Multiborrower Deals Come to SFR

NEW YORK CITY—With institutional players controlling less than 1% of the inventory in the single-family rental sector, it was only a matter of time before securitized product geared toward smaller owners came to market. The first two multiborrower SFR transactions have been announced over the past few weeks, and Fitch Ratings believes we'll see more than $1 billion in such deals this year.

First out of the gate was B2R Finance's B2R 2015-1, $230 million of pass-through certificates backed by 144 mortgage loans that are secured by single-family residential properties, two- to four-unit properties, condominium properties, townhomes, multifamily properties and mixed-use properties. “B2R is pioneering the first securitization of residential investor mortgages in the US to grow its platform, increase the amount of capital available to our clients and enable us to continue our leadership position in growing the asset class,” Jason Hogg, CEO of Charlotte, NC-based B2R, said in late March.

B2R was established in 2013 by funds managed by Blackstone Tactical Opportunities. Invitation Homes, also part of the Blackstone Group, has been responsible for six of the 16 single-borrower SFR securitizations to date.

Another lender with ties to a leading investment management group—in this case, Cerberus Capital Management—FirstKey Lending LLC is behind the second such multiborrower offering. FirstKey Lending 2015-SFR1 will be collateralized by 16 loans secured by mortgages on 3,628 single-family, two- to four-unit and multifamily rental properties, with a total aggregate principal balance of $240.79 million.

Kroll Bond Rating Agency, which has assigned preliminary ratings to five classes of FKL 2015-SFR1, notes in its presale report that the properties are situated in 14 states, with four exposures that each represent more than 10.0% of the pool balance: Florida (26.8%), Georgia (19.3%), California (14.2%), and Texas (10.4%). The loans have principal balances ranging from $2.9 million to $51.3 million for the largest loan in the pool, a 722-property American Homes 4 Rent portfolio. The five largest loans, which also include Gorelick (13.3%), Lafayette Portfolio (11.5%), AVR (10.2%), and Gorelick 2 (7.9%), represent 64.2% of the initial pool balance, while the 10 largest loans represent 88.3%.

In common with Fitch on the B2R securitization, KBRA awarded an AAA rating on the FirstKey deals class A tranche. A Fitch report offers insights into why ratings agencies are more comfortable in some respectswith multiborrower SFR, despite what may be more limited financial resources and property management experience on the part of smaller borrowers.

For one thing, the issuer is not putting all of its eggs in one basket, so to speak. “Unlike SB SFR, where performance is predicated on the execution of one sponsor's business plan and where default risk is binary due to the single loan structure, the diversity of sponsorship in the B2R transaction lessens transaction dependence on the performance of any individual sponsor,” says Fitch. Regional diversity is another positive in the B2R deal, as is the case with FirstKey's securitization.

Fitch also cites a more conservative approach to valuations in the B2R deal, compared to SB values which assume that owner occupants are the lilely buyers in subsequent sales. The B2R deal takes an income capitalization approach traditionally used with income-producing real estate.

“While many of the single-family properties in this transaction could be ultimately sold to owner occupants, Fitch expects a material portion of the collateral properties to be rented for the foreseeable future,” according to the report.

And while there are risks associated with the non-institutional nature of many of the borrowers and property managers, Fitch says B2R has mitigated the risks. The securitization includes cross-collateralization, recourse or nonlimited non-recourse carveouts, cash management for nonrecourse loans, funded escrows, management replacement and full appraisals. “Underwriting standards include DSCR and LTV underwriting constraints; limits on low value homes; full lease review; manager review; sponsor reviews; and demographic assessments including population growth and density,” says Fitch.