Progress Residential 2021-SFR3 Trust — Moody’s assigns provisional ratings to Progress Residential 2021-SFR3 Trust

Rating Action: Moody’s assigns provisional ratings to Progress Residential 2021-SFR3 TrustGlobal Credit Research – 06 Apr 2021New York, April 06, 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 2,381 single-family rental properties owned by Progress Residential (Progress) 2021-SFR3 Trust securitization.The complete rating action is as follows:Issuer: Progress Residential 2021-SFR3 TrustCl. A, Provisional Rating Assigned (P)Aaa (sf)Cl. B, Provisional Rating Assigned (P)Aa3 (sf)Cl. C, Provisional Rating Assigned (P)A3 (sf)Cl. D, Provisional Rating Assigned (P)Baa3 (sf)RATINGS RATIONALEOverviewThe transaction’s Aaa advance rate (the ratio of senior certificate to the Moody’s Value) is 41.2%. 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.The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world’s economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of single family rental sector from a gradual and unbalanced recovery in US economic activity.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Key Transaction FeaturesEnhanced structural features: The transaction structure has a multi-tier DSCR test and a payment-in-kind (PIK) feature for class F to H. Similar to Progress 2021-SFR2 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.Increased Leverage: The total leverage (excluding Class I) of 87.5% in Progress 2021-SFR3 is the same as in Progress 2021-SFR2. The sponsor will retain Class I, which is about 7.50% of total BPO value, for the term of the transaction.Delinquent tenants: As of February 28, 2021, there are 331 tenants who have been delinquent for 30 days or more, representing approximately 13.9% of the total property count, which is substantially higher than most Progress transactions of approximately 1-2% but is similar to the delinquency rate of 12.9% in Progress 2021-SFR1 and 9.4% in Progress 2021-SFR2 transactions. However, total delinquent amount is approximately $1,355,605, representing approximately 2.6% 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. As of March 2021, 163 tenants are still delinquent. Overall, Progress has maintained strong rent collections on the 2021-SFR3 pool with over 90% 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%, to pay the class H 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, and if the DSCR for classes A through G is at least 1.20x, to pay remaining interest due on class H.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, G and H 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 three-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.The securitization incorporates up to 5% voluntary substitution (by property count) over the life of the transaction. Similar to Progress 2021-SFR2 transaction, the total property substitution can be increased up to a maximum of 35% subject to certain conditions. Any substitution over 5% is subject to receipt of a no downgrade confirmation (a rating agency condition, or RAC (See our 2010 Special Comment, “Moody’s Clarifies Policy for the Issuance of RACs” which makes clear that the provision of a RAC remains entirely within Moody’s discretion, and it may be that Moody’s will not provide a RAC even if the transaction documents – to which we are not a party – require it.). At the time of a RAC request, we would likely consider, among other things, the credit profile of the updated pool, including geographic concentrations, and third party reviews of the substitute properties.Similar to Progress 2021-SFR2, 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. 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.Recovery analysisThe Final Recovery Value, which varies by rating levels, is calculated through the following steps.1. For the 29 newly acquired property 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.For the remaining 2,352 properties (including properties from Progress Residential 2017-SFR1), we estimated Moody’s Value by applying an additional haircut to the recent BPO values instead of using the lower of haircutted BPOs and cost basis to estimate a new Moody’s value. We applied this approach because as properties age, original purchase price and renovation costs become less relevant whereas current property values become more important.We estimate the Moody’s Value to be $507,886,703.2. Moody’s assumed that a lower 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 pre-determined 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 35 months while a portion of the properties would generate income for 25 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. It is an indirect subsidiary of Pretium Partners, LLC. Properties in the securitized pool will be 100% managed through subsidiaries of Progress Residential PM Holdings, LLC, who are responsible for all aspects of operations: renovations, repairs, leasing, marketing, tenant screening, tenant services, compliance, safety and general preservation of the collateral.Master and special servicerA highly rated master servicer, Midland Loan Services, a division of PNC Bank, National Association (long-term senior unsecured A2 negative, long-term bank deposits Aa2 negative, bca a2) 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, G and H. In addition, servicing fees will be calculated based on outstanding principal balance minus any deferred interest and other than in respect of Component I.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, 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 -24.3%. The Moody’s debt service coverage ratio is 1.56x 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: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 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 Alternatively, please see the Rating Methodologies page on 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: information on the representations and warranties and enforcement mechanisms available to investors are available on .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 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 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 least one ESG consideration was material to the credit rating action(s) announced and described above.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 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 see 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 for additional regulatory disclosures for each credit rating. Pavan Prema Kumar Analyst Structured Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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