By the Numbers

Single-family rental securitizations signal another strong year

Mary Beth Fisher, PhD | August 12, 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.

Price performance for single-family rental debt in both primary and secondary markets continues to be strong, although compressed cap rates and rate volatility have added friction to new issuance. A strong fundamental outlook has helped keep new issue spreads mostly stable in ‘AAA’ classes since mid-March, and spreads in ‘BBB’ classes have only widened by about 50 bp. Some recent deals have come below par, pushing yields higher. Despite lingering stress, new issue spreads across classes continue to run in-line with the wider end of secondary market levels. This is a reversal from the second half of 2020, when new SFR deals usually priced in line with the tight end of secondary levels, exposing new issue investors to wider secondary spreads on any retrades.

Primary market mostly steady since March

In the new issue market, the ‘AAA’ A class of SFR securitizations have priced steadily in the 140 bp to 165 bp area since mid-March, depending on the issuer and WAL of the tranche. This is up to 100 bp wide of their mid-2021 tights, when A classes were coming to market around 55 bp to 65 bp. The two exceptions have been a multi-borrower CoreVest deal whose A tranche came at 210 bp, and the recently priced PATH deal from new issuer Pagaya AI, a fintech company, whose A tranche came at 225 bp.

Exhibit 1: SFR Class A (AAA) Spreads at Pricing

Note: Fixed-rate deals only. CoreVest (CAFL) deals are multi-borrower and tend to come to market and trade wide of single-borrower deals.
Source: Bloomberg, Amherst Pierpont Securities

Several of the recent deals have come to market at discount prices. The yields at issuance for A classes have varied from a cycle low of 1.00% for a Progress (PROG) deal in early 2021, to about 5.25% for the most recent CoreVest (CAFL) deal. CoreVest is a multi-borrower issuer, meaning the deal is secured by multiple loans from multiple, distinct borrowers. These deals tend to price and trade wide of the single-borrower deals, which are secured by a single loan to a single borrower that covers all of the homes in the pool.

Exhibit 2: SFR Class A (AAA) Yield at Pricing

Note: Fixed-rate deals only. CoreVest (CAFL) deals are multi-borrower and tend to come to market and trade wide of single-borrower deals.
Source: Bloomberg, Amherst Pierpont Securities

New issue pricing of the ‘BBB’ D tranche also hit a cyclical low in the middle of 2021 with spreads around 125 bp. This coincided with historically tight spreads in the investment grade and high yield credit markets. After the sharp rise in rates and spread widening in the beginning of 2022, SFR has widened rather modestly since mid-March from 275 bp to about 325 bp, depending on issuer. This does not include the PATH deal, whose D class priced at a 425 bp spread.

Exhibit 3: SFR Class D (BBB) Spreads at Pricing

Note: Fixed-rate deals only. CoreVest (CAFL) deals are multi-borrower and tend to come to market and trade wide of single-borrower deals.
Source: Bloomberg, Amherst Pierpont Securities

Progress (PROG) has priced the most deals so far this year, and their deal structure tends to be consistent. Their 5-YEAR weighted average life D tranche in the SFR5 deal priced at 270 bp in March, and their 4.9 WAL D class in July with the SFR6 deal priced at 315 bp. So, there has clearly been some spread pressure down the stack, but not much.

Looking at the yields of new issues at pricing, the picture is the same. Yields on single-borrower, new issue D classes of SFR securities are currently 6.00% to 6.25%, up from 2.0% in March 2021 and 5.50% in March 2022. The CoreVest deals stand out as coming to market wide of the single-borrower deals, but they are still within context of the additional risk in SFR.

Exhibit 4: SFR Class D (BBB) Yield at Pricing

Note: Fixed-rate deals only. CoreVest (CAFL) deals are multi-borrower and tend to come to market and trade wide of single-borrower deals.
Source: Bloomberg, Amherst Pierpont Securities

Secondary market trading mostly inside of new issues

There appeared to be a bit of a new issue concession in ‘AAA’ classes of SFR securitizations earlier in the year, but as the market has remained stable that 10 bp to 20 bp concession seems to have vanished for single-borrower, repeat issuers. Trading in the secondary market for ‘AAA’ A classes has a wide range, but even paper trading at the wides in secondary is mostly in-line with new issue. Most of the secondary trading of A tranches is for somewhat shorter WAL classes, but the graph below includes secondary trading spreads only for WAL >= 4.0, which is mostly in context of the new issue market.

During the second half of 2020, SFR issuance began to meaningfully increase due to the exceptional home price appreciation and rush to single-family detached homes. At that time new issues were pricing in-line with the tightest trading levels in the secondary market. The same trend is apparent for D classes in the primary and secondary markets (not shown but available upon request).

Exhibit 5: SFR Class A (AAA) Spreads

Note: Fixed-rate deals only; WAL >= 4.0.
Source: Bloomberg, Amherst Pierpont Securities

SFR market projected to keep growing

The public securitized SFR market had been growing slowly but steadily for several years since its inaugural issue in 2013. But issuance really exploded in response to the pandemic, when it more than quadrupled from $2.2 billion in 2019 to $9.4 billion in 2020. Issuance about doubled again in 2021 as capital continued to pour into the sector. There have been 17 deals issued year-to-date in 2022 totaling $10.8 billion. This is similar to the 2021 pace of 27 deals and $17.8 billion, particularly given then bulk of 2021 issuance came in the second half of the year.

Exhibit 6: SFR securitized issuance and outstanding

Source: Bloomberg, Amherst Pierpont Securities

The SFR securitized market now has $46 billion outstanding. That should continue to grow through year-end to about $50 to $53 billion.

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.