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Shelter Growth Partners joins long list of bridge lenders issuing CRE CLOs

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Add Shelter Growth Capital Partners to the long list of "bridge" lenders tapping the commercial mortgage bond market for longer term financing.

The transaction, Shelter Growth CRE 2018-FL1, is backed by 22 properties with a total balance of $415.1 million, according to Moody's Investors Service.

It is static, meaning that the manager cannot buy or sell loans in the portfolio, aside from “companion” interest in loans secured by the same assets already held in the securitization trust. For the first two years of the transaction, the sponsor can use principal proceeds to acquire such loans, so long as they rank on a “pari passu,” or equal basis, with the existing loans.

However, proceeds from sales of defaulted assets or recoveries from disposed assets may not be used to acquire companion loans.

That’s typical for a debut transaction; investors are typically not comfortable purchasing an actively managed CRE CLO from a first-time issuer.

The initial asset pool has an average loan-to-value ratio, as calculated by Moody’s, of 117.8%. While high, that is lower than the LTV of other CRE CLOs that Moody's has rated recently.

The credit quality of the portfolio is slightly higher than that of comparable recent Moody's- rated CRE CLOs, with a weighted average rating factor of 4596, equivalent to a Moody's rating of B3/Caa1.

The recovery rate of the portfolio is also slightly higher than that of comparable recent Moody's rated CRE CLOs; the rating agency expects that recoveries, in the event of default, on the assets would be 57%, on a weighted average basis.

By property type, the portfolio’s biggest exposure is to multifamily, which accounts for 32.8% of total assets, followed by industrial (32%), office (17.9%), hotel (13.6%), mixed-use (2.2%), and retail (1.5%).

The single largest loan, at 16.7% of the pool, is the Phoenix Industrial Portfolio, which is secured by a fee-simple interest on one industrial property and leasehold interests on seven additional properties totaling 3.9 million square feet of rentable located across four states: Wisconsin (4), Illinois (2), Tennessee (1) and Arkansas (1). The portfolio is only 60% leased, however the borrowers plan to invest $15 million in capital improvements in the form of mechanical and structural improvements. Loan proceeds also include provisions to buyout a partner related to five of the properties in the portfolio.

Six tranches of notes that receive interest and principal will be issued in the transaction; Moody’s expects to assign an Aaa rating to the senior tranche of notes, which accounts for 53% of the capital structure, and has an assumed coupon of one-month Libor plus 105 basis points. There is also a tranche of preferred shares that will receive whatever any residual interest and principal left after payments to the senior classes of notes.

J.P. Morgan Securities is the placement agent.

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