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Rating Action:

Moody's assigns provisional ratings to Home Partners of America 2021-2 Trust SFR transaction

21 Oct 2021

New York, October 21, 2021 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to four classes of certificates backed by one fixed-rate loan secured by a pool of 6,148 single-family rental properties owned by Home Partners of America 2021-2 Trust (6,108 properties owned by the Borrower and 40 mortgage loans on single-family properties in Texas which are owned by a wholly-owned subsidiary of the Borrower).

The complete rating action is as follows:

Issuer: Home Partners of America 2021-2 Trust

Cl. A, Assigned (P)Aaa (sf)

Cl. B, Assigned (P)Aa3 (sf)

Cl. C, Assigned (P)A3 (sf)

Cl. D, Assigned (P)Baa3 (sf)

RATINGS RATIONALE

Overview

The advance rate to BPO for this transaction at stresses consistent with a Aaa rating level is 35.50%. 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

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 (i) 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, (ii) the aggregate in place rents of the substitute properties is equal or greater than the current rent of the replaced properties at the time of receiving the written notice to substitute the properties, (iii) the underwritten net cash flow of the substitute properties for the trailing twelve months at the time of receiving the written notice to substitute the properties is at least equal or greater than the greater of (a) trailing twelve months current underwritten cash flow or (b) underwritten net cash flow as of the closing date, and (iv) No new MSA can be introduced in the transaction and no MSA percentage can be increased by more than 2.5% of allocated loan amount.

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. Our analysis also took into consideration the RTP is the choice of the tenants and the RTP cannot be synchronized or timed with the ECR. In addition, the properties where tenants are given notice of their intent to exercise their RTP options will be excluded from the ECR.

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. Our analysis incorporates potential adverse selection of properties, premium release from the right to purchase program, potential increase in geographic concentration and limited independent third party diligence on the substitute properties.

Future substitution

Of note, unlike other SFR transactions, this transaction allows the sponsor to release a substitute property without simultaneously acquiring another eligible property so long as the sponsor deposits the release amount in a substitution reserve account (future substitution). The sponsor must substitute the subject property within one year from the date of such deposit and a failure to effect a future substitution later than such date will result in the release of the funds in the substitution reserve account to pay the bond holders. The sponsor is not permitted to effect a future substitution in connection with a release of a property as a result of a renter's exercise of its option to purchase the property. Future substitutions generally provide the sponsor flexibility in managing the process of substitution.

Total potential future substitutions in this transaction are limited to 5% of the closing date pool by count if it is a voluntary substitution and 10% of the collateral value as of the closing date if such substitution is due to a disqualification of a property.

We believe future substitution introduces the risk of a shortfall in the trust's cash-flows during the period when the funds are deposited in the substitution reserve account. To address this risk, we analyzed the DSCR sensitivity and view the results of our analysis as sufficient.

Sponsor: Home Partners Holdings LLC ("HPA") is the securitization sponsor and loan sponsor. HPA commenced operations in June 2012. The principal business of HPA since its formation has been the acquisition, renovation, leasing and management of single-family residential homes under its Right to Purchase Program. The Right to Purchase Program is different from the single-family rental model typically employed by other operators and that allows a prospective resident to select its home from housing inventory that is for sale to homeowners rather than properties operated as rental properties. HPA receives property management services from Pathlight, wholly-owned subsidiary of HPA Inc. We deem HPA an adequate sponsor for the transaction. HPA is required to provide yearly audited financial statements as well as several agreed-upon companywide performance metrics. We will monitor the performance of HPA on an ongoing basis.

Right to Purchase (RTP) program: Significant portion of the properties (28.2% by property count) are rented by residents who have a right to purchase the property in the future at an agreed upon exercise price. In the RTP program, residents have identified a home that is within the resident's rental and acquisition budget and meets HPA's investment criteria. Renters with right to purchase options are therefore incentivized to maintain their properties well, and consumer-chosen properties may be in better school districts than properties otherwise acquired, which could benefit property recovery values in a liquidation scenario. Also, when renters exercise the right to purchase, the property will be released from the securitization at a premium which leads to faster deleveraging of the transaction, a credit positive. The RTP percentage by property count (28.2%) is lower than previous HPA transactions. In our analysis we took into account the historical RTP exercise rate and also noted that some properties are released from the pool for non RTP reasons. In our premium release benefit assumptions, we considered this information.

Allocation of Mandatory Release Prepayments: This transaction has a higher percentage of RTP options (28.2% by property count), which is less beneficial to the transaction if exercised compared to previous HPA deals. Consistent with HPA 2021-1 transaction, the mandatory release RTP prepayments will be distributed to the offered certificates (Class A through Class G) in pari passu/pro rata order. We view the pro-rata RTP prepayment feature as credit negative for the senior tranche and credit positive for the subordinate tranches. To assess the impact of the pro-rata RTP prepayment feature to the Class A senior bond, we consider the RTP prepayments to the subordinate tranches under a high premium release scenario as potential payment shortfalls. The payment shortfalls are considered as additional recoveries to the subordinate tranches.

