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Rating Action:

Moody's assigns definitive ratings to FirstKey Homes 2021-SFR1 Trust

15 Jul 2021

New York, July 15, 2021 -- Moody's Investors Service ("Moody's") has assigned definitive ratings to four classes of certificates backed by one fixed-rate loan secured by mortgages on 9,238 single-family rental properties owned by FirstKey Homes 2021-SFR1 Trust securitization. The properties were acquired by the affiliates of Cerberus SFR Holdings Partners, L.P. ("Cerberus SFR Holdings"), the sponsor, between April 2015 and February 2021.

The complete rating action is as follows:

Issuer: FirstKey Homes 2021-SFR1 Trust

Cl. A, Assigned Aaa (sf)

Cl. B, Assigned Aa2 (sf)

Cl. C, Assigned A2 (sf)

Cl. D, Assigned Baa2 (sf)

RATINGS RATIONALE

Overview

The advance rate for this transaction at stresses consistent with a Aaa rating level is 37.75%. 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.

Key Transaction Features

Leverage: The total leverage of 90.00% in FKH 2021-SFR1 is in line with 90.00% leverage in FKH 2020-SFR1 and FKH 2020-SFR2, but higher than 86.75% in AMSR 2021-SFR2 and 78.8% in Tricon 2020-SFR1. The corresponding Moody's LTV is 109.9%, which we consider to be high. We made a negative adjustment to our recoveries to account for this increased risk.

Excess Collateral Release: This deal will include an Excess Collateral Release (ECR) feature whereby the sponsor can remove properties without prepaying the loan balance, or paying yield maintenance or a release premium to the trust. The ECR will be subject to rating agency confirmation (RAC), that the ratings will not be withdrawn or downgraded as a result of the exercise of such feature. The ECR will also have to satisfy certain LTV ratio requirements as well as geographic diversity and rents and cash flow tests. Although ECR is subject to RAC and certain other tests, our recovery analysis took into consideration this feature.

Recycled SPVs: The borrowers are recycled special purpose entities. We think each recycled SPV can pose additional risks to the trust such as liabilities incurred in its previous business dealings which could require payment, potentially reducing the amount of assets available for bondholders. Also, liabilities could increase the likelihood of a borrower being put into bankruptcy. To mitigate these risks, each borrower will sign an officer's certificate attesting to the lack of such liabilities, among other things, and issuer's counsel will have performed lien and liability searches. The borrowers will also make recycled SPV representations and warranties, breaches of which will be full recourse to the sponsor. Nevertheless, we made a small negative adjustment to our recoveries to account for the increased risk.

Tenant quality: The tenants are of a weaker credit quality compared to other SFR operators. The average household income for FirstKey Homes tenants is lower than the $75k-$100K average household income for other SFR operators. Due to the lower income, there is a higher chance that under economic stress these tenants may be unable to pay rent and may not maintain the properties in good condition, which in turn would impact the sale value of the properties in a liquidation scenario. Furthermore, almost 29% of the tenants are not paying through ACH, which is the norm for the SFR sector. Some of the tenants are paying their rents with a credit card, which charges a 2-3% processing fee. In addition, similar to most other SFR transactions, the loan agreement does not specify tenant eligibility criteria, which leaves open the risk that sponsor could lower their standards to attract even less creditworthy tenants during the loan term. We took the weak tenant profile into consideration in our analysis and applied a negative adjustment to our recoveries.

Borrower pool release: Similar to FKH 2020-SFR2, on or after the monthly payment date in July 2024 (the Yield Maintenance Date), any of the Borrowers (FKH SFR C1, L.P. and FKH SFR C2, L.P.) may be released as a Borrower under the loan agreement and the properties owned by such Borrower will be released from the lien of the loan by prepaying the loan in an amount equal to the aggregate release amount for each property owned by such Borrower. The released Borrower will pay the trust a 5% premium release for the first 5% of the aggregate allocated loan amount of the properties released using this option. The partial paydown associated with the borrower pool release will be allocated on a pro rata basis among the certificates. The borrower pool release option is subject to a RAC from each Rating Agency that the borrower pool release will not result in a qualification, reduction or withdrawal of the then current rating assigned to any class of certificates. The borrower pool release option of the loan on or after Yield Maintenance Date is credit neutral as of issuance. At the time of a RAC request, we would likely consider, among other things, the credit profile of the updated pool, including geographic concentrations, and credit enhancement available to the notes.

