Colony Financial, the real estate investment trust responsible for the second-ever securitization of single family rental properties, is also tapping the securitization market to fund investments in "transitional" commercial real estate (CRE).
During a conference call to discuss first quarter financial results today, executives said that the company originated five first mortgage loans and a related mezzanine loan with an aggregate unpaid principal balance of $94 million between January and March.
Early in the second quarter, Colony Financial completed its first CRE securitization, which was backed by these loans and six others, for a total of $190 million. The underlying collateral includes hospitality, retail, multi-family and mixed-use properties. The senior bonds were priced with weighted average coupon of LIBOR plus 1.78%. The average loan-to-value ratio on the loans was 70%; the average initial debt yield was 10% and the average debt service coverage ratio was 1.5x.
Darren Tangen, COO and CFO at Colony Financial, said during the call that the company retained $79 million of subordinate bonds and that these securities are now yielding blended rate of Libor plus 14 bps.
Tangen said that the lending platform targets shorter-term, floating-rate first-lien mortgages.
“[This] is an exciting strategy for Colony Financial to manufacture outside yield in an otherwise low yield lending environment, in an area of meaningful potential balance sheet growth in years to come,” he said.
The loans are underwritten on properties that are in need of stabilization, either through additional lease-up, repositioning and/or major capital investments
“Given the more intensive underwriting of transitional CRE assets commercial banks, life insurance companies and conduit lenders have not been active in this market which has left a large opportunity for more specialized lender, such as Colony Financial, to fill the void,” said Tangen.
The transitional CRE market is even more underserved when loan sizes fall below the $25 million threshold. “This all translates into higher interest rates on new loan origination that, once securitized, can deliver attractive returns on the retained interest,” said Tangen.
Colony Financial is in the process of closing another $300 million of loan originations and plans to complete between $700 million and $1 billion loan originations in 2014. The plan, said Tangent, is to fund some of the costs through the securitization market.
On April 3, Colony Financial's Colony American Homes subsidiary priced $513 million of bonds backed by single family rental properties. It was only the second such deal ever, following on the heels of a $479 million securitization by The Blackstone Group’s Invitation Homes in November 2013.