CRE CLOs Grow in Popularity Among Investors and Issuers

CRE Collateralized Loan Obligations (CLOs) have emerged as a sophisticated and reliable financing tool post-crisis. As more issuers and investors enter the space, panelists at the June 2019 CREFC Conference largely agreed that CRE CLO issuance would be flat to slightly up in 2019 and that the market has room for growth.

CRE CLOs had a robust 2018. Volume reached nearly $14 billion, according to Kroll Bond Rating Agency (KBRA). This represents 80% year-over-year-growth, reflecting a wider acceptance of the financing vehicle by investors and transitional lenders. This year has also been off to a strong start, with $3.6 billion in issuance in the first quarter, up 12.5% year-over-year, KBRA reported.

These statistics demonstrate that CLOs — defined as a securitization vehicle to provide short-term financing to bridge lenders with loan portfolios on transitional assets — are gaining popularity as a financing tool with predictable terms, noted Kraig Kohring, real estate and financial services department chair at Polsinelli, speaking on the “Static Electricity: CRE CLOs Staying Power” panel.

A New CRE CLO Market

One challenge in growing the market has been educating investors on how CRE CLOs have evolved and matured since the financial crisis.

Panelist, Gene Kilgore, executive vice president at Arbor Realty Trust, noted that today’s CRE CLOs are significantly different from pre-crisis CLOs.

Before the financial crisis, many transactions were exposed to subordinate collateral. “You saw anything with a projected cash flow attached, from an A note to preferred equity and everything in between,” Kilgore noted.

Today, almost all of the collateral in transactions is first-mortgage collateral. He mentioned that at Arbor, today’s transactions include about 80% leverage and 100% of the collateral is first-mortgage, which are mainly multifamily loans.

“The nature of collateral has changed, and the leverage and the structure has changed. Today you’re seeing almost solely financings…People are treating [CLOs] as a real financing tool.” He added that the structures are also much simpler than they were pre-crisis, making CLOs more accessible to a large network of issuers and investors.

CRE CLOs Have Growth Potential

The types of issuers in the CRE CLO space varies widely, from private funds to publicly traded mortgage REITs, noted panelist Patrick Mattson, managing director at KKR.

“It’s a bespoke tool that the market has adapted to,” he said. Issuers also vary by asset type (some focus on one property type and others are diversified) and in size. While the tool has historically been used for “middle-market lending” (loans under $50 million), “during this cycle, there’s been an emergence of larger loan originators using CLOs as a financing tool,” Mattson added.

One question posed to panelists is if there is enough investor appetite to grow the CRE CLO market.

Panelist Manish Rajguru, portfolio manager at Lord, Abbett and Co., said he believed there was capacity for the market to grow, noting that CRE CLOs are a “good complement to what’s in the conduit universe” because they are short-term financing and allows for transitional financing.” He added that strong investor demand for temporary financing will support the market’s continued growth.

Kilgore added that working with an experienced issuer that understands the CLO structure, the reporting requirements and the compliance requirements is also critical.

“Regardless of the size [of the transaction], you need to have the appropriate personnel to do it,” he added, especially for managed transactions, which require a more hands-on approach.

Contact Arbor today or visit our Loan Programs page to learn more about Arbor’s bridge lending options.