03/20/22 03:53 PM EDT

SUNDAY NIGHT REIT READ | 3.20.22 | (INVH)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Hope everyone enjoyed the weekend!

Cartoon of the Weekend: Chrome Dome

Ticker: INVH

Subsector: Single-Family Rentals

Headline: Digging into some key points from INVH's securitization documents

We recently obtained and reviewed the offering documents for Best Idea Short INVH's 2018-SFR4 securitization maturing 1/9/26, with an original UPB of ~$960 million and current UPB of just under ~$670 million as of 12/31/21. This is one of five remaining non-recourse securitizations (but with limited guaranty) with roughly ~$3.1 billion of remaining UPB. Investors will recall that INVH has paid down roughly ~$4 billion of these issues since 1Q19 and issued just under $2 billion of senior unsecured notes since 2Q21, ostensibly to reduce leverage and also become and investment-grade issuer. While we don't disagree that this was the goal, and that investment-grade unsecured issuance by REITs is generally preferred by long-only's, upon review we also believe it is "advantageous" for INVH to be reducing this debt outstanding given the terms/covenants vis-a-vis current litigation. We present some of these points below, and would welcome feedback from both the equity and fixed-income actors on the buyside, particularly amongst anyone investing in SFR securitizations. Again, we think clients should be aware of these terms that are often overlooked by equity investors.
The original trust included ~5,400 properties across all of INVH's markets, with 22.4% of the loan amount allocated to California across 751 properties. A natural question would be, of the ~$300 million or so of UPB paid down thus far, how much of that was allocable to California and potentially covered under the whistleblower complaint?
For the purposes of this security, INVH OP functions as "Sponsor, Loan Sponsor, Owner, Borrower, and Guarantor."
Page 126, Management Agreement - (g) The Manager is also generally required to comply in all material respects with any and all laws, ordinances, orders, rules, regulations, requirements, permits, licenses, certificates of occupancy, statutes and deed restrictions applicable to the Properties. The costs of compliance are generally covered by the Borrower and will be included in the Operating Budget and payable out of the Operating Account.
Page 164, Representations & Warranties - The Loan Agreement will contain representations and warranties by each Loan Party that are customary in transactions similar to the Loan, including, without limitation:... the maintenance of all material permits and licenses; and the maintenance of all required insurance. The representation and warranties that the Borrower will be required to make are attached as Annex E to this offering circular. The “Property Covenants” will be the covenants set forth in Annex D and the “Property Representations” will be the representations and warranties set forth in Section B of Annex E.
Page 168, Loan Events of Default; Remedies: (vi) if any certification, representation or warranty made by a Relevant Party in the Loan Agreement or any other Loan Document, other than a Property Representation, or in any report, certificate, financial statement or other instrument, agreement or document furnished to the Lender shall have been false or misleading in any material and adverse respect as of the date such representation or warranty was made; provided, however, if any untrue certification, representation or warranty made after the Closing Date is susceptible of being cured, the Borrower will have the right to cure such certification, representation or warranty within 30 days after receipt of notice from the Lender; (xi) a breach of the covenants set forth in the Loan Agreement relating to the compliance with all legal requirements applicable to the Borrower.
Page 174, Condition of Property; Legal Compliance: Each Property (including the leasing and intended use thereof) will be required to comply in all material respects with all applicable legal requirements, including, without limitation, building and zoning ordinances and codes and all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits, required for the legal leasing, use, occupancy, habitability and operation of the Property, all such certifications, permits, licenses and approvals are required to be maintained in full force and effect, except as would not reasonably be expected to have an Individual Material Adverse Effect on the Property. The Borrower will be required to obtain and maintain in full force and effect all consents, approvals, orders, certifications, permits, licenses and authorizations of, and make all filings with or notices to, any court or governmental authority related to the operation, use or leasing of the Property except where the failure to obtain would not reasonably be expected to have an Individual Material Adverse Effect with respect to the Property.
