By the Numbers

Liquidity, yield and spread curves in single-family rentals

Mary Beth Fisher, PhD | September 22, 2023

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 (SFR) securitizations sit in a hybrid space between MBS and CMBS. SFR deals typically involve a single loan taken out by an institutional borrower to finance a pool of rental homes. The underlying risk may be residential, but the structure makes SFR similar to single-asset, single-borrower (SASB) deals. The strength of single-family homes combined with the collateral silo of deals has kept SFR credit curves flatter and spreads trading inside of most non-agency CMBS. But there is still relative value in the market for portfolios that prioritize liquidity, yield or rolling down a spread curve.

SFR deals have become a bit more standardized over time, and performance has benefited tremendously from exceptional home price appreciation and rent growth through pandemic. The following recommendations are based on a broad overview of trading activity across issuers and by tranches and rating classes:

The credit curve of an SFR issuer tends to be flatter than SASB credit curves, and trading activity is over a fairly narrow band in most tranches.
Credit spreads have tightened predictably over time, with each vintage having a nearly distinct credit curve.
Liquidity in the secondary market is, not surprisingly, highly sensitive to deal and tranche size.
Active traders have the greatest liquidity in the largest tranches of the most frequent issuers: the AAA-rated A class, the BBB- rated E class, and whichever high yield tranches are cut to be the largest, which can depend on the deal and the issuer.
Buy and hold investors can pick up additional yield relative to the rating by focusing on the smaller A-rated C class, and BBB+ rated D tranches; and buying securities of less frequent issuers.
Regardless, SFR securities of similar vintages and class ratings tend to trade in relatively tight bands, which makes pricing a bit more transparent across the product.

A note on classes and ratings

SFR deals follow the same format as CMBS and SASB structures—the ratings step down from AAA to BB or below as the letter of the class traverses the alphabet. Generally at issue the ratings structure is as follows:

Table 1: Example ratings at issuance across tranches

Note: Illustrative purposes only as a guideline.
Source: Bloomberg, Santander US Capital Markets

In theory, single-family rental (SFR) deals should occupy the space between non-agency, single-family residential and multi-family non-agency CMBS, and that appears to be the case. Further down in credit the difference between commercial and residential real estate keeps single-borrower SFR predominantly inside of multifamily SASB. That can provide an attractive option for both non-agency residential investors to reach for additional yield, and non-agency multifamily investors to diversify into single-family rentals. SFR is a comparatively small asset class with about $50 billion currently outstanding across a handful of issuers.

Exhibit 1: Amherst Residential (AMSR) credit curve extracted from secondary trading levels

Note: Secondary trading spread data of all AMSR securities by class since 9/1/2022. * indicates last trade. Bar represents median of trading range. Spreads shown are to the LIBOR swaps curve prior to 2/15/2023, and to Treasury curve afterwards. Class ratings can be upgraded over time. Spreads are to full extension. Multiple numbered classes, for example, E1 and E2, are combined.
Source: FINRA/Trace, Santander US Capital Markets

Credit spreads tighten across vintages

There is additional information that can be extracted about the credit curves when the vintages of the various securities are identified (Exhibit 2). Most of the AMSR investment grade securities of the 2019 vintage have already matured, and the few trades of 2019 securities over the past year have been of the longest duration, non-investment grade classes G through I. Consequently, the tightest part of the AMSR credit curve belongs almost exclusively to the 2020 vintage. The vast majority of trading activity in the 2020 vintage across all tranches has been at or below the median spread, and in many cases has been 50 to 100 bp below that median. In fact, for consistent and stable SFR issuers, investors can roughly extract credit curves for each vintage. The current vintage typically the widest spreads, gradually tightening to the oldest vintage still outstanding. This is the result of two factors:

The shortening of duration as the bonds get closer to maturity; and
The accumulation of home price appreciation, which raises the value of the underlying collateral and reduces credit risk.

Exhibit 2: AMSR credit curves across vintages

Liquidity varies across the credit curve

Another factor which can be imputed from the secondary trading data is that the relative liquidity of various tranches varies significantly across the credit curve. As another example, the credit structure of Progress Residential (shown in Exhibit 3) – the most frequent SFR issuer with the largest amount of debt outstanding – exhibits similar trends in secondary trading. This isn’t surprising but it does reinforce expectations:

In the investment grade tranches, secondary trades are most frequent in the largest tranches: the A, E and B, typically. Caveat that where there are multiple classes – typically of the E and F tranches – these are combined. However, the larger sized class will still tend to have higher secondary trading volume and the smaller class of the same letter will tend to be priced relative to its more liquid sibling.
Buy and hold investors who want to pick up additional yield by sacrificing some liquidity may want to invest in the C and D classes, while investors who expect to trade in and out of positions would likely find tighter bid-ask spreads in the A, B and E classes.
The high yield and non-rated tranches tend to vary in size depending on the issuer and the deal. In some Progress Residential (PROG) deals, the BB or B rated G tranche in the high yield space is considerably larger than the F, and consequently more liquid in the secondary market. The lower level of credit support is material though, as it can be the first tranche not retained by the issuer and the lowest rated tranche of the deal.

