Fortress Investment Group is launching its second-ever CRE-CLO – apparently for the second time.
The $600 million deal will recycle some collateral from Fortress’ prior deal, which was completed in 2016.
In a presale report published Wednesday, Kroll Bond Rating Agency said that FORT CRE 2018-1 will initially be backed by 19 whole loans and participations with an aggregate balance of $408.1 million and $141.9 million of cash; four of the 19 initial loans, representing 8.7% of the initial total, will be purchased from the 2016 CLO within 30 days of closing.
The deal has another 120 days to put the rest of the cash to work. Unlike Fortress’ 2016 transaction, it is actively managed and can also reinvest proceeds from loans in the portfolio for two years. Kroll had previously issued a presale report on the new transaction in early November, before the notes issued in the 2016 transaction were redeemed.
While none of the loans being acquired from FORT CRE 2016-1 have ever been associated with a principal loss, Kroll has identified one of them, an $8,000 loan on the Columbus Marriott, as a “loan of concern” due to its weak operating performance driven by low occupancy. At least two of the three others are also secured by hotels: A $10,000 loan on the Colony Palms Hotel and a $7,000 loan on the Peery Hotel. (The fourth is only identified in the presale report as “Forestbrook.”)
Once FORT CRE 2018-1 acquires the four loans, FORT CRE 2016-1 will still have four loans outstanding, two of which are currently in special servicing and two on the master servicer’s watch list.
CRE CLOs rarely include recycled collateral because the loans being securitized are transitional financing and tend to have short terms, though these terms can often be extended.
FORT CRE 2018-1 is more highly leveraged than the sponsor’s 2016 transaction. Kroll puts the loan-to-value ratio of debt held in the securitization trust at 122.2%, up from 111.1% for the prior deal. However that is still lower than some recent CRE CLOs rated by Kroll.
Another difference: The new transaction offers substantially more credit enhancement. The super senior tranche benefits from 51.5% subordination, in the form of the other notes being issued; by comparison, the super senior tranche of the prior deal benefited from 45.1% subordination. (Both are rated AAA by Kroll.)
Likewise, the senior support tranche of the new deal benefits from 45.9% subordination, up from 38.5% for the comparable tranche of the prior deal.
Kroll doesn’t spell out the reason for the additional credit enhancement in its presale report, so the impetus may have come from investors.
However, the presale report does highlight the relatively heavy exposure to lodging properties; at 21.3%, it the third highest of the comparable set, which ranged from 0.0% to 30.8%, with an average of 12.5%. Even Fortress’ prior deal had less exposure to hotels, just 15.3%.
If and when the lodging exposure declines as the loans pay down, Fortress has the ability to acquire additional lodging assets as long as the total lodging exposure does not exceed 20 of the collateral balance. KBRA generally views hospitality properties unfavorably as these assets tend to have more volatile cash flows compared to other property types, due to their dependence on nightly room rates.
The pool’s current lodging exposure consists of four full-service (14.7%), one limited service (4.1%) and one select service (2.5%) hotel. Four (11.3%) of the properties are brand affiliated and have franchise or management agreements that expire between 2027 and 2039, while the remaining two properties (10.0%) currently operate on an independent basis. The borrowers plan to perform overall renovations and/or a property improvement plan at each of the hotels.
