New York, June 18, 2020 -- Moody's Investors Service ("Moody's") has assigned definitive ratings
to four classes of certificates secured by mortgages on 2,759 single-family
rental properties owned by BAF Assets, LLC. The complete
rating action is as follows:
Issuer: AMSR 2020-SFR2 Trust
Cl. A, Definitive Rating Assigned Aaa (sf)
Cl. B, Definitive Rating Assigned Aa2 (sf)
Cl. C, Definitive Rating Assigned A2 (sf)
Cl. D, Definitive Rating Assigned Baa3 (sf)
RATINGS RATIONALE
Overview
Our advance rate for this transaction at stresses consistent with a Aaa
rating level is 36.6%. Moody's uses the advance rate
to determine whether the asset value is sufficient to support a targeted
rating level given the size of the transaction's liabilities.
Our analysis has considered the effects that the COVID-19 outbreak
and the announced government measures to contain the virus are having
and will have on the US economy and on the performance of the single family
rental (SFR) sector.
Specifically, for SFR transactions, government and private
organizations have enacted and may continue to enact policies to try and
curb the negative effects of the virus' spread, which may include
temporary suspension of tenant evictions, rent relief, rental
assistance, or other relief programs for tenants. While such
policies have the potential of temporarily reducing cashflows to the trust,
they will likely have limited impact on the credit quality of the rated
bonds because 1) the most stressful scenario for certificate holders (which
is our rating scenario) would be one where the loan is in default and
properties are liquidated over an extended period of time. In this
scenario, rental income accounts for a very small portion of the
overall recoveries, and our liquidation stresses already factor
in a stressed home price environment; 2) the loan has an underwritten
DSCR of 1.50, allowing for significant declines in cashflows
before the loan is at risk of default; 3) the loan is secured by
properties that are geographically diversified, which reduces exposure
to any single market that may be more affected by COVID-19.
Also the geographic diversification reduces cash flow volatility since
excess cash flow from one property can augment the cash flow of another
to meet the debt service requirements. As a result, we have
not made any adjustments related to COVID-19 for this transaction.
The contraction in economic activity in the second quarter will be severe
and the overall recovery in the second half of the year will be gradual.
However, there are significant downside risks to our forecasts in
the event that the pandemic is not contained and lockdowns have to be
reinstated. As a result, the degree of uncertainty around
our forecasts is unusually high.
We regard the COVID-19 outbreak as a social risk under our ESG
framework, given the substantial implications for public health
and safety.
In rating this transaction Moody's analyzed the collateral to assign a
probability of default and an eventual recovery value. In the recovery
analysis, the expected proceeds from the sale of the properties
and the rental income prior to the sale were modeled under various stressed
home price depreciation scenarios. For this transaction,
Moody's stressed probability of default simulates a scenario in which
the borrower cannot refinance their loan at maturity and the securitization
trust must sell the properties. Moody's also evaluated the strength
of property management, the servicers and other third parties,
along with the transaction's structural and legal framework.
Key transaction features
Increased Leverage: The total leverage of 95% in this transaction
is the highest among all large loan SFR transactions previously rated
by Moody's. As a result of the higher total leverage, the
borrower has less equity in the properties and less incentive to maintain
or create value, and in stress scenarios may choose to divert resources
to other properties with lower leverage. We made a negative adjustment
to our recoveries to account for this increased risk.
Voluntary Substitution: The securitization incorporates up to 5%
voluntary substitution (by property count) over the life of the transaction.
Voluntary substitution of properties is subject to a number of conditions
including the aggregate property value of the substitute properties will
at least be equal or higher than the higher of current property value
or closing date property value of the replaced properties, and the
underwritten net cash flow of the substitute properties for the trailing
twelve months commencing on the next calculation date is at least equal
or greater than the underwritten net cash flow as of the most recent calculation
date. Having flexibility to remove or substitute properties from
the securitization is valuable to a sponsor as it allows the sponsor to
efficiently manage its overall portfolio. However, an operator's
use of substitution to acquire a property from the securitization could
otherwise reduce the incentive to acquire properties through the premium
release mechanism. Our analysis incorporates the reduced premium
release incentives, potential adverse selection of properties,
potential increase in geographic concentration and limited independent
third party diligence on the substitute properties.
Weak structural features: The transaction structure has a multi-tier
DSCR test and a payment-in-kind (PIK) feature for class
F to I similar to the previous transaction AMSR 2020-SFR1,
where the PIKable certificates can receive interest payment even before
the multi-tier DSCR test kicks in. In our opinion,
this structure is slightly credit negative because in several scenarios,
available funds in the cash collateral can be lower. In an event
of default, funds in this account can act as additional credit enhancement
to the certificates. Our advance rates reflect a small adjustment
for this feature.
Insurance: This transaction's properties are covered by a blanket
insurance policy that also covers other properties in Amherst' portfolio.
Additionally, the borrower's blanket policy provides for a maximum
deductible equal to 5% of the total insurable value (TIV) of affected
properties per occurrence of named windstorm and a maximum deductible
equal to 15% of the TIV of affected properties per occurrence of
earthquake. We increased our loss expectation on the higher-rated
notes to account for less-than expected insurance coverage.
Recovery Analysis
The Final Recovery Value, which varies by rating levels, is
calculated through the following steps.
1. For the 2,759 newly acquired properties, instead
of using the acquisition price the borrower paid to a wholly owned subsidiary
of the sponsor, which was determined by a cap-rate,
we determined Moody's Value by utilizing the most recent third-party
BPO values, to which we applied a haircut because the value was
not based on a full appraisal by a licensed appraiser, a process
we consider to be most reliable. The haircut we applied was higher
than some other SFR transactions as we did not have the benefit of having
original acquisition price and post-acquisition renovation costs
of the properties. The cumulative BPO on the properties is approximately
$543.7 million. We determined the initial Moody's
Value to be $434.4 million.
