Another commercial mortgage lender specializing in “transitional” properties is making its debut in the securitization market.
Hunt Mortgage Group is marketing bonds backed by 23 loans on 36 properties totaling $279.4 million; several of these loans have future funding commitments totaling $15.5 million, for a total target collateral balance of $349.2 million.
All of the loans were originated by Hunt Mortgage Group, a subsidiary of Hunt Cos., one of the largest originators of loans for the Federal Housing Administration, Freddie Mac and Fannie Mae multifamily loan originators. The company and its affiliates originate some $2 billion a year for the government-sponsored enterprises, and it currently services $12.5 billion of loans.
The properties that ultimately serve as collateral for this transaction, dubbed Hunt CRE 2017-FL1, likely do not quality for GSE financing, at least not yet. Most are in what rating agency DBRS describes as “a period of transition.” That means the owners have a plan to stabilize income and improve the value the properties. All pay floating rates of interest, and no principal, for their entire original terms, which range from 18 to 36 months.
The majority is multifamily properties; only four, representing 12.2% of the initial pool balance, are secured by commercial and specialty properties, which, according to DBRS, “often exhibit higher cash flow volatility than traditional multifamily properties.”
Another plus, according to the rating agency: None of the loans in the pool are secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties.
Also, the properties are primarily located in core markets (4.2% urban and 61.4% suburban), which benefit from greater liquidity. There are only six loans, representing 23.6% of the pool, located in tertiary markets, and no properties located in rural markets.
DBRS puts the overall weighted average debt service coverage ratio at 1.11x, which it considers to be “high-leverage financing.”
One loan, Brookhaven Portfolio, representing 8.4% of the pool, has sponsorship associated with negative credit history. The sponsor filed for bankruptcy in 2010 on a portfolio of loans to negotiate a forbearance agreement.
DBRS expects to assign an AAA to the senior tranche of Class A notes to be issued by Hunt CRE 2017-FL1, which benefits from 42% subordination; as well as to the Class A-S notes, which only benefit from 37% subordination. There are four other tranches of notes with ratings ranging from AA to B. Hunt will retain the bottom 16.75% of the transaction balance.
Hunt is the second multifamily lender to debut in the CRE-CLO market this year, following Greystone, which completed its first CRE-CLO, and the first transaction by anyone since risk retention rules took effect, in March.
So far this year, there have been seven transactions (excluding Hunt’s deal) totaling $2.5 billion; that’s nearly as much as the $2.7 billion completed last year as a whole. DBRS recently reported that there are at least five in the pipeline for the third quarter.
Interestingly, Hunt’s deal and Greystone’s share the same placement agents, Wells Fargo Securities and JPMorgan Securities. Another unusual characteristic that they share, at least for this asset class, is a reinvestment period.