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CREFW-Fall2014 10.15.14

The IHSFR 2013-1 portfolio was structured with an initial period of heavy lease rollover, which caused vacancy rates to ramp up from 0% at origination to a high of 8% in February 2014 and contractual monthly rents to decline. However, the strong DSCR of 2.10x at origination easily cushioned this decline, and recent reports indicate that this deal is now performing slightly above expectations. Vacancy rates are likely to stabilize around 4-6%, well below rating agency assumptions of approximately 10%, and average rental rates have steadily increased from an average of $1,312 at origination to $1,329 as property managers have been able to push rents. Figure 3 Monthly Rents and Vacancies IHSFR 2013-SFR1 Source: Remittance reports, Nomura Figure 4 Lease Expirations IHSFR 2013-SFR1 Source: Remittance reports, Nomura CRE Finance World Autumn 2014 28 Risks and Outlook While the initial performance of single-family rental deals has been in line with expectations, risks regarding strength of sponsorship, valuation, and collateral performance may arise as these deals season. The primary concern regarding these deals is the limited history of institutional ownership of single-family rental housing. All of the rating agencies express concern about the quality and longevity of the operators, noting that skilled management is necessary to maintain stable cash flows, especially in light of the geographic dispersion of the portfolios. Both S&P and Fitch highlight operational infancy as a key factor contributing to their decision not to rate the deals as AAA credits. The business models of each of these investors continue to evolve, and, as a result, we believe that the timing of repayment for these deals is uncertain, especially in light of loose prepayment restrictions and multiple extension options. In addition to the viability and structure of the business model, the use of home price appreciation models to derive collateral value has been a topic of considerable discussion. Because it is likely that these homes may remain rental properties for several years, some believe that the portfolios should be valued primarily on the basis of rental income, while loan amounts are based on underlying single-family property prices. As a result, this differentiation may increase refinancing risk at maturity, should the market shift its view on the valuation of these properties. However, expectations for rental growth, fairly low LTVs, and the option to sell underlying homes back into the residential market should help to assuage these concerns. In spite of these uncertainties, we believe that these deals provide an appealing alternative, allowing traditional RMBS and CMBS investors to gain exposure to the rebounding housing market. Given high DSCR levels, low interest rates, and initial performance, we believe that the likelihood of term default is extremely low. Further, the strengthening residential market and solid multifamily market, as well as demand for higher-yielding securitized assets, will enable these institutional investors to refinance at the end of the extended loan term. In addition, strong issuance through next year is likely to increase liquidity in the sector, providing investors with attractive risk-adjusted returns versus other comparable sectors within securitized products. Little Pink Houses for You and Me


CREFW-Fall2014 10.15.14
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