Rating Agency, told IFR. “Then it is unknown—as issuers finish refinancing the assets they have, and acquisitions have slowed down.”