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Rating Action:

Moody's assigns provisional ratings to American Homes 4 Rent 2014-SFR1

Global Credit Research - 07 May 2014

Approximately $387.7 million of mortgage backed securities rated

New York, May 07, 2014 -- Moody's Investors Service has assigned provisional ratings to four classes of certificates backed by a floating rate loan secured by mortgages on 3,871 single family rental properties backing American Homes 4 Rent 2014-SFR1 securitization.

The complete rating action is as follows:

$270.4 million of Class A certificates, Assigned (P) Aaa (sf)

$37.7 million of Class B certificates, Assigned (P) Aa2 (sf)

$40.9 million of Class C certificates, Assigned (P) A2 (sf)

$38.7 million of Class D certificates, Assigned (P) Baa2 (sf)

RATINGS RATIONALE

Credit Analysis of American Homes 4 Rent 2014-SFR1

This transaction is a securitization of cash flows from single family rental properties, and is backed by a single loan made to the borrower, a subsidiary of the sponsor, American Homes 4 Rent. The collateral for the loan includes both the mortgages on the properties and a pledge of 100% of the equity in the borrower. The transaction's cash flows come from the rental income the properties generate. Should the borrower default on the loan, the trust could recover the balance by liquidating the properties.

Moody's evaluation of the issuer's ultimate ability to repay interest and principal was based on a recovery analysis (detailed below) of the portfolio of single family rental properties backing this securitization. Moody's evaluated this deal in a stressed, but hypothetical, scenario; the deal has other resolution possibilities, few of which include a loan default.

Moody's also evaluated the portfolio cash flow of American Homes 4 Rent 2014-SFR1 to assess the probability of default during the term of the loan. However, because the amount of historical information on vacancy rates, expenses and cash flow of single family rental properties in a stressed environment is very limited, in its analysis Moody's could not rely significantly on the transaction's cash flow to meet its long-term obligations.

Moody's concerns about equity foreclosure (as expressed in "Single Family Rental Securitization Structures Without Mortgages Would Increase Risk," published 17 January 2013) were mitigated because the mortgages and pledges of the borrower's equity, both secure the loan backing the transaction. Moody's was therefore able to assign high investment-grade ratings to the senior certificates.

AMH Property Management LLC, the property manager, has demonstrated its ability to effectively handle the day-to-day business of managing a national single family rental platform. Additionally, the property manager's technological systems allow it to efficiently manage employees to control labor costs, track and monitor repairs and maintenance, and, most importantly, attract, respond to and retain tenants. Midland Loan Services, a division of PNC Bank, National Association is both master and special servicer.

Background

Moody's "Single family Rental Securitizations - Institutional Buyers Bring Different Approaches to a New Asset Class," published 6 March 2014, provides a detailed overview of the market for single family rental properties.

Methodology

The principal methodology used in this rating was "Moody's Approach to Rating CMBS Large Loan/Single Borrower Transactions" published in July 2000. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

In rating securities backed by single family rental properties, Moody's compares the credit risk inherent in the underlying properties with the credit protection the transaction structure offers. On 6 March 2014, Moody's published a request for comment which is now closed, "Moody's Approach to Rating Single Family Rental Securitizations." If Moody's approach becomes effective as proposed, there will be no ratings impact on this transaction.

The analysis of American Homes 4 Rent 2014-SFR1 is based largely on "Moody's Approach to Rating CMBS Large Loan/Single Borrower Transactions," which outlines the approach Moody's applies to large loan commercial mortgage backed securities (CMBS) backed by multifamily housing. Moody's relied on this CMBS rating methodology to analyze the expenses the underlying properties incur and the cash flow they generate and to assess the probability of default during the term of the loan, and stresses the recovery value from properties at a time of refinancing or liquidation as detailed below. However, Moody's deviated from the published methodology when assessing the collateral value, using the lower of the recent BPO (Broker Price opinion) values subject to further haircuts and the purchase price partially adjusted for renovation completed by American Homes 4 Rent instead of its usual cash flow analysis based on cap rates.

The analysis took into account, among other things, a review of the housing markets in key Metropolitan Statistical Areas (MSAs), Moody's home price depreciation assumptions for conventional RMBS, and Moody's Analytics' "Scenario 4" stress, which models a protracted slump in the economy. Because of the stressed values, Moody's deviated from its published LTV targets. For example, in order to calculate the advance rate (LTV) consistent with a Aaa rating, we assumed a further 35% - 45% price decline on the unsold properties depending on the MSA's.

The analysis also takes into account the strength of the property manager. The performance of the manager is a key driver of cash flows in a single family rental securitization. Although operating and managing single family rental properties and multi-family rental properties is similar, operating costs could be higher because of the geographic dispersion of individual single family properties. Additionally, because each home has unique features, renovating, maintaining and marketing could be more demanding than for a typical multi-family setting. Management on a national level will require greater economies of scale.

The value of single family residential properties has traditionally not been directly related to income the property could generate as a rental property. Value interpreted by traditional buyers and sellers of single family residential properties can include many qualitative factors that cannot be quantified through an income approach. Moody's believes that traditional RMBS valuation of the single family residential properties, which is based on recent sales of comparable properties, is more appropriate for this asset class. However, because of the high concentration of properties in a few markets and potentially greater price volatility, Moody's assumes greater home price depreciation when determining recovery values from these properties compared to the stress it uses to rate RMBS transactions.