Exhibit 3: PROG credit curves across vintages

Note: Secondary trading spread data of all PROG securities by class since 9/1/2022. * indicates last trade. Bar represents median of trading range. Spreads shown are to the LIBOR swaps curve prior to 2/15/2023, and to Treasury curve afterwards. Class ratings can be upgraded over time. Spreads are to full extension. Multiple numbered classes, for example, E1 and E2, are combined.
Source: FINRA/Trace, Santander US Capital Markets

Credit and liquidity differences across issuers

Secondary trading can also provide a platform for investigating credit and liquidity differences across issuers for similarly rated tranches. This is a macro view only, since differences in original or remaining maturity, underlying credit or collateral composition is not taken into account. However, evaluating the differences in trading levels do provide a starting point.

Over the past year, fixed-rate class A SFR spreads have traded roughly in the range of 25 bp to 250 bp across issuers.

Older vintage deals that are close to maturity, for example, 10-year deals issued by American Homes 4 Rent (AH4R) in 2014 and 2015. AH4R hasn’t tapped the securitized SFR market since 2015. As a listed equity, the company now primarily raises unsecured debt in investment grade market to finance it’s portfolio.
Recent vintages of shorter maturity deals, for example, 5-year deals issued by AMSR and PROG in 2019 and 2020, have also dominated the lower end of the spread range over the past year.
The small, first time issuers, PATH, BRDGE and NRMLT, have occupied the upper end of the spread range with 2022 issues.
CoreVest, the lone multi-borrower SFR securitized issuer to date, spans the spread spectrum, with its older deals nearing maturity trading tight, while it’s 2021 issues are still at the upper end of the range. CoreVest deals are the only SFR securities to date that have experienced delinquencies, defaults and some losses. The wide trading range and relatively lower liquidity even on their A classes is not surprising.

Exhibit 4: Class A SFR spreads in secondary trading across issuers

Note: Secondary trading spread data of all fixed-rate class A SFR securities by issuer since 9/1/2022. * indicates last trade. Bar represents median of trading range. Spreads shown are to the LIBOR swaps curve prior to 2/15/2023, and to Treasury curve afterwards. Class ratings can be upgraded over time. Spreads are to maturity.
Source: FINRA/Trace, Santander US Capital Markets

Tricon (TAH and TCN) is also one of the largest SFR issuers (Exhibit 5) and their credit and liquidity is comparable to that of AMSR, PROG and First Key (FKH).

Exhibit 5: SFR deals by issuer

Note: Tricon American Homes was recently fully subsumed by Tricon Residential.
Source: Bloomberg, Santander US Capital Markets.

Class E spreads tend to show a much broader trading range discriminated by vintage, performance and issuer (Exhibit 6). Secondary trading spreads for these typically BBB- rated classes at issuance have ranged from 100 bp to 550 bp over the past year. Older deals that are close to maturity and have often been upgraded occupy the tighter end of the range, while 2023 vintages and those from small issuers trade at the top of the range.

Exhibit 6: Class E SFR spreads in secondary trading across issuers

Note: Secondary trading spread data of all fixed-rate class E (E1 and E2 are combined) SFR securities by issuer since 9/1/2022. * indicates last trade. Bar represents median of trading range. Spreads shown are to the LIBOR swaps curve prior to 2/15/2023, and to Treasury curve afterwards. Class ratings can be upgraded over time. Spreads are to full extension.
Source: FINRA/Trace, Santander US Capital Markets

Notably, this also illustrates that one of the best places to pick up substantial spread compression and retain the benefit of higher liquidity is in the E classes. The smaller D classes are a notch higher in the ratings, but overall suffer from a bit lower trading volume (Exhibit 7).

Exhibit 7: Class D SFR spreads in secondary trading across issuers

Note: Secondary trading spread data of all fixed-rate class D SFR securities by issuer since 9/1/2022. * indicates last trade. Bar represents median of trading range. Spreads shown are to the LIBOR swaps curve prior to 2/15/2023, and to Treasury curve afterwards. Class ratings can be upgraded over time. Spreads are to full extension.
Source: FINRA/Trace, Santander US Capital Markets

SFR deals trade inside of similar non-agency commercial real estate securitizations

The structure and collateral of an SFR securitization looks the most like a multi-family single-asset, single-borrower (SASB) deal. The strength of the single-family residential market and relatively high demand for a limited supply of SFR securities has kept spreads inside of SASB.

The new issue spreads of the AAA-rated, A class of single-borrower, fixed-rate SFR deals have ranged from 80 bp to 220 bp since early 2022, and have settled around 160 bp for the last couple of deals (Exhibit 8).
The discount margins (yes, but fixed-rate SASB deals were pretty rare during this time frame) AAA-rated, A class SASB deals have ranged from about 90 bp to 275 bp, depending on property type, over the same time frame. Industrial deals are a reasonable comparable and generally come in-line to tighter than multifamily. Four of the last five industrial deals have had their A classes price with discount margins from 200 bp to 250 bp (Exhibit 9).

Exhibit 8: SFR class A spreads at pricing

Note: CoreVest (CAFL) deals are multi-borrower and price wide of single-borrower deals. Data since 1/1/2022.
Source: Bloomberg, Santander US Capital Markets

As you go down the credit spectrum, SFR tends to price tighter than comparably rated multifamily and industrial SASB deals, for example, by roughly 50 bp to 100 bp tighter in the D class (not shown, data available upon request).

Exhibit 9: SASB class A discount margins at pricing

Note: Floating benchmark is either 1-month SOFR.
Source: Bloomberg, Santander US Capital Markets

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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