Hurricane Florence damaged some 30 Invitation Homes Inc. residential properties when it walloped the Carolinas in September, but that hasn’t kept the houses out of a new mortgage-backed securities transaction.
A total of 46 homes underpinning the Invitation Homes 2018-SFR4 bond have been hurt by Hurricanes Florence and Michael, and the exact impact of that damage isn’t yet known, according to a pre-sale report from Kroll Bond Rating Agency. But investors are still sweet on the deal, which turns a $960 million loan into bonds backed by single-family rental properties. The securities are expected to price by the end of the week.
“We’re not overly concerned with the hurricanes in this deal,” said Garrett Tripp, a senior portfolio manager with Denver-based Braddock Financial who oversees a $270 million asset-backed securities fund. “We thought about it a lot more back in 2017, when you had the storms come through in Harvey and Irma.”
They’re not concerned because the deal’s overall exposure to hurricane damage is so low — 46 homes is a tiny slice of the roughly 5,000 in the portfolio — and also because safeguards are written into the deal that protect against this very scenario.
The underlying loan agreement spells out property condition requirements that, if not met — like if a hurricane makes a home unlivable — force the borrower to either swap out the property for a similar one or buy it out of the deal, according to the Kroll report. Plus, the loan specifies that properties in designated flood areas must carry flood insurance, and the issuer carries insurance that protects against named storms.
That doesn’t mean mortgage bonds are completely storm-proof. Tripp explained that a catastrophe the size of Hurricane Katrina, for example, could impact the rents that support deals like these, invalidating assumptions made by the issuer. “I do think there’s a level where if the damage was large enough, as an investor, we would stay out,” he said.