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Rating Action:

Moody's assigns definitive ratings to Invitation Homes 2018-SFR3

28 Jun 2018

New York, June 28, 2018 -- Moody's Investors Service, ("Moody's") has assigned definitive ratings to four classes of certificates backed by one floating rate loan with a seven year term secured by mortgages on 6,662 single-family rental properties owned by Invitation Homes. The pool has upsized since we assigned provisional ratings but there was no significant difference in the overall characteristics of the pool. We analyzed the upsized pool for purpose of assigning the definitive ratings. 5,280 properties, representing 74.2% (by BPO) of the total, are currently securing the loan backing the Invitation Homes 2015-SFR3 transaction, and 803 properties, representing 13.5% of the total, were previously secured the loan backing the Invitation Homes 2013-SFR1 transaction, which was paid off in full in February 2017. The remaining 579 properties, representing 12.3% (by BPO) of the total, were previously secured the loan backing the Invitation Homes 2014-SFR2 transaction, which was paid off in full in November 2017. As such, the Properties that secured the 2013-SFR1 Loan and the 2014-SFR2 Loan are currently unencumbered. The net proceeds from the offering of Invitation Homes 2018-SFR3 will be used to repay in full the Invitation Homes 2015-SFR3 loan in order to obtain a release of the properties securing the Invitation Homes 2018-SFR3 transaction on the closing date.

The complete rating action is as follows:

Issuer: Invitation Homes 2018-SFR3 Trust

$603.8 million of Cl. A Certificates, Assigned Aaa (sf)

$162.5 million of Cl. B Certificates, Assigned Aa2 (sf)

$111.5 million of Cl. C Certificates, Assigned A2 (sf)

$83.6 million of Cl. D Certificates, Assigned Baa2 (sf)

RATINGS RATIONALE

The transaction's Aaa advance rate (the ratio of senior certificate to the Moody's Value) is 40.6%. 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.

The transaction allows for 5% voluntary substitution. 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 associated with such an option, taking into consideration Invitation Home's strong performance.

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

1. The cumulative BPO on the properties is approximately $ 1,857,690,124. For all the properties, we applied an additional haircut to the recent BPO values instead of using the lower of BPOs (after applying a haircut) 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 values whereas current property values obtained through third party BPOs could become a better indicator of market value. All the properties in this transaction were acquired before 2015 with the exception of one property. We did not receive any updated information on the renovation cost. However, we have used the most recent property valuations in our analysis to estimate Moody's Value. The total Moody's Value for the portfolio is $ 1,485,346,824.

2. As the borrower can substitute properties, Moody's assumed that a limited 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 ("HPD") factor to the properties' values ranging from 30% to 50% of the Moody's Values at an Aaa level, depending on the MSA. Our HPD assumptions are informed by, among other things, a review of the housing markets in the transaction's key MSAs and geographic concentration as measured by the effective number of MSAs. For this pool, we increased our HPD stress to account for a potential increase in geographic concentration due to voluntary substitution.

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 38 months while a portion of the properties would generate income for 28 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 additional foreclosure costs, which included fixed legal costs, total servicing and special servicing fee 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 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.

Moody's assessment of THR Property Management L.P. (the "Property Manager"), a wholly owned subsidiary of Invitation Homes, has demonstrated its ability to effectively handle the day-to-day business of managing a national single-family rental platform. Additionally, seasoned senior management team and effective use of technology are strengths of the property manager. We considered Invitation Homes performance when evaluating the tenant eligibility criteria and did not apply an adjustment to our recoveries as it is a refinance transaction backed by seasoned collateral from IH 2015-3, IH 2014-2 and IH 2013-1.

The master servicer and special servicer is Midland Loan Services, a division of PNC Bank, National Association.

Master and special servicer

A highly rated master servicer, Midland Loan Services, a division of PNC Bank, National Association (long-term deposit rating of Aa2) 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.

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 Midland Loan Services to be a strong servicer, 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

To account for a sustainable level of income and expenses, we adjusted the sponsor's underwritten net cash flow by -21.2%, on a weighted average basis. In particular, since this transaction has a seven year term, we increased capital expenditures to account for higher expenses associated with maintenance and repairs to take into consideration potential deterioration of properties due to aging. Since the properties in this transaction are from Invitation Homes 2015-3, Invitation Homes 2014-2 and Invitation Homes 2013-1 securitizations, we increased certain costs including capital expenditure to adequately reflect the historical performance of the properties in this securitization and prior transactions. Using our adjusted net cash flow and assumed starting interest rate, Moody's debt service coverage ratio was 1.31x. 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 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 2015. 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 of the disclosure form.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1131117 .

In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.

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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Khakan Haider
Associate Lead 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

Sang Shin
VP - Sr Credit Officer
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.
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