Multiple-property pool: The loan is secured by multiple properties. A loan secured by multiple properties benefits from lower cash flow volatility because excess cash flow from one property can augment the cash flow of another to meet the debt service requirements. The loan also benefits from the pooling of equity from each underlying property. The loan is secured by a pool of 6,148 single-family rental properties (6,108 properties owned by the Borrower and 40 mortgage loans on single-family properties in Texas which are owned by a wholly-owned subsidiary of the Borrower) located in 56 MSAs in 21 states.

Effective property manager: The day to day property administrator for this transaction is Home Partners of America LLC ("Property Administrator"). The property manager is Pathlight Property Management ("Property Manager"), which became wholly owned by Home Partners of America on April 29, 2016. The Property Administrator and Property Manager combined have approximately 150 full-time personnel as of August 31, 2021, dedicated to property management, marketing, leasing, financial and administrative functions, and acquisition and renovation functions. The Property Manager is responsible for day-to-day management of the properties, including collection functions (and will continue to be following the origination of the Loan and issuance of the Certificates)(except in the case of past due rent amounts that are sometimes outsourced to a collection agency), as well as managing any litigation, any issues relating to the Loan Sponsor's Right to Purchase Program and the decision to sell any properties to third parties.

Servicing: Midland Loan Services (Midland), a Division of PNC Bank, National Association (long-term deposit rating of Aa3) will be the master servicer and special servicer of this transaction. The master servicer will be responsible for the servicing of the loan and advancing of principal and interest. Also in a default scenario, the special servicer will be responsible for administrating/working out the loan. The master servicer and special servicer have experience servicing and managing commercial and multi-family mortgage loans and real estate assets. Midland has the resources and experience to manage and dispose of the assets in the event of a borrower default. The responsibilities of the master, primary and special servicer are similar to those in a typical commercial mortgage-backed securities (CMBS) transaction. The defined and active role of the special servicer is a credit positive.

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.

Legal Issues: Due to the presence of Right to Purchase Agreements, the transaction included certain structural features to comply with consumer laws in Texas which could limit the servicer's options to liquidate the Texas properties in a default scenario. We have made some adjustments to our Texas foreclosure timeline assumption, but we believe that overall the impact of these additional structural features is minimal. Furthermore, the mortgages backing the transaction are subject to the leases and tenant right to purchase options which may make it more difficult to dispose of the properties than properties that are not subject to a right to purchase option. However, we believe the impact will be minimal because the tenant can only exercise the right to purchase option at a price that is in excess of allocated loan amount for any given property and that an investor considering whether to purchase the property would likely view having an existing rent-paying resident as a positive.

For more information on this transaction and certain unique aspects such as the Right to Purchase Program, please refer to our Presale Report.

Recovery Analysis

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

1. The cumulative BPO on the properties is approximately $2.5 billion. We determined the initial Moody's Value to be approximately $2.0 billion after considering 1) the sponsor's acquisition cost adjusted for 50% of our estimate of home price appreciation (excluding lower-value properties) since acquisition, plus 40% of the rehabilitation cost; and 2) 85% of the most recent value based on BPOs. For properties acquired more than 3 years ago, we generally applied a higher haircut to the recent BPOs because we do not give benefit to the original acquisition price and post-acquisition renovation costs of these properties.

2. We assumed that a limited percentage of these properties will be purchased out of the transaction at full market value before the borrower defaults, netting proceeds equal to the allocated loan amounts plus a pre-determined premium on those properties.

3. For the remaining properties, we applied a home price depreciation factor to the properties' values ranging from 30% to 50% of the Moody's Value at a Aaa-stress level, depending on the MSA.

4. Under our Aaa stress scenario, we 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 months while a portion of the properties would generate income for months. Our 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. We 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.

6. Finally, we 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.

In addition, the loan agreement specifies minimum tenant eligibility criteria and lease requirements. We view the tenant eligibility criteria in the loan agreement as weak because there is no income-to-rent coverage criteria. We took this into consideration in our analysis and applied a negative adjustment to our recoveries.

Cash flow analysis

To account for a sustainable level of income and expenses, we adjusted the sponsor's underwritten net cash flow by -21.1%, on a weighted average basis. In particular, since this transaction has a five 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. Using our adjusted net cash flow and assumed starting interest rate, Moody's debt service coverage ratio was 1.41x. 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 "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_1307602.

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.

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_1288235.

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

Sonny Weng
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.
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