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Benefit Street booking forward capacity in CRE CLO market

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Benefit Street Partners is taking advantage of attractive funding for bridge lending to book some forward capacity in the commercial real estate market.

At $610 million, the lender’s next securitization of loans to fix up or repurpose apartment buildings, hotels and offices is some 50% larger than its previous transaction, completed in November 2017. That’s largely because Benefit Street Partners has only identified some $522 million of assets; the remainder $88 million of proceeds will be set aside to acquire whole loans and senior participation interests in additional assets over the next four months, according to rating agency presale reports.

After the ramp-up period is completed, Benefit Street Partners can continue to acquire previously unidentified whole loans and senior participations with principal proceeds from the mortgage assets, provided such assets satisfy the reinvestment criteria and eligibility criteria, for another 20 months.

That’s much more flexibility than the sponsor gave itself in the commercial real estate collateralized loan obligation completed in November. In that deal, it had “limited post-closing ability,” to acquire companion participations in loans that were already held in the portfolio, according to rating agency reports.

Both the prefunding period and the length of the reinvestment period are unusual for CRE CLOs issued since the financial crisis.

The initial portfolio of 28 loans is most heavily concentrated in multifamily properties, which account for 37.2% of the total, followed by hospitality, at 20.8%, office, at 20%, and retail at 11.9%.

The largest loan, at 10.9% of the initial balance, is secured by the Williamsburg Hotel in Brooklyn, N.Y. The Harlem apartment portfolio, also in New York, ranks second at 8% of the portfolio, followed by 3 Gateway Center in Newark, N.J., at 7.3%

Seven of the initial assets (29.9%) are seasoned loans that were previously securitized in a 2015 transaction, RFT 2015-FL1, issued by Realty Finance Trust, Benefit Street Partners' predecessor, according to Kroll Bond Rating Agency.

Kroll notes, unfavorably, that the new deal's lodging exposure is unusually high for a CRE CLO. The rating agency "generally views hospitality properties unfavorably as these assets tend to have more volatile cash flows than other property types due to their dependence on nightly room rates," the presale report states.

Also unusual is the fact that the initial portfolio includes one fixed-rate asset; transitional financing is typically floating rate. Fixed-rate collateral creates some risk, since the CRE CLO notes to be issued pay floating rates of interest. However, Moody’s Investors Service believes that the interest rate risk is somewhat mitigated because the par amount of the fixed-rate loan is only 3.4% of the initial balance.

Among other risks is the high leverage; Moody’s estimates the average loan-to-value of the initial asset pool to be 118.8%. Kroll Bond Rating Agency puts its slightly lower, at 115.1%. Based on the appraised value of the properties, the LTV is much lower, at 63.5%, however.

Both Moody’s and Kroll expect to assign triple-A ratings to the senior tranches of notes to be issued in the transaction, called BSPRT 2018-FL3. There are also five subordinated tranches with ratings from Kroll ranging from AA- to B-; Moody’s is not rating the subordinate tranches.

JP Morgan Securities is the underwriter.

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CMBS CLOs Benefit Street Partners