Benefit Street Partners, the credit arm of private equity firm ProvidenceEquity, is tapping the securitization market to finance 25 retail, office, industrial, and multifamily properties that are being redeveloped.
This type of financing is becoming increasingly common as the commercial real estate market starts to cool, prompting landlords to fix up or repurpose buildings. But the lending is primarily being done by banks and insurance companies that keep the loans on balance sheet. Investment funds like Benefit Street Partners play a smaller role, which is why these kinds of securitizations are still relatively rare.
The deal, BSPRT 2017-FL1, is structured as a commercial real estate collateralized loan obligation. Among other things, this allows Benefit Street to actively manage the portfolio of collateral. By comparison, a commercial mortgage bond conduit is backed by a static pool of loans.
The loans themselves are also different from typical CMBS loans. They have shorter terms and pay floating rates of interest, as opposed to 10-year fixed-rate terms for CMBS loans.
And unlike CMBS collateral, which is typically “stabilized,” or completed and fully leased, the properties backing BSPRT 2017-FL1 generally are undergoing renovations or are being converted to new uses, which is the premise for seeking short-term, floating-rate debt.
The biggest exposure (9 loans, 31.1% of the pool) is to office properties. But the single largest loan is a $32 million mortgage on Cedarbrooke Apartments, a multifamily building in Auburn, Ill., a suburb of Detroit. The property is 95.3% occupied, but the owner is in the process of renovating units to upgrade kitchen and bathroom fixtures and replace flooring, lighting throughout. This is expected to allow management to increase monthly rent by $250 to $300 a unit.
DBRS considers the financing to be highly leveraged. It puts the weighted average debt service coverage ratios for the entire portfolio, on a term and refinance basis, at 0.98x and 0.90x, respectively.
Fifteen loans, representing 57.9% of the pool, have a future funding component, meaning that the owner of the property will be able to borrow additional funds, further encumbering the properties. The proceeds necessary to fulfill these obligations, which total $46.4 million, will be drawn on primarily from a committed warehouse line and will be held outside the trust, but will be pari passu with the trust participation.
The securitization trust will issue three tranches of notes totaling $339.5 million. DBRS expects to assign a AAA to the senior tranche, which benefits from 46.515% subordination. There will also be a tranche of preferred shares representing 18.8% of the transaction balance that will be retained by an affiliate of Benefit Street.
Situs Asset Management is the servicer; J.P. Morgan Securities and Goldman Sachs are the placement agents.
