Dan Chambers is managing director in Fitch Ratings' U.S. commercial mortgage-backed group.
Dan Chambers is managing director in Fitch Ratings' U.S. commercial mortgage-backed group.

Invitation Homes chose to exercise an option to extend the term of a loan backing the first single-family rental securitization.

While the notice came at the 11th hour, it was no real surprise. The portfolio of rental homes ultimately backing the $479 million Invitation Homes 2013-SFR1 has been performing well, but there could still be challenges refinancing other deals in this sector when they come due over the next several years.

Invitation Homes 2013-SFR1 is the one of 22 single-borrower single-family rental securitizations completed since December 2013. The loan that backs it has a two-year initial term and can be extended by one year up to three times, for a total possible term of five years. However, the sponsor appeared to hesitate, waiting until Oct. 30 to notify the deal's servicer that it intended to exercise the first extensions, pushing the maturity out to Dec. 9, 2016.

As a result Kroll Bond Rating Agency, which had placed the deal on "Watch Developing" on Oct. 23, affirmed all of its outstanding ratings.

Most of the other deals in this sector have similar terms. That means a total of $10.84 billion will mature between 2016 and 2025.

"We still think that these large-loan, single-borrower deals, face significant refinance challenges, primarily because investment grade leverage is double what you would expect from other CMBS assets," said Dan Chambers, managing director in Fitch Ratings' U.S. commercial mortgage-backed group. "And refinance options, as far as I can tell, are still limited to securitization."

Fitch has not rated any of the single-borrower SFR securitizations.

Like commercial mortgage-backeds (and unlike residential mortgage-backeds), there is little amortization in single-family rental securitization. For example, the class A certificates issued by IH 2013-SFR1 have an original principal balance of $278.7 million and have paid down by just $8.8 million over the past two years.

To refinance, secured lenders will 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. Investment grade debt yields for SFR securitizations have hovered in the 5% range, while debt yields for multifamily CMBS are north of 10%.

"If you look at it from a cash-flow basis, debt yield is nowhere close to a multifamily or other income-producing asset classes," said Chambers. "It is unlikely a secured lender would refinance the current debt, absent significant improvement in property cash flow"

So what happens if a loan defaults?

As with commercial mortgages, which do not fully amortize over their terms, the repayment of principal on the single-family rental bonds depends on the borrower's ability to refinance the loan that serves as trust collateral. If that's not possible, the service can attempt to recover the securitization balance by selling the properties, either voluntarily or through enforcement. "Either way, it raises questions regarding the liquidation strategy that really haven't been answered," said Chambers.

Together, institutional buyers own a small 1% slice of the single-family rental market. Some market observers are confident that other rental operators would absorb a liquidation of a large portfolio of homes.

Ryan Stark, a managing director at Deutsche Bank, thinks that a large number of homes coming onto the market at the same time could cause prices in the broader housing market to drop. Nevertheless, "as long as there are still people that are willing to rent, you'll get back to the place where the cap rates are so attractive that other operators, not in distress, are going to step in and start buying," he said at a seminar sponsored by Morningstar on Oct. 21.

Invitation Homes, a subsidiary of Blackstone Group, owns more than 45,000 houses in markets including Atlanta, Las Vegas, Los Angeles, Sacramento, Phoenix and throughout Florida.

American Homes 4 Rent, based in Agoura Hills, Calif., owns nearly 37,500 single-family properties in 22 states, according to report published by Morningstar in October.

Two other players, Colony American Homes and Starwood Waypoint Residential Trust, have agreed to merge; when the deal is finalized, the combined company will own more than 30,000 homes and have $7.7 billion in assets.

Other single-family rental issuers include Phoenix-based Progress Residential and Tricon American Homes, which is majority-owned by Toronto asset manager Tricon Capital Group. Together these sponsors have issued a total of 22 deals since 2013.

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