Tricon Capital Group, the latest entrant in the single-family rental securitization market, offers investors greater exposure to two unusual types of collateral: Section 8 homes and condominiums.
Section 8 homes, which are federally assisted housing designed for low-income renters, account for 14% of the transaction pool, according to Morningstar, which is rating the deal. No long-term history with respect to tenant management and cost containment has yet been established among these Section 8 tenants.
Condos and two-to-four family properties account for 7.5% of the pool; the highest proportion of multifamily properties in any single-borrower, single-family transaction to date, according to Morningstar.
The pool also includes 366 properties, or 13.7%, that are leased on a month-to-month basis.
The issuer extracts a rent premium for month-to-month properties. According to the Morningstar presale, the gross rental yield for the pool is 9.5%, higher than some of the previous single-family rental transactions.
Although investors can bank on higher rental yields, they should also expect higher vacancies. The vacancy rate at cut-off was 5% and Morningstar applies a 14% vacancy assumption to the pool, higher than any other single-family rental securitization.
In a separate report published last week, Morningstar warned that higher rental yields don't always produce the best cash flow, since these properties tend to turn over more often, potentially leading to lower overall cash flows.
Otherwise, Tricon's deal has the familiar hallmarks of other single-borrower single-family rentals: an underlying five-year loan ($380.8 million) backed by a large pool (3,509) of income-producing single-family homes. The floating-rate loan pays only interest for its entire term and the homes are located in familiar metropolitan statistical areas: California (25.7%), followed by Charlotte (12%) and Phoenix (11.7%).
Morningstar and Kroll Bond Ratings assigned preliminary AAA/AAA ratings to the class A notes, AA/AA ratings to class B notes, A/A- ratings to the class C notes, BBB+/BBB+ ratings to the class D notes and BBB-/BBB- ratings to the class E notes. Only Morningstar assigned BB ratings to the class F notes. Deutsche Bank is the lead bank.
Tricon Capital is a publicly traded REIT that operates in two segments: asset management and single-family rentals. As of the fourth quarter of 2014, the company had $2.5 billion of assets under management. The asset management business provides local operating partners with equity and mezzanine financing for residential land development, single-family and multifamily construction, and retail development. The single-family rental business focuses on acquiring, renovating and leasing single-family homes.
As of Dec. 31, 2014, the sponsor's single-family rental portfolio included 5,000 homes located throughout the U.S.; the five markets most heavily represented are Northern and Southern California, Phoenix, Reno and Las Vegas. The homes are on average sized at 1,484 square feet and generate an average monthly rental income of $1,130.