Recovery Value Analysis

Moody's bases its principal recovery estimates on a liquidation scenario in which the trust liquidates a significant portion of the properties under stressed conditions that include falling home prices and long foreclosure timelines that increase the costs of maintaining the properties. Moody's recovery estimates also account for rental income, on the assumption that the trust will continue to rent out some of the homes following default until the properties are foreclosed on and vacated prior to REO sale. The collateral's final recovery value is equal to Moody's estimate of the properties' initial value (the Moody's Value) minus the value lost following a home price stress, adjusted for a portion of the rental revenue net of the full rental expenses and all expenses incurred by vacant properties. Moody's also adjusts the final recovery amount by the legal, servicing and other carrying costs associated with a portfolio liquidation. Moody's assumptions are based on its historical assessments of single family residential values and of current market conditions.

Moody's determines a stressed recovery value in a default scenario by

- assigning an initial Moody's Value to the collateral

- assuming a certain limited percentage of properties would be sold at full market value and the trust would only receive the applicable release premium

- stressing the recovery values of the remaining properties that were not released

Moody's then calculates revenue and expense adjustments to the stressed recovery value by

- assuming a portion of the properties are vacant at default and estimating rental income and associated costs on the portion of properties during the stressed liquidation timelines

- estimating the total cost required to maintain all the remaining properties until liquidation

- estimating foreclosure costs such as fixed legal costs, servicing fees, special servicing liquidation fees, and transfer taxes

- estimating potential master servicer advances plus the interest on the servicer advances

Net Cash Flow Adjustment and DSCR

Moody's evaluates the net cash flow from the properties to assess the probability of default on the loan during the term. It makes property-specific adjustments to the underwriter's net cash flow projections. In order to derive the net cash flow available to service the debt, Moody's considers current rental market conditions, a portfolio's more recent performance, operating expense ratios, and industry outlooks and forecasts made by industry participants. Moody's also considers market-level adjustments to concessions, sales and marketing, commissions, management fees, and capital items such as ongoing maintenance expenses and replacement reserves to the extent the underwritten cash flow does not already fully reflect. Moody's derives its adjustment to property level cash flow for single family rental properties from its historical assessments of stabilized net cash flow for multifamily properties.

Highlights of the Credit Analysis of American Homes 4 Rent 2014-1

The transaction's Aaa advance rate (the ratio of senior certificate to the Moody's Value) is 51.22%. 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.

Moody's calculates the Final Recovery Value, which varies by rating levels, through the following steps.

1) The cumulative Broker Price Opinion (BPO) on the properties is approximately $690 million. We determined the initial Moody's Value for this portfolio at $527.9 million after considering

(a) the sponsor's acquisition cost adjusted for (i) 50% of Moody's estimate of home price appreciation (excluding lower-value properties) since acquisition, plus (ii) 40% - 50% of rehabilitation cost, and (b) 85% of the most recent broker price opinion (BPO).

2) Moody's assumed that a certain 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) Moody's then stressed the recovery values of the remaining properties that the sponsor did not release by applying a home price depreciation factor to the properties' Moody's Value, ranging from 35% to 45% for different MSAs.

4) Under its Aaa stress scenarios, 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 owner's 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 for a typical RMBS transaction. Moody's expects the foreclosure process to be quicker given that the trust does not have to foreclose on individual borrowers; instead the trust will foreclose either on the lien on the mortgage or the equity of the SPV borrower.

5) Moody's estimated additional foreclosure costs, which included fixed legal costs, servicing fees and master servicing fees of 0.36% of the loan amount, special servicing liquidation fees of 0.75% of the property value, and transfer taxes of 0.70% for any property in Florida.

6) Finally, Moody's (a) assumed that the master servicer will continue to advance principal and interest (to the extent the servicer deems recoverable) on the certificates until the properties are liquidated and (b) estimated the interest accrued on the servicer advances.

Cash Flow Analysis

Moody's weighted average adjustment to the pool's underwritten net cash flow was -21.2%. The Moody's Debt Service Coverage Ratio is 2.04X (based on initially indicated pricing). For more information on Moody's CMBS approach to analyzing rental cash flows, please see "Moody's Approach to Rating CMBS Large Loan/Single Borrower Transactions."

Factors that would lead to an upgrade or downgrade of the rating:

A higher than assumed decline in home prices, rental vacancy rates, expenses could have an adverse impact on the ratings. In addition, the ratings could also be negatively impacted if the ability of the property manager to effectively manage the day-to-day operations of the business is compromised.

Sensitivity Analysis

If, in determining the initial rating, Moody's decreased the Moody's recovery on the collateral by 5%, the model-indicated ratings would be the following:

For the Class A's current rating of (P)Aaa (sf), Aa1

For the Class B's current rating of (P)Aa2 (sf), A1

For the Class C's current rating of (P)A2 (sf), Baa1

For the Class D's current rating of (P)Baa2 (sf), Ba1

Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time, rather they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.

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.

Moody's received and took into account one or more third-party assessments on the due diligence performed regarding the underlying assets or financial instruments in this transaction and the assessments had a neutral impact on the credit rating.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF365530

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.

As the section on loss and cash flow analysis describes, 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Padma Rajagopal
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kruti Muni
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns provisional ratings to American Homes 4 Rent 2014-SFR1
No Related Data.
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