By the Numbers

Securitization market robust as some issuers exit

| May 20, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Single-family rental securitizations remain a pocket of relative strength in the structured product universe despite sharply wider spreads across virtually all sectors. Unlike most other sectors, issuance has not significantly slowed despite higher rates and market volatility. And spreads in the secondary market remain reasonable although wider. One difficulty facing SFR securities is little standardization across deals, which requires investors do extensive documentation review. This fragmentation is likely to increase as new players enter and as the three largest institutional operators appear to be exiting in favor of raising money in the senior unsecured debt markets.

More growth ahead for SFR

Midway through the second quarter of 2022, the SFR market is on pace to meet or exceed its record issuance of $17.8 billion in 2021 (Exhibit 1). Ten deals totaling $7 billion have come to market from six different issuers so far in 2022, nearly double the pace of year-to-date issuance in 2021. This isn’t unexpected, given the unprecedented amount of capital flowing into the sector over the past two years. To efficiently manage properties and respond to housing needs in fast growing markets, much of that money has gone into build-to-rent initiatives. Homes under construction cannot be financed through SFR securitization. As those homes are completed and operators seek stable financing, the SFR market should continue growing for several years. Single-family construction starts were estimated to be 86,000 homes as of the third quarter of 2021, according to Arbor. Institutional operators own and manage approximately 300,000 homes, roughly 2% of the 15 million homes in the single-family rental market.

Exhibit 1: SFR issuance and outstanding

Note: Amounts in millions.
Source: Bloomberg, Amherst Pierpont Santander

Largest operators migrate to corporate debt over securitization

The three largest institutional operators are Invitation Homes, American Homes 4 Rent and Tricon, all public companies with ‘BBB-‘ ratings. These three companies manage more than half of the 300,000 properties and are expanding their portfolios through purchases of existing homes and build-to-rent initiatives. However, the bulk of the growth in BTR and SFR is coming from privately-owned operators without the investment grade ratings needed to issue senior unsecured debt at a cost competitive to a ‘AAA’ to ‘A’ rated SFR securitization (Exhibit 2).

Exhibit 2: American Homes 4 Rent outstanding debt issues

Notes: Prices and yields as of 5/19/2022.
Source: Bloomberg, Amherst Pierpont Santander

American Homes 4 Rent (AMH) recently raised $900 million of financing through two senior unsecured debt issues: a $600 million 10-year and a $300 million 30-year deal. The weighted average coupon on the debt at issue was 3.85%. The company first tapped the corporate debt market in February 2018 and has $2.6 billion of senior unsecured currently outstanding. Overall, the weighted average coupon on the debt is 3.78% with a weighted average maturity of 13 years and a weighted average spread to the Treasury curve of 200 bp.

By comparison, AMH’s last SFR securitization was in 2015, the AH4R 2015-SFR2 deal (Exhibit 3). AMH was somewhat unusual in that it preferred to raise longer-term financing through securitization. It’s four fixed-rate deals were all 10-year maturities, and one floating-rate deal was a 5-year that matured in 2019. In total, AMH raised $2.6 billion in the SFR securitization market, with $1.9 billion still outstanding.

Exhibit 3: American Homes 4 Rent most recent SFR securitization

Notes: Prices and levels from Bloomberg as of 5/19/2022.
Source: Bloomberg, Amherst Pierpont Securities

The AH4R 2015-SFR2 deal is rated ‘AAA’ to ‘A+’, has a remaining maturity of about 3.4 years and a weighted average spread to the Treasury curve of 153 bp. For an extra 50 bp of spread the company can extend their debt maturity by nearly 10 years by migrating from SFR securitizations to corporate debt. At an equivalent maturity, the corporate financing would probably be through the SFR market, despite the significantly lower ratings for the issuer compared to the securitization.

Tricon and Invitation Homes have also started issuing corporate debt, though Tricon has also tapped the SFR market in a securitization this year. Although this provides the three public SFR operators with competitive financing, corporate debt is likely not a competitive option compared to securitization for the privately held operators who would almost certainly be high yield issuers.

The large public operators are building their portfolios, but the biggest growth is coming from private operators and their aggressive BTR platforms. As these properties roll from construction to stabilized rentals over the next several years, the SFR market will likely become the go-to source for financing and could double in size. What would help is some significant standardization across deals, particularly in terms of collateral substitution and release provisions, credit metrics and deal structure. This would take some of the heavy lift off of investors and attract more capital to the space.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles