Prime Finance Partners is tapping the securitization market to finance lending to commercial properties that are being rehabbed or converted to a new use.
The deal, dubbed PFP 2017-4, is backed primarily by short-term loans on office buildings, according to rating agency reports. The initial collateral consists of 31 floating-rate mortgages secured by 35 transitional properties. Twenty-one of these loans have future funding participations totaling $38.1 million that may eventually become part of the collateral for the deal.
Seventeen loans of the loans totaling 59.7% of the portfolio are secured by office buildings.
The largest loan, One Kansas City Place, representing 10.3% of the collateral pool, is primarily occupied by an investment-grade tenant, Kansas City Power and Light Co., on a long-term lease that expires over nine years past the fully extended loan maturity. The owner, Executive Hills Management, plans to make improvements with a view toward leasing up vacant space. (The property is currently 72.1% occupied, below the local submarket occupancy rate of 83.8%.)
The next biggest exposure is to multifamily properties, which account for eight loans representing 23.1% of the portfolio. (None of the multifamily loans in the pool are currently secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties, according to DBRS.)
Of the 31 loans, there are three unclosed loans as of Sept. 13, 2017, representing 7.6% of the pool.
Fitch Ratings considers the deal to be more highly leveraged than multi-borrower mortgage bonds it has rated recently. It puts the pool debt service coverage ratio at 0.83x; worse than the 1.25x average for the year to date. Fitch also puts the loan-to-value ratio at 132.7%, worse than the year-to-date average of 101.7% for deals it has rated. (Fitch's analysis assumed a weighted average mortgage rate of 9.52%, in line with the 2017 YTD and 2016 averages of 9.49% and 9.50%, respectively.)
DBRS puts the weighted average debt service coverage ratio a 1.01x.
Both Fitch and DBRS expect to assign triple-A ratings to the senior-most tranche of notes to be issued, which benefits from 41% credit enhancement. DBRS is also provisionally assigning an AAA to a tranche with 31.75% credit enhancement is expects to assign ratings ranging from AA to B to the more subordinate tranches.
Prime Group, based in San Francisco, focuses on midsize loans of $10 million-$75 million and typically retains whole loan or residual exposure through maturity of its loans, according to Fitch.
Aggregate originations have recently averaged between $1.5 billion and $2.0 billion per year, and average $20 million-$25 million per loan. Since 2008, Prime has raised almost $3.2 billion of capital over six funds, including one fund that invests in CMBS B-pieces, and has reportedly never suffered a realized loss. Loan investments are sourced by a combination of direct relationship and mortgage broker business totaling approximately 80% and 20%, respectively.
