Issuers this month have pushed forward several new structured-finance offerings intended to back project financing of commercial real estate (CRE) properties.
The deals include a second 2021 CRE collateralized loan obligation managed by a collateral advisor arm of Ares Management, a deal that is among four CRE CLOs deal to price this month.
HERA Commercial Mortgage 2021-FL1, via Citigroup, is a $945 million managed CRE CLO (commercial real estate collateralized loan obligation) secured by fixed-rate, interest-only short-term loans transitional and non-stabilized properties including office, multifamily, industrial, lodging and self-storage.
Starwood Real Estate Income Trust (NYSE: STWD), meanwhile, is proposing a $500 million project finance CDO through its collateral advisor, STWD Investment Management, LLC.
The HERA transaction involves 21 whole or participation loans with an in-trust balance of $833 million, along with $112 million of cash collateral that may be used to acquire a pair of identified, delayed-close loans up to 90 days after closing.
The managed transaction will have a two-year revolving period through February 2023 for Ares to reinvest in new property loans, which carries the risk of potentially increased the deal’s already high leverage with a 135.6% loan-to-value ratio (as measured by Kroll Bond Rating Agency).
Ares Commercial Real Estate Management, a subsidiary of Ares Rea Estate Enhanced Income REIT, is sponsoring the deal. It originated all but two of the loans in the pool that were taken out by Extra Space Storage LP; Ares has since acquired those storage-portfolio loans.
Proceeds from ten of the loans, or 52.2% of the pool, were used for acquisition financing while another 10 representing 42.5% of the pool were refinancing loans. Another loan was used for recapitalization, according to Kroll. While Ares’ plans for each of the properties varies, states Kroll, plans generally including capital-improvements and upgrades to transitional properties and leasing up or re-leasing properties at higher rent rates for the non-stabilized assets.
Eight classes of notes will be issued, including a $519.75 million tranche with triple-A ratings from Kroll and Moody's Investors Service. The Class A tranche priced at 105 basis points over one-month Libor.
Activity by CRE CLO sponsors has been brisk so far in 2021, after a moribund 2020 as a result of the economic shock of the COVID-19 pandemic. Six deals totaling $3.2 billion have priced in the first two months of the year, already totaling more than half of the $5.9 billion in CRE CLO issuance volume in 2020 via 11 deals.
In 2019, 29 deals totaling $15.74 billion were issued. Besides the two deals from Ares, this year's sponsors include Arbor Realty Trust, CrossHarbor Capital Partners, Varadero Capital, and LoanCore Capital.
The deal count does not include the project finance CDO Starwood is putting forward. According to Moody’s, STWD 2021-SIF1 will be an actively managed portfolio of project finance loans (60% of the pool) and broadly syndicated, non-investment grade corporate infrastructure loans (40%).
Underwritten by MUFG Securities Americas, the deal will have non-call period through October 2022 and a reinvestment period through April 2024.
The projected weighted average life of the transaction is seven years.
