Tricon Residential 2022-SFR1 -- Moody's assigns provisional ratings to Tricon Residential 2022-SFR1

Rating Action: Moody's assigns provisional ratings to Tricon Residential 2022-SFR1Global Credit Research - 22 Mar 2022New York, March 22, 2022 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to four classes of Tricon Residential 2022-SFR1 certificates backed by one fixed-rate loan with a 59 months term secured by mortgages on 2,484 single-family rental properties owned by SFR JV-2 2022-1 Borrower LLC.The complete rating action is as follows:Issuer: Tricon Residential 2022-SFR1 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 Tricon Residential 2022-SFR1 is a $579.4 million securitization backed by a single loan secured by 2,484 single-family rental (SFR) properties owned by SFR JV-2 2022-1 Borrower LLC. All properties were acquired between July 2021 and December 2021. The transaction issues a series of certificates to which distributions of principal and interest are paid in a sequential order.The advance rate for this transaction at stresses consistent with a Aaa rating level is 39.75%. 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 FeaturesLow Leverage: The total leverage of 76.5% in Tricon 2022-SFR1 is lower than the leverage in previous Tricon SFR transactions. The corresponding Moody's LTV is approximately 90.0%, which we consider to be low compared to Tricon 2021-SFR1 with 109.5%. The low leverage increases the sponsor's incentives to maintain the properties in good condition in a stressed economic environment.Low DSCR: Moody's DSCR for this transaction is 1.14x and is the lowest we have seen across Tricon SFR transactions. Low DSCR increases the probability that the loan would default, which would occur if the collections on the collateral were not sufficient to pay interest on the certificates in any given month.Our recovery analysis factors in both the net income generated by properties as well as the interest owed to the certificates, so a lower DSCR would correspond to a lower recovery value and lower advance rates, all else equal.In comparison to the prior transactions, low DSCR in this transaction is primarily driven by the higher indicated weighted average coupon (WAC) payable on the certificates.Voluntary Substitution: The securitization incorporates up to 2.0% 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 (iv) No new MSA can be introduced in the transaction.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, an operator's use of substitution to acquire a property from the securitization could otherwise reduce the incentive to acquire properties through the premium release mechanism.Our analysis incorporates the reduced premium release incentives, potential adverse selection of properties, potential increase in geographic concentration and limited independent third party diligence on the substitute properties.Recovery AnalysisThe Final Recovery Value, which varies by rating levels, is calculated through the following steps.The aggregate BPO of the properties is approximately $757.7 million. The initial Moody's Value for all properties was determined after considering 1) the sponsor's acquisition cost adjusted for 50% of Moody's estimate of home price appreciation (excluding lower-value properties) since acquisition, plus 50% of the rehabilitation cost; and 2) 85% of the most recent BPO. The total Moody's value is $643.5 million.1. As the borrower can substitute properties, Moody's assumed that a lower 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.2. 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. For this pool, we increased our HPD stress to account for a potential increase in geographic concentration due to voluntary substitution.3. 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 owner's association fees, insurance, repairs, and sales and marketing, would stretch for 37 months while a portion of the properties would generate income for 27 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.4. 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.5. 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.Moody's assessment of TAH Operations LLC (Tricon PM), the property manager, is that the company has the ability to effectively handle the day-to-day business of managing a national single-family rental platform. A seasoned senior management team and effective use of technology are strengths of the property manager.Master and special servicerThe master servicer and special servicer is 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.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 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.Cash flow analysisMoody's weighted average adjustment to the pool's underwritten net cash flow was -25.2%. In particular, since this transaction has a fifty-nine months 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. The Moody's debt service coverage ratio is 1.14x, which is based a weighted average fixed rate coupon of 4.4%.Factors that would lead to an upgrade or downgrade of the ratings:UPMoody'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.DOWNMoody'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.Single-Family Rental Securitizations MethodologyThe 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 DISCLOSURESFor 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_1322818.The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.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, 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. James Huh Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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