By the Numbers
Securitization market robust as some issuers exit
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. This material does not constitute research.
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.
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