2. As the borrower can substitute properties, Moody's assumed
that a lower percentage of these properties will be sold out of the transaction
at full market value before a borrower default, netting proceeds
equal to the allocated loan amounts plus a pre-determined premium
on those properties.
3. To account for the potential adverse selection and increased
geographic concentration in certain markets, in the disposition
of the properties remaining in the pool after a default, Moody's
applied a home price depreciation factor to the properties' value,
ranging from 30% to 50% of the Moody's value at a Aaa level,
depending on the MSA. Our home price depreciation assumptions are
informed by, among other things, a review of the housing markets
in the key MSAs, and geographic concentration as measured by the
effective number of MSAs. We further stressed the MSA concentration
risk due to voluntary substitution and potential increase in geographic
concentration.
4.We then calculated the revenue and expense adjustments for the
distressed properties that were sold. The revenue would come from
the in-place rental income on the portion of properties that were
still rented while awaiting liquidation, and the expenses,
from in-place expenses, including maintenance, taxes,
servicing, and other fees and costs on the properties. Both
the revenues and costs depend heavily on the assumed timelines necessary
for foreclosure and liquidation. The foreclosure timeline will
depend on whether the trust forecloses on the equity pledge from the borrower,
which is faster, or on the liens from the mortgages. The
length of a property foreclosure itself depends in part on whether the
property is in a judicial or non-judicial foreclosure state.
In our Aaa stress scenario, we assume that the trust pursues the
longer and costlier mortgage foreclosure route; in our Baa3 stress
scenario, we assume that it pursues the quicker equity foreclosure
route. We calculated revenues and expenses in three additional
steps:
5. Under its Aaa stress scenario, Moody's assumed that the
total cost required to maintain all the properties remaining in the pool
after default, including real estate taxes, property management
fees, vacancy, home owners association fees, insurance,
repairs, and sales and marketing, would stretch for 40 months
while a portion of the properties would generate income for 30 months.
Moody's stress for foreclosure timeline for this transaction is lower
than a typical RMBS transaction because Moody's expects the foreclosure
process to be quicker since the trust does not have to foreclose on individual
borrowers; instead, for each loan, it will foreclose
either on the special purpose vehicle borrower itself or the properties
owned by a single entity.
6. Moody's estimated additional foreclosure costs, which
included fixed legal costs, special servicing fees of 0.25%
of the loan amount, special servicing liquidation fees of 0.75%
of the property value, and transfer taxes.
7. Finally, Moody's assumed that the master servicer will
continue to advance the interest (to the extent deemed recoverable) on
the certificates until the properties are liquidated, and estimated
the interest accrued on the servicer advances.
Master and special servicer
A highly rated master servicer, Midland Loan Services, a division
of PNC Bank, N.A. (long-term senior unsecured
A2 stable, long-term bank deposits Aa2 stable, bca
a2) is responsible for advancing timely payments of interest on the loan
to the extent deemed recoverable. The servicer will also receive
monthly updates on the status of every property backing the transaction.
Having a special servicer that can step in to manage the portfolio to
maximize recoveries for the certificate holders in the event of a borrower
default is credit positive.
Of note, the master servicer will only be advancing interest payments
to class A through class E2 and not class F to I. In addition,
servicing fees will be calculated based on outstanding principal balance
minus any deferred interest.
Midland Loan Services will also be the special servicer for this transaction
and will be responsible for servicing and administering the loan in the
event of default or in the case of a reasonably foreseeable default that
could give rise to the transfer of servicing to the special servicer and
of any foreclosed collateral. Midland is an integral part of PNC's
real estate finance business, and has more than 20 years of experience
as a commercial mortgage master, and primary and special servicer
for CMBS securitizations, government sponsored enterprises and institutional
investors.
Although we deem the servicing arrangement to be adequate, we applied
a negative adjustment to our recoveries to account for the concentration
risk of having a limited number of available servicers in SFR securitizations.
Cash flow analysis
Moody's weighted average adjustments to the pool's underwritten net cash
flows -25.2%. The Moody's debt service coverage
ratios is 1.14x (based on Moody's assumed starting interest rate).
For more details on Moody's CMBS approach to analyzing rental cash flows,
refer to "Moody's Approach to Rating Large Loan and Single Asset/Single
Borrower CMBS," published in May 2020. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
UP
Moody's would consider upgrading the transaction or some of its tranches
if, for example, properties underlying the portfolio were
to appreciate substantially and the property conditions were to remain
well maintained.
DOWN
Moody's would consider downgrading the transaction if the transaction
were to breach its debt yield trigger. Additionally, breaches
of certain loan covenants could lead to an event of default in the transaction
and, if unremedied, a downgrade. Moody's will also
monitor the transaction's portfolio mix for any unexpected changes.
Unexpected negative changes could result from unusual patterns in the
properties that are released by a sponsor as contemplated by the transaction
documents. Also, where available, changes in rent renewal
and lease turnover rates and time to re-rent could indicate performance
issues.
The principal methodology used in these ratings was "Moody's Approach
to Rating Single-Family Rental Securitizations" published in November
2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1179424.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement
mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232865.
The analysis relies on an assessment of collateral characteristics to
determine the collateral loss distribution, that is, the function
that correlates to an assumption about the likelihood of occurrence to
each level of possible losses in the collateral. As a second step,
Moody's evaluates each possible collateral loss scenario using a
model that replicates the relevant structural features to derive payments
and therefore the ultimate potential losses for each rated instrument.
The loss a rated instrument incurs in each collateral loss scenario,
weighted by assumptions about the likelihood of events in that scenario
occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Max Sauray
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Padma Rajagopal
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
