By the Numbers
SFR outperformance leaves SASB looking more attractive
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-asset single-borrower (SASB) deals now look like attractive alternatives to single-family rental (SFR) securitizations. SFR spreads have recently tightened back to levels of a year ago with help from strong fundamentals, elevated rent growth and a bit of a scarcity component. SFR has outperformed many private CMBS still lingering a bit wide as fears of office property defaults start to roil the market. SASB deals consequently now offer simplicity of loan and collateral analysis similar to SFR but at relatively wider spreads.
Common to SFR and SASB: one loan backed by one or more properties
In both SFR and SASB deals the underlying asset is a single loan, which can cover one property or many properties of the same type. In SFR deals the collateral can be hundreds to thousands of rental homes across several states. The collateral backing a SASB deal ranges from a single trophy office or hotel property to a portfolio of industrial or multifamily properties. One of the strengths of both securitizations is that there is only a single loan covering the collateral, and the borrower is typically very experienced and well capitalized. This simplifies analysis of the loan. It also helps that there have been zero defaults in either single-borrower SFR or SASB to date.
Strong SFR spread performance
The simplicity of evaluating the loan combined with a strong outlook for residential real estate has allowed SFR deals to price inside of most other non-agency CRE products. Spreads on the A class of SFR deals at pricing hit their tights in the fourth quarter of 2021 into the first quarter of 2022, with new issue spreads of the ‘AAA’ A classes coming to market at 80 bp over the 5-year Treasury (Exhibit 1). Spreads widened to 160 bp to 180 bp later in 2022, although CoreVest and a couple of first-time issuers marked the wides in November at 210 bp to 250 bp. The market has since become more constructive, with longtime issuers Amherst and Progress recently pricing their A classes at 120 bp to 125 bp, inside of where both issuers brought deals through most of 2022. The all-in yield is about 5.50%, assuming the loans do not prepay.
Exhibit 1: New issues spreads on SFR class A, rated ‘AAA’
Note: Class A is typically ‘AAA’ at issue. CoreVest (CAFL) deals are multi-borrower and price wide of single-borrower deals. Classes not necessarily priced at par. Data since January 2022.
Source: Bloomberg, SCIB US
The story in the ‘BBB+’ D class of SFR deals is much the same (Exhibit 2). New issue spreads widened in 2022, going from a low of about 150 bp to around 320 bp, again ex-CoreVest and some novice issuers. The recent Progress and Amherst deals both priced the ‘BBB+’ D class at 265 bp over the 5-year Treasury. It is worth noting that both deals had low coupons of 3.80% (PROG) and 3.75% (AMSR) and the bonds came at a significant discount to par; likely deals that waited to come to market until the environment was more receptive.
Exhibit 2: New issue spreads on SFR class D, rated ‘BBB+’
Note: Class D is typically BBB+ rated at issue. CoreVest (CAFL) deals are multi-borrower and price wide of single-borrower deals. Classes not necessarily priced at par. Data since January 2022.
Source: Bloomberg, SCIB US
SASB has tightened less than SFR
While most SFR deals have fixed-rate coupons and 5-year maturities, most SASB deals for the last two years have had floating coupons and mostly 5-year maturities. Pardon the minor sin of comparing fixed-rate spreads to floating-rate discount margins, but it does show nearly identical trends. The new issue discount margins of ‘AAA’ SASB A classes (Exhibit 3) and ‘BBB+’ SASB D classes (Exhibit 4) of SASB deals have started to tighten.
Exhibit 3: New issue discount margins on SASB class A, rated ‘AAA’
Note: Class A is typically ‘AAA’ rated at issue. Data since January 2022.
Source: Bloomberg, SCIB US
At the beginning of 2022 when spreads were at their tights, A class discount margins were in the neighborhood of 100 bp for most property types, while those for the D class were around 200 bp for the tightest deals, though showed significantly more variance. Notably in both cases, SASB deals backed by retail properties consistently priced among the widest. New issue SASB spreads more than doubled for most property types. After a long drought of issuance, a recent industrial and hospitality deal each priced. They came inside the wides of 2022 but have not recovered at the same pace of SFR spreads.
Exhibit 4: New issue discount margins on SASB class D, rated ‘BBB+’
Note: Class D is typically BBB+ rated at issue. Data since January 2022.
Source: Bloomberg, SCIB US
The recovery down the stack in D class SASB is weaker, particularly considering the strength of the industrial sector and the propensity for hotels, like residential rentals, to raise prices along with inflation. Recent discount margins were 330 bp (industrial) and 425 bp (hospitality) over 1-month term SOFR. With 1-month term SOFR at 4.55% and headed higher, that provides yields of 7.85% and 8.80%. Like SFR, SASB has not seen any defaults yet, and it benefits from very strong sponsors. The recent D classes have 30% to 45% credit enhancement, which provides a considerable buffer even if something does go wrong.
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 © 2024 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.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
