Rating Action: Moody's assigns provisional ratings to New Residential Mortgage Loan Trust 2022-SFR1Global Credit Research - 10 Jan 2022New York, January 10, 2022 -- 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 1,200 single-family rental properties owned by New Residential Mortgage Loan Trust 2022-SFR1 (NRMLT 2022-SFR1 ) securitization. The properties were acquired by affiliates of New Residential Investment Corp. (NRZ) , the loan sponsor, between August 2019 and September 2021.The complete rating action is as follows:Issuer: New Residential Mortgage Loan Trust 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 The advance rate for this transaction at stresses consistent with a Aaa rating level is 26.75%. 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 FeaturesLeverage: The loan's leverage is high, which could reduce the sponsor's incentives to maintain the properties in good condition in a stressed economic environment. The total leverage of 95.00% in NRMLT 2022-SFR1 is in line with FRTKL 2021-SFR1 at 95.0% and lower than Progress 2021-SFR11 at 99.5%. The corresponding Moody's LTV is 115.5%, compared to FRTKL 2021-SFR1 at 118.5% and Progress 2021-SFR11 at 124.4%. We reduced our stressed recoveries to account for Moody's LTV exceeding 100%. The loan sponsor, NRZ, will retain 5% of the initial certificate balance of each class of the certificates to satisfy risk retention obligations.Excess Collateral Release: Similar to recent SFR transactions, this deal will 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 The ECR will be subject to rating agency confirmation, or RAC, that the ratings will not be withdrawn or downgraded as a result of the exercise of such feature.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.Voluntary Substitution: The securitization allows for up to 5% voluntary substitution (by property count) over the life of the transaction. The total property substitution can be increased up to a maximum of 35.0% subject to certain conditions. Any substitution over 5% is subject to receipt of a no downgrade confirmation (a rating agency condition, or RAC). 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. Our recovery analysis takes into account the risk of increased geographic concentration because of voluntary substitution and limited third-party review scope on substituted properties.Alignment of Interest: In typical SFR transactions, the property manager is usually an affiliate of the sponsor. In contrast, in this transaction, the sponsor delegates the day-to-day management of the properties in the pool to an external third-party property manager, RENU Property Mgt LLC (RENU), who is also providing property management services for other SFR property owners. The alignment of interest risk is partially mitigated because of the arrangement between RENU and NRZ. RENU and NRZ are aligned through a Make Whole Agreement (MWA). The MWA compares the portfolio actual performance versus the underwriting assumptions from RENU. In case the portfolio actual yield exceeds the targeted yield, RENU will earn an additional fee. On the other hand, if the portfolio actual yield is below the targeted yield, RENU will make NRZ whole so that NRZ will achieve its underwritten cap rate. This arrangement strengthens the sponsor/management arrangement in this transaction because it incentivizes the property manager to effectively manage the portfolio.Enhanced structural features: The transaction structure has a multi-tier DSCR test and a payment-in-kind (PIK) feature for classes F, G, H, and I. Similar to Progress 2021-SFR11, 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.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%, to pay interest due on class H up to the lesser of its coupon and 4.5%, to pay interest due on class I and then if the DSCR (calculated as of the last day of each calendar quarter) 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, if the DSCR for class A through G is at least 1.20x, to pay remaining interest due on class H and if the DSCR for class A through H is at least 1.20x, to pay remaining interest due on class I.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, class G, class H and class I 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.Recovery analysisThe Final Recovery Value, which varies by rating levels, is calculated through the following steps.1. For all the 1,200 newly acquired properties, we determined Moody's Value by considering both (a) the sponsor's acquisition cost (the price it paid to acquire the properties) 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 50% 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. We estimate the Moody's value to be $231,796,121.2. We assumed that a limited percentage of the properties would be sold out of the transaction at full market value prior to a borrower default, 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. We then calculated the revenue and expense adjustments for the distressed properties that were sold. The revenue would come from the in-place rental income on the portion of properties that were still rented while awaiting liquidation, and the expenses, from in-place expenses, including maintenance, taxes, servicing, and other fees and costs on the properties.Both the revenues and costs depend heavily on the assumed timelines necessary for foreclosure and liquidation. The foreclosure timeline will depend on whether the trust forecloses on the equity pledge from the borrower, which is faster, or on the liens from the mortgages. The length of a property foreclosure itself depends in part on whether the property is in a judicial or non-judicial foreclosure state. In our Aaa stress scenario, we assume that the trust pursues the longer and costlier mortgage foreclosure route; in our Baa2 stress scenario, we assume that it pursues the quicker equity foreclosure route. We calculated revenues and expenses in three additional steps:5. In our Aaa stress scenario, we assume that the total cost required to maintain all the properties remaining in the pool after default, including our estimates for real estate taxes, property management fees, vacancy, homeowners' association fees, insurance, repairs, and sales and marketing, would stretch for 37 months, while a portion of the properties would generate rental income for 27 months. We placed a lighter stress on foreclosure timelines for this transaction than in a typical RMBS transaction because we expect the foreclosure process to be quicker given that the trust does not have to foreclose on individual borrower; instead, it will foreclose either on the lien of the mortgage or the equity in the SPE borrower. 6. Finally, Moody's assumed that the 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.6. We also 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 property transfer taxes.7. Last, we assume that the master servicer will continue to advance interest on the certificates until the properties are liquidated, and estimated the necessary interest accrued on the amount of servicer advances. The final recovery value is the sum of the recovery values of the premium released properties (Step 3), the recovery values of the distressed-sold properties (Step 4), and the rental income following default (Step 5), minus the maintenance costs (Step 6), foreclosure expenses (Step 7), and advance reimbursements. The transaction's advance rate is the ratio of the liabilities to the final recovery value. We use the advance rate to determine whether the asset value is sufficient to support a targeted rating level, given the amount of the transaction's liabilities. To gauge the sensitivity of the transaction's advance rate to different underlying assumptions, we ran scenario analyses varying the home price depreciation rate, vacancy rate, and premium release percentage.The Servicer and Special ServicerA highly rated servicer, Midland Loan Services, a Division of PNC Bank, National Association (long-term senior unsecured A2 stable, long-term bank deposits Aa3 stable) 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, H and I. In addition, servicing fees will be calculated based on outstanding principal balance minus any deferred interest.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 -25.3%. Based on Moody's assumed starting interest rate, the Moody's debt service coverage ratio is 1.07x for class A through class I. 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 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_1315768.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. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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.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. Max Sauray Vice President - Senior Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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