Annex D-1, Property Covenants of the Borrower, 7.) Compliance with Legal Requirements: The Property (including the leasing and intended use thereof) shall comply in all material respects with all applicable legal requirements, including, without limitation, building and zoning ordinances and codes and all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits, required for the legal leasing, use, occupancy, habitability and operation of the Property, all such certifications, permits, licenses and approvals shall be maintained in full force and effect, except as would not reasonably be expected to have an Individual Material Adverse Effect on the Property.
Annex E-1, Representations and Warranties of the Borrower, 1. Organization: Each Loan Party and each SPC Party possesses all rights, licenses, permits and authorizations, governmental or otherwise, necessary to entitle it to own its properties and to transact the businesses in which it is now engaged, except to the extent that failure to do so could not in the aggregate reasonably be expected to have a Material Adverse Effect.
Annex E-8, Representations and Warranties of the Borrower, 12. Management: The ownership, leasing, management and collection practices used by each Loan Party and Manager with respect to the Properties... have been, to the actual knowledge of the responsible officers of the Manager and each Loan Party, in compliance with all applicable legal requirements, and all necessary licenses, permits and regulatory requirements pertaining thereto have been obtained and remain in full force and effect, except to the extent that failure to obtain would not reasonably be expected to have a Material Adverse Effect.
Annex E-9, Representations and Warranties of the Borrower, 17. Compliance with Legal Requirements: The Property (including the leasing and intended use thereof) complies with all applicable legal requirements, including, without limitation, building and zoning ordinances and codes and all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits, required for the legal leasing, use, occupancy, habitability and operation of such Property, except as would not reasonably be expected to have an Individual Material Adverse Effect with respect to the Property. There is no consent, approval, permit, license, order or authorization of, and no filing with or notice to, any court or governmental authority related to the operation, use or leasing of the Property that has not been obtained, except as would not reasonably be expected to have an Individual Material Adverse Effect with respect to the Property.
Page 12, Prepayment to Cure Breach: If any Property fails to comply with each of the property covenants set forth in Annex D of this offering circular (the “Property Covenants”) and the property representations (the “Property Representations”) set forth in Section B of Annex E to this offering circular (any such Property, a “Disqualified Property”), following the lapse of the applicable cure period, if any, set forth in the Loan Documents, the Borrower will be required to prepay the Loan by 100% of the Allocated Loan Amount for such Property (or in the amount of the Release Amount in the event the Property becomes a Disqualified Property as a result of a voluntary action or omission by any Loan Party or an action or omission by any third party authorized by a Loan Party, that, in each case, such Loan Party intends to result in (i) an imposition of a lien (other than a Permitted Lien) on such Property (ii) a transfer of such Property or (iii) such Property becoming a Disqualified Property (a “Voluntary Action”)).
Page 19, Limited Guaranty: The Loan Sponsor (INVH) will provide a limited guaranty (the “Sponsor Guaranty”) for (i) certain losses arising out of bad acts, Specified Liens and any Previously-Owned Properties Liabilities or any Previously-Owned TRS Liabilities described under “Description of the Loan—Guaranties” in this offering circular...
Page 152, Guaranties: On the Closing Date, the Loan Sponsor will execute a limited guaranty (the “Sponsor Guaranty”) pursuant to which the Loan Sponsor will guaranty (A) any loss, damage, cost, expense, liability, claim or other obligation to the extent actually incurred by the Lender (including attorneys’ fees, costs and out-of-pocket expenses reasonably incurred, limited to one counsel for the Lender and one local counsel in each applicable jurisdiction) arising out of or in connection with the acts or omissions of any Relevant Party or any affiliate of any Relevant Party (each, a “Designated Party”) in each case arising with respect to any of the following: (i) fraud or intentional misrepresentation by any Designated Party in connection with the Loan...
So it follows, if permits were not obtained for required work, and homes are out of code, do those potential violations (1) constitute an event of technical default, (2) require a cure payment, etc? And then as an extension, what about the other four securitizations? Are they cross-collateralized/defaulted? What implications would cash traps and/or liquidations of property within the securitizations have for meeting corporate unsecured debt payments and/or dividends. All valid questions that need to be asked (and answered), in our view. At the very least, we need to be thinking about these items.