The CRE CLO market has attracted a number of new players this year that traditionally kept short-term, “bridge” loans on balance sheet. Securitizing these loans has always offered a better match, in terms of maturity, than lines of credit from banks. But in recent months, spreads on commercial real estate collateralized loan obligations have made this type of funding particularly attractive.
It’s telling that Hunt Mortgage Group, part of a larger real estate group with deep pockets, is taking advantage of the deal-making economics. Hunt bought Centerline Capital in 2013, adding a lending business to their already vast and well-diversified platform. Michael Becktel, managing director and head of proprietary lending at Hunt Mortgage, says the fact that the company is private and family owned allows it to be flexible. The Hunts have committed a significant amount of capital to growing the finance and investment side of the organization, which includes balance sheet lending.
So when Hunt first started looking at launching a CLO, the company was primarily interested in diversifying its sources of financing. It wasn’t an “arbitrage,” in the way that CLOs backed by below investment-grade corporate loans are.
While the firm wasn’t trying to time the market, the timing turned out to be fortuitous.
What type of bridge lending does Hunt do?
MICHAEL BECKTEL: Historically, HMG was an agency lending shop, which still makes up the core of the platform. When Hunt bought Centerline, it divested a large affordable housing business and cycled that capital back into the company to grow the nonagency side of the business.
In our bridge-lending business, we focus on light-transitional/value-add properties or timing bridge transactions. While we’ve continued to expand the box, the core of our bridge business is built around creating feeder business for our permanent lending platform. Outside of multifamily, we stick to the major food groups of office, industrial and retail.
We also have a fixed-rate permanent lending proprietary product called HFX, which has a seven-year term, and is comparable in pricing, leverage, and structure to a conduit product but without the headaches. The loans range from $7.5 million to $25 million. In this product, we’ve been able to remove the execution risk that is oftentimes associated with CMBS lending. Hunt offers a free spread-lock at loan application, so borrowers won’t get re-traded as things change in the capital markets. In addition, Hunt and its partners are effectively the “b-piece buyer," which removes closing-table “kick-out” risk as well. We also service and specially service the loans, which our borrowers very much appreciate. Our non-multifamily bridge lending will now drive borrowers to that side of the platform.
Why not so a pure multifamily CLO?
Both investors and rating agencies are comfortable with multifamily, but the concentrations in the CRE CLO are reflective of Hunt Mortgage’s portfolio. The vast majority is agency multifamily, but a third or so is diversified. We wanted to show the market that, yes (the CRE CLO) is driving agency lending, and that’s key, but Hunt has broader expertise than that.
Will CRE CLO funding boost Hunt’s bridge lending?
Certainly the CRE CLO markets are extremely attractive right now, we’re very pleased with the execution, but it’s just another financing vehicle for us. (We want to have) a diversified set of financing. When we first started to look at launching a CLO, it wasn’t an arbitrage. We didn’t think of it that way. The cost of warehouse financing was relatively attractive. The CLO was approximately equivalent in terms of the weighted average cost of financing and pricing. It was more about additional diversification in financing sources. (A CLO) is truly matched term (funding), it’s non-recourse, and when the market improved, it became a great trade-off. But we weren’t trying to time the market, we were just executing our business plan.
Our goal is to continue to grow the business in an intelligent way. But we will be a bridge lender whether the CLO market is there or not, unlike some that rely on CRE CLO for financing. That said, the cost of capital in this deal allows us to be more aggressive on spread for deals that we like. What we won’t do is sacrifice credit quality, but it’s a very competitive market.
Did the transaction introduce the company to new investors?
There was some of that; the road show was very helpful in marketing the company. Not everyone knows how broad and deep Hunt’s platform is. Being able to tell our story was useful, not just for the lending business, but Hunt companies more broadly.
What’s the outlook for the multifamily sector?
The majority of what we do is workforce housing, needs based. The rental market may be slowing down, but that’s attracting more people (borrowers) to the (bridge loan) space. A combination of factors is driving borrowers into the bridge space. Sponsors that may have traditionally been stabilized investors are chasing yield, and looking for value-add opportunities. Bridge loans are of course a great alternative for value-add deals. Part of it is just educational; borrowers are learning more about the product and appreciate the relatively low-cost, the IO nature and its flexibility.