Granite Point Mortgage Trust, the real estate investment trust spun out of Two Harbors Investment last year, is marketing its first securitization of loans used to fix up or repurpose commercial real estate.
The $826.6 million transaction, GPMT 2018-1, is collateralized by 23 loans totaling $748 million and $78.6 million cash, according to Kroll Bond Rating Agency. The cash will be used to acquire two loans totaling $68.1 million that are expected to close after GPTM 2018-1 does, and a $10.5 million companion participation in one of the trust loans.
That represents approximately two-fifths of the REIT’s $2.4 billion portfolio, according to Kroll.
The deal is what’s known as a commercial real estate collateralized loan obligation, a vehicle that has become very popular for financing short-term floating-rate mortgages. Six transactions were completed in the first quarter of this year, and there are 10 in the second- quarter pipeline, according to Kroll. The rating agency estimates that in 2018, total issuance volume could be $12 billion to $15 billion, up from $7.7 billion in 2017.
Compared with some recent deals by regular CRE CLO issuers that are actively managed, Granite has a limited ability to buy and sell assets during the life of the transaction. In addition to three loans identified in the presale report, the sponsor can also acquire companion participations related to the initial assets for 2.5 years post-closing. It cannot acquire loans on any additional properties, however.
In other ways, however, the transaction is pushing the envelope. Of the 25 commercial mortgage assets, six (30.3%) are non-controlling participations in whole loans.
“In certain situations, if conflicts of interest arise between GPMT (whose affiliates hold the controlling participations) and the noteholders, such as during a loan workout, the noteholders have no control or consultation rights that would enable them to have any input regarding the resolution strategy,” Kroll notes in the presale report.
The rating agency added that the exposure to non-controlling participations in this transaction is lower compared to some of the recent, similarly sized transactions, where the initial exposure to non-controlling participations exceeded 95% - an apparent reference to a deal sponsored last year by the Blackstone Group.
The trust loan collateral is also highly leveraged, with a weighted average in-trust loan-to-value ratio, as measured by Kroll, of 125.3%. That the third highest of the 12 CRE CLO transactions rated by Kroll in the last 12 months, which ranged from 112% to 135%, with an average of 121%.
Kroll expects to assign an AAA to $442.21 million of Class A notes, which benefit from 46.5% credit enhancement, as well as to $52.59 million of Class A-S notes, which benefit from 40.125% credit enhancement.
Granite Point’s transaction cannot be called before May 2020; if it is not called, the coupon on the Class A and A-S notes steps up on October 2022; the coupon on the Class B and Class C notes steps up in February 2023 and the Class D notes in August 2023.
