Halister News

(Bloomberg) -- Tranches of single family rental bonds offer attractive relative value vs credit risk transfer bonds and non-agency RMBS, though there’s limited upside in SFR when compared with single-borrower/large loan CMBS, Wells Fargo analysts Gary Zhu, Neil Delap and Marielle Jan de Beur write in research note.

• “We recommend AAA/AA SFR bonds as a portfolio diversification trade; however, we see limited near-term outperformance potential in senior SFR tranches”
• Investors might favor SFR tranches in AAA/AA space given less idiosyncratic risk vs SASB CMBS floaters; in addition, the Moody’s CPPI Index shows major markets have CRE valuations that are 35% above pre-crisis peak levels
• Some investors question sustainability of SFR market given shrinking supply of discounted homes available for purchase; in addition, the sector has only 2 yrs of history
• CLOs could also be favored over SFR for investors with multi-asset mandates; AAA/AA SFR bonds have underperformed similarly rated CLOs since June 2015
  • “With the recent widening in SFR spreads, the sector is now trading at a discount versus CLOs. We believe SFR bonds should trade wide to CLOs”
• “SFR bonds become more interesting in the middle of the capital stack, specifically single-A and BBB+ rated tranches”
  • Generically, single-A rated SFR tranches offer ~230bp, 205bp, 165bp and 125bp over credit card ABS, STACR M1, CAS M1 and generic legacy RMBS
  • Single-A rated SFR bonds are trading inside of similarly rated CMBS large-loan floaters and 3.0 CLOs on a nominal basis
• Consumer credit availability, homeownership rates, macroeconomic growth are factors that influence performance of non-agency RMBS and SFR
  • “SFR bonds provide diversification because the underlying collateral should react differently than non- agency RMBS to changes in these economic conditions”
• Currently projecting $5b-$7b in SFR issuance for 2016; “however, given the recent spread widening, we may revise our estimate downward as sponsors choose alternative funding sources”