By the Numbers
Secondary markets look best for catching tighter SFR spreads
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.
Investors looking to add exposure to single-family rentals should focus on picking up pieces in the secondary market or risk missing some upside. New issue pipelines for single-family rentals remain thin with many operators bypassing public markets in favor of warehouse financing or private deals that offer more flexible terms. But spreads in single-family rentals have meanwhile joined other parts of the market in tightening and show potential to go tighter.
The final SFR new issue deals defined the wides
Similar to most securitized products, spreads entered 2022 close to their tights and trended wider throughout the year. The new issue market in CMBS, SASB, CRE CLOs and single-family rentals (SFR) shut down in the middle of November when spreads were still near their peaks. The final SFR deals to price in 2022 came at the wides (Exhibit 1). The ‘AAA’ A classes priced at spreads of 50 bp to 75 bp in mid-2021, and from 75 bp to 100 bp during the first quarter of 2022. The last deal to price was from Bridge (BRDGE 2022-SFR1) whose A class priced at 250 bp on November 17 for a yield of 6.75%. The ‘BBB’ E2 class came at 750 bp over for a yield of 11.75%. This was the first deal from Bridge, so the market demanded a price concession. But a FirstKey (FKH 2022-SFR3) deal priced a day before Bridge at 215 bp for the A class and 400 bp for the D (BBB+) tranche, while the E classes were retained.
Exhibit 1: Single-family rental class A (AAA) new issue spreads hit wides in November
Note: Fixed-rate deals only New issue tranches often not priced at par. CoreVest (CAFL) deals are multi-borrower and tend to come to market and trade wide of single-borrower deals The final 4 deals of the year priced versus the Treasury instead of the LIBOR swap curve, which added roughly 5 bp to the spread.
Source: Bloomberg, Amherst Pierpont
Spreads have since tightened significantly in secondary trading
Across most structured products, spreads hit their wides between mid-October to mid-November. That coincided with recent peak 10-year Treasury rates, when they were above 4.00%. As the economic data began to improve and the Fed indicated it would downshift from 75 bp hikes to 50 bp hikes, the markets became more constructive and spreads began to tighten.
Exhibit 2: Single-family rental class A (AAA) spreads tighten in secondary trading
Note: Fixed-rate deals only; bonds in secondary market have weighted average life >= 4.0. Spreads shown are the average spread for each CUSIP that traded on a particular day.
Source: Bloomberg, FINRA/Trace, Amherst Pierpont
The ‘AAA’ class A tranches of SFR deals tightened in secondary trading from about 210 bp over LIBOR swaps to below 175 bp, depending on the deal. Trades during January have often been in the 160 bp context and below. This isn’t unique to SFR, as other non-agency CMBS and CRE CLOs have experienced similar performance. SFR provides some market transparency since trading levels are available on TRACE, unlike most other mortgage-backed securitized products.
The credit curve remains steep with lower-rated tranches trading at significantly wider spreads, though there has been considerable tightening there as well. The D classes of SFR deals were briefly trading 350 bp to 400 bp above LIBOR swaps (Exhibit 3) in November and early December, before tightening to below 300 bp. The longer WAL classes are still roughly 50 to 75 bp wide of their June 2022 levels and could outperform as the Fed continues to downshift over the next couple of months.
Exhibit 3: Single-family rental class D (BBB) spreads in secondary trading
Note: Trades of fixed-rate, D class tranches of single-family rental deals. D classes are typically rated BBB+ at issue but are often upgraded over time. Weighted-average life and spreads are to maturity, not to full extension.
Source: FINRA/Trace, Amherst Pierpont
Securitization market remains stalled
SFR investors seeking to add exposure need to either be very competitive in the secondary space or seek out opportunities to enter private financing deals, as the moribund new issue market shows little signs of coming back to life before late in the second quarter. Commercial real estate transaction volume, though not perfectly analogous to residential transaction volume, is at a seasonal low. Some buyers are pushing for lower prices to lift capitalization rates – a strong incentive with short term financing rates on the verge of approaching 6.00%.
Private financings of SFR portfolios, particularly build-to-rent communities, increased as the securitization markets became more volatile in the latter half of 2022. This may curb new securitized issuance in 2023 as operators and investors work together on chunkier or bespoke transactions given the greater flexibility of terms.
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