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.
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