Enhanced structural features: The transaction structure has a multi-tier DSCR test and a payment-in-kind (PIK) feature for class G. In a low DSCR scenario, interest that would otherwise be due on class G subordinate to fees and expenses that support the management and preservation of the properties such as property management fees and capital expenditure, as well as trapping additional cash collateral that can be used to pay senior bondholders. Although the overall framework benefits the transaction, we did not give explicit benefit to the rated tranches primarily because the class G deferred interest is not directly used to pay down the principal of senior bonds. Moreover, in an event of default scenario, it is at the discretion of the servicer or trustee whether to apply the cash that is trapped in the cash collateral account to pay down the bonds or for expenses in connection to the operation of the properties.

Payment Priority: On each monthly payment date, except during a loan event of default, funds in the cash management account will be applied sequentially to the security deposit account, tax account, and insurance account as necessary in order to make required payments, then to the lender, funds sufficient to pay the monthly debt service coverage which will be used to pay interest due on class A through class F3 sequentially, and, if the DSCR (calculated as of the last day of each calendar quarter) for the non-PIK principal and interest bonds is at least 1.20x, to pay interest due on the class G.

The class G bond (the PIK bonds) will not receive interest if the DSCR ratio for the class A through class F3 bonds fall below 1.20x. Instead, the interest otherwise due on the PIK bonds will be subordinated to mandatory principal repayment of the loan, property management fees, and the capital expenditure reserve account. Any remaining cash will be trapped in the cash collateral account. Failure to pay current interest to the class G will not result in an event of default, but the interest due will accrue to the balance of this bond. Once the DSCR ratio for class A through class G is above 1.20x for two consecutive quarters, the funds in the cash collateral account will first be used to reduce the balance of the PIK bonds by the amount of its respective deferred interest amounts.

This deal has a three-year yield maintenance premium that requires the borrowers to pay a yield maintenance amount following the voluntary release of the property. With respect to 7.5% of optional release properties, the sponsor may release these properties at any time and will not be subjected to the payment of yield maintenance premium. We are credit neutral on this feature since the yield maintenance premium amount is not used to pay down the notes and we do not rate to this amount. In addition, this deal is a non-amortizing deal. The cash from the property release payments will benefit the trust since proceeds from the sale up to the allocated loan amount plus the premium release amount would be available to repay the notes. Since the optional release properties are not subject to yield maintenance premium, the borrowers may be more inclined to release the property since it is cost effective for the borrowers.

Recovery analysis

The Final Recovery Value, which varies by rating levels, is calculated through the following steps.

1. The cumulative value (based on Broker Price Opinions) of the properties is approximately $2.299 billion. The initial Moody's Value for properties that were acquired less than three years ago was determined after considering 1) the sponsor's acquisition cost adjusted for 50% of Moody's estimate of home price appreciation (excluding lower-value properties) since acquisition, 50% of the rehabilitation cost; and 2) 85% of the most recent BPO. For the remaining properties, we applied an additional haircut to the recent BPO values instead of using the lower of haircut BPOs and cost basis to estimate a new Moody's value. We applied this approach because as properties age, original purchase price and renovation costs could become less relevant in determining current market value whereas current property values obtained through a third party BPOs could become a better indicator of market value. The total Moody's value is $1.900 billion.

2. 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 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' values ranging from 30% to 50% of the Moody's Values 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.

4. 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 45 months while a portion of the properties would generate income for 35 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, it will foreclose either on the special purpose vehicle borrower itself or the properties owned by a single entity.

5. Moody's estimated foreclosure costs that 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.

6. Finally, Moody's assumed that the 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.

Moody's assessment of FirstKey Homes, LLC, the property manager, is that the company has the ability to effectively handle the day-to-day business of managing a national single-family rental platform. The property management function is completely internal. FirstKey Homes' approach to management relies on the centralization of corporate oversight and certain operational functions, while many immediate property management functions are performed by local office personnel. The servicer and special servicer is Midland Loan Services, a Division of PNC Bank, National Association.

Servicer and special servicer

A highly rated servicer, Midland Loan Services, a Division of PNC Bank, National Association (long-term senior unsecured A2 stable, long-term bank deposits Aa3 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 servicer will be advancing all interest payments due. In addition, servicing fees will be calculated based on outstanding principal balance (other than Component I and 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 adjustment to the pool's underwritten net cash flow was -23.6%. Based on Moody's assumed starting interest rate, the Moody's debt service coverage ratio is 2.0x for class A through class G. 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."

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 DSCR 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 "Single-Family Rental Securitizations Methodology " published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1214103. 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_1294638 .

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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.

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 agent(s) and issued with no amendment resulting from that disclosure.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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 the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Max Sauray
Vice President - Senior 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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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