Progress Residential is bringing its next $406 million securitization of single-family rental properties to market, even as concerns mount on the depth of pandemic-driven tenant forbearance and delinquency trends.
Progress Residential 2020-SFR2 is a single-borrower, single-loan MBS transaction backed by the individual mortgages on 2,067 income-producing properties owned and managed by Progress, a real estate investment trust vehicle of private equity firm Pretium Partners.
The single-family residences in the collateral pool have a combined value of approximately $431.7 million (based on independent broker price opinion), according to Kroll Bond Rating Agency. (Kroll applied a 10.1% haircut to the issuer’s estimated BPO value of $469.9 million.)
Kroll has issued preliminary ratings to six of the eight classes of notes included in the capital stack, including an early AAA rating on the $184.4 million Class A tranche.
The deal is the second for Progress this year, which priced a $513 million transaction in early March. Progress Residential has issued 13 previous single-loan securitizations of SFRs, five of which have paid off in full — emblematic of a newer MBS asset class on institutionally managed rental properties that has performed well, Kroll noted. None of the 46 single-borrower SFR securitizations Kroll has rated since 2013 has involved an issuer loan that went delinquent or fell into special servicing.
But the threat of COVID-19 will put this and other subsequent SFR securitizations to the test.
“This [asset class] performance is expected given that the transactions have generally seasoned less than three years, on average, in an environment where home prices have appreciated, and rental rates have increased,” stated a Kroll presale report issued Monday. However, “[i]t remains to be seen what the overall impact of the COVID-19 pandemic will have on home prices and rental rates.”
Data is lagging on recent levels of delinquency and rent deferrals for single-family rental properties. Last week, DBRS Morningstar issued a market surveillance report of 26 rated SFR securitizations showing that the month-over-month delinquency rate had actually decreased by 10 basis points in March to 0.6%, during the early stages of the deep macroeconomic slide for the U.S. and global economies due to the pandemic.
With a reporting date through March 31, DBRS Morningstar’s data “may not show the full effect of the coronavirus pandemic's impact on SFR performance to date,” according to that agency’s May 15 report.
Kroll has accounted for the potential economic consequences of the coronavirus outbreak, from job losses by tenants and falling real estate prices, by factoring in lower potential recoveries for investors due to greater delinquency expectations and depressed BPO values.
The presale report discloses that 257 tenants of properties in the collateral pool have already been granted rent deferrals, and 99 tenants were delinquent as of the end of April (meaning they were more than $200 in arrears after 30 days past due). Another 54 properties were on rental payment plan workouts, and 167 properties were currently vacant.
But Progress reported that as of May 10, it has still collected 81.6% of the total rent due on the pool’s subject homes for the month; that follows a 91.6% collection total in April and 95% in March.
The weighted average lease terms on the properties is 12.4 months, with an estimated annual net cash flow of $22.3 million. Progress collects about $1,621 per house, which is 104.6% of market rent average of the 15 cities represented in the collateral pool.
The properties in Progress 2020-SFR2 are located in nine states, with the largest exposures to Florida (26%), Arizona (17.9%) and Nevada (12.6%). The largest markets are Phoenix (17.9% of the pool), Las Vegas (12.6%) and Orlando (11.8%).
The five-year, interest-only Progress loan was originated by Goldman Sachs, which had placement help from BofA Securities, Deutsche Bank and Morgan Stanley.
