DBRS Morningstar Finalizes Provisional Ratings on Home Partners of America 2020-2 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the Single-Family Rental Pass-Through Certificates (the Certificates) issued by Home Partners of America 2020-2 Trust (HPA 2020-2 or the Issuer):

-- $108.3 million Class A at AAA (sf)
-- $31.3 million Class B at AA (sf)
-- $12.1 million Class C at A (sf)
-- $22.8 million Class D at BBB (high) (sf)
-- $10.7 million Class E at BBB (low) (sf)
-- $27.6 million Class F at BB (low) (sf)

The AAA (sf) rating reflects 54.04% of credit enhancement provided by subordinated notes in the pool. The AA (sf), A (sf), BBB (high) (sf), BBB (low) (sf), and BB (low) (sf) ratings reflect 40.73%, 35.59%, 25.92%, 21.38%, and 9.68% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

The HPA 2020-2 Certificates are supported by the income streams and values from 838 rental properties. The properties are distributed across 18 states and 38 metropolitan statistical areas (MSAs) in the United States. DBRS Morningstar maps an MSA based on the ZIP code provided in the data tape, which may result in different MSA stratifications than those provided in offering documents. As measured by value, 49.7% of the portfolio is concentrated in three states: Colorado (23.9%), Washington (14.3%), and Minnesota (11.6%). The average purchase price per property is $338,277, and the average value is $339,962. The average age of the properties is roughly 27 years. The majority of the properties have three or more bedrooms. The Certificates represent a beneficial ownership in an eight-year, fixed-rate, interest-only loan with an initial aggregate principal balance of approximately $235.5 million.

As in typical single-borrower, single-family rental transactions, the waterfall has straight sequential payments with reverse sequential losses.

DBRS Morningstar estimated the base-case net cash flow (NCF) by evaluating the gross rent, concession, vacancy, operating expenses, and capital expenditure data. DBRS Morningstar’s base-case underwriting yielded an aggregate annualized NCF of approximately $8.9 million. Based on DBRS Morningstar’s NCF assumptions outlined in the presale report, the DBRS Morningstar NCF analysis resulted in a minimum debt service coverage ratio of greater than 1.0x.

Vacancy data in the single-family rental space is relatively limited. In general, based on performance data in existing securitizations as well as information gathered in annual property-manager reviews, vacancy is considered low in the single-family rental market. However, because of the lease expiration profile, DBRS Morningstar applied a base vacancy rate of 9%, an additional base vacancy adjustment related to the impact of the Coronavirus Disease (COVID-19) pandemic, plus a qualitative adjustment that brought the vacancy rate to 12.5% of the gross income, which is more conservative than the underwritten economic vacancy rate of 4.1% of the Issuer’s gross income. As noted in DBRS Morningstar’s monthly Single-Family Rental Performance summary (under the Research tab at www.dbrsmorningstar.com), the vacancy rate across issuers is heavily influenced by the number of lease expirations in each month. Generally, the more leases expiring in a given month, the higher the vacancy rate will be. With 70.2% of the properties by count expiring from July 2021 to September 2021, DBRS Morningstar expects vacancy levels to increase around this three-month period.

Additionally, DBRS Morningstar applied a stress to the broker price opinions (BPOs) because, in general, a valuation based on a BPO may be less comprehensive than a valuation based on a full appraisal. Independent Settlement Services (ISS) provided full appraisals for 60 properties in the pool, and DBRS Morningstar adjusted its valuation stresses to account for full appraisals. In addition to the BPO stress mentioned above, DBRS Morningstar recently adjusted that stress upward because of the impact of the coronavirus pandemic.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: September Update,” dated September 10, 2020.

The transaction allows for discretionary substitutions of up to 5.0% of the number of properties as of the closing date, as long as certain restrictions are met.

The Sponsor intends to satisfy its risk retention obligations under the U.S. Risk Retention Rules by holding the Class G Certificates, either directly or through a majority-owned affiliate.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is U.S. Single-Family Rental Securitization Ratings Methodology (May 28, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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