Bridge Investment Group is giving itself some additional flexibility to manage its next securitization of loans on transitional property.
Unlike Bridge’s two prior commercial real estate collateralized loan obligations, the $600 million BDS 2018-FL3 will be backed by a combination of loans and cash; the sponsor is giving itself 180 days after the deal closes to completed the purchase of a previously identified loan as well as to acquire additional loans it has yet to identify, according to rating agency presale reports.
The new deal will also be actively managed, meaning Bridge can use proceeds from repayment of loans in the portfolio to acquire additional loans, for two years, post closing.
By comparison, the lender’s prior two deals, both completed this year, were fully ramped, or invested, at closing. And proceeds in the two prior deals can only be put to work in participations of loans already in the portfolio.
Bridge appears to be paying for these privileges, however. The new deal is structured with two senior classes of notes; one of them benefits from the subordination of 54%, in the form of the less-senior notes. That’s up considerably from 46.875% subordination for the senior tranche of Bridge’s previous CRE CLO, completed in August, and 46% for the senior tranche of its inaugural deal, completed in February.
Both Kroll Bond Rating Agency and Moody’s Investors Service expect to assign an triple A ratings to this super senior tranche of notes. Kroll alone is assigning an AAA to a senior support tranche with just 46% subordination.
There are five other classes of notes that Kroll expects to rate from AA- to B- and an unrated tranche of preferred securities.
J.P. Morgan Securities, Barclays Capital and Amherst Pierpont Securities and the placement agents.
The initial loan collateral consists of 21 pari passu participations (85.8%) and three whole loans (14.2%). Twenty participations (79.3%) each have a related companion participation that represents an unfunded future advance obligation, and the aggregate unfunded amount of all future advance obligations related to the initial collateral assets is $60 million, all of which are held outside the transaction. The unfunded future advance obligations for all but one loan are held by Bridge, with the $2.8 million unfunded participation for Vaughan Place (second largest, 7.5%) held by an affiliate of the Fortress Investment Group.
Like Bridge’s prior CRE CLOs, the initial 23 loans in the portfolio (nearly 75%, according to Kroll) are heavily concentrated in multifamily properties. There is a single lodging property, which rating agencies generally consider to be a riskier asset class because revenues can be more volatile than other kinds of commercial property. Seaview, a Dolce hotel, is a 296-room resort, with two 18-hole golf courses, in Galloway, New Jersey. The hotel was previously owned by Stockton University, which was using 165 of the 296 rooms for student housing. The sponsor plans to make $15.7 million in capital improvements, including converting the dorm rooms to hotel rooms.
In addition, two of the multifamily properties have characteristics of lodging assets. If those assets are classified as hotel (which Moody’s does), the pool’s lodging exposure will be 16.4%.
Kroll considers the initial collateral to be highly leveraged. It puts the weighted average loan-to-value ratio of the assets held in the trust at 133.7%; that’s the third highest of the 22 CRE CLOs it has rated over the last 12 months. However, the KLTV is lower than that of Bridge’s own two prior CRE CLOs, which had KLTVs of 135% and 135.3%, respectively.
