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Rating Action:

Moody's assigns provisional ratings to Progress Residential 2021-SFR9 Trust

12 Oct 2021

New York, October 12, 2021 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to four classes of certificates backed by one fixed-rate loan secured by mortgages on 1,808 single-family rental properties owned by Progress Residential (Progress) 2021-SFR9 Trust securitization.

The complete rating action is as follows:

Issuer: Progress Residential 2021-SFR9 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 transaction's Aaa advance rate (the ratio of senior certificate to the Moody's Value) is 37.99%. 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

Enhanced structural features: The transaction structure has a multi-tier DSCR test and a payment-in-kind (PIK) feature for classes F and G. Similar to Progress 2021-SFR8 transaction, the PIKable certificates can receive partial 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 than prior transactions. 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.

High Leverage: The total leverage excluding Class H is of 91.5% in line with previous Progress transactions. The sponsor will retain Class H, which is about 8% of total BPO value, for the term of the transaction.

Delinquent tenants: As of August 31, 2021, there are 46 tenants who have been delinquent for 30 days or more, representing approximately 2.54% of the total property count, which is lower than the delinquency rates seen in recent Progress transactions. Total delinquent amount is approximately $104,879 (as of August 31, 2021), representing approximately 0.23% of total annual gross revenue. For tenants who are affected by COVID-19, Progress does not offer rent forgiveness but instead would waive late charges, accept partial payments and offer rental repayment plans. Overall, Progress has maintained strong rent collections on the 2021-SFR9 pool with close to 97.2% rental collection rate.

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 E-2 sequentially, and, if funds are available, to pay the class F up to the lesser of its coupon and 4.5%, to pay the class G up to the lesser of its coupon and 4.5%, and then if the DSCR for the non-PIK bonds is at least 1.20x, to pay remaining interest due on class F (if any), and if the DSCR for classes A through F is at least 1.20x, to pay remaining interest due on class G.

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 F, and G will not result in an event of default, but the interest due will accrue to the balance of these bonds. Once the DSCR ratio for class A through class E-2 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 their respective deferred interest amounts in sequential order.

Voluntary prepayments from unrestricted cash not associated with a release of collateral would be distributed in reverse sequential order. This benefits the trust not only because the securitized loan balance would decrease while the collateral balance would remain unchanged, but the reverse sequential payment would also improve the transaction debt service coverage ratio as weighted average spread on the loan decreases. Overall, we are credit neutral on this particular feature as the cash flow is from the sponsor and not from the trust, and is an option that the sponsor can exercise. Of note, voluntary prepayments to cure low DSCR trigger still remain sequential.

This deal has a 4.5 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.

Progress 2021-SFR9 transaction incorporates 5% voluntary substitution. 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, our recovery analysis incorporates the risk of increased geographic concentration due to voluntary substitution and limited third party review scope on substituted properties.

Similar to Progress 2021-SFR8, this deal will also 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. With the ECR feature, we believe there will be less incentive for the sponsor to release properties from the pool and pay a premium to the trust. The ECR will be subject to rating agency confirmation, or 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 requirement as well as geographic diversity and rents and cash flow tests. Although ECR is subject to rating agency confirmation and certain other tests, our recovery analysis took into consideration this feature.

Also, our premium release assumptions took into account the 5% voluntary substitution and the ECR feature in this deal.

Recovery analysis

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

1. For all the 1,808 newly acquired properties, we determined Moody's Value by considering both (a) the sponsor's acquisition cost (the price it paid to acquire the properties) adjusted for improvements that the sponsor has made and any home price appreciation since acquisition and (b) the most recent BPO, to which we applied a 15% haircut because the value was not based on full appraisal by a licensed appraiser, a process we consider to be most reliable. To adjust the acquisition cost for improvements and home price appreciation for the properties, we added 40% of the cost of any renovations that the sponsor completed, plus 50% of our estimate of the increase in the property's value from home price appreciation, based on the change in the MSA-specific National Association of Realtors' median home value since acquisition. We did not give a home price appreciation benefit to lower-value properties because they tend not to appreciate as much as higher value ones and are less liquid.

We estimate the Moody's value to be $458,313,134.

2. Moody's assumed that a limited percentage of these properties will be sold out of the transaction at full market value before a borrower defaults, netting proceeds equal to the allocated loan amounts plus a predetermined 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 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 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 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.

Property management is critical to the performance of this transaction, which requires a disciplined approach to renovations and economies of scale in marketing and management. A strong property manager with the ability to manage a geographically diverse portfolio of single-family rental properties is a strong mitigant to operational risk and cash flow variability. As part of the rating process, we reviewed Progress Residential PM Holdings, LLC (the property manager) and found them to be acceptable in its role. The property manager, a Delaware limited liability company, was formed in March 2016. The property manager is an affiliate of the sponsor. Properties in the securitized pool will be 100% managed by the property manager and its affiliates, who are responsible for all aspects of operations: renovations, repairs, leasing, marketing, tenant screening, tenant services, compliance, safety and general preservation of the collateral.

Sponsor

The sponsor of the mortgage loan is P3-A Single-Family Rental Trust ("Progress Residential Trust"), which is organized as a Maryland real estate investment trust and is managed by Pretium Single-Family Rental Manager III, LLC (the "Fund Manager"), a subsidiary of Pretium Partners, LLC ("Pretium Partners").

Of note, failure of the loan sponsor (or a replacement non-recourse carveout guarantor) to maintain (i) net assets of not less than $150,000,000 (inclusive of the loan sponsor's or such replacement non-recourse carveout guarantor's direct or indirect interest in the borrower) and (ii) Net assets of not less than $90,000,000 (exclusive of the loan sponsor's or such replacement non-recourse carveout guarantor's direct or indirect interest in the borrower) (clauses (i) and (ii), collectively, the "Sponsor Financial Covenant") would not constitute a loan event of default. In addition, so long as the loan sponsor complies with the Sponsor Financial Covenant, the loan sponsor's investments and other activities will be entirely unrestricted.

In our view, with a weaker Sponsor Financial Covenant, if the net worth of the loan sponsor decreases, then the net worth might not be adequate for the transaction to manage the properties in the securitized pool and to affect the undertaking of prohibited actions covered by the limited recourse guaranty or to honor any obligations under the limited recourse guaranty if such prohibited actions are taken and losses result under the loan. We factored in the weaker covenant in our analysis.

Master and special servicer

Midland Loan Services, a division of PNC Bank, National Association 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 E-2 and not class F, and G. In addition, servicing fees will be calculated based on outstanding principal balance minus any deferred interest and other than in respect of Component H.

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 and consider Midland Loan Services to possess strong servicing capabilities, 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 -23.4%. The Moody's debt service coverage ratio is 1.45x for class A through class H. 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_1306640.

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_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.

Ruomeng Cui
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

Sang Shin
VP - Sr Credit Officer/Manager
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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