CoStar US Analysis: US REITs increasingly joining ranks of non-bank lenders to CRE

By Mark Heschmeyer - Tuesday, September 05, 2017 9:01

With cap rates for commercial property sales reaching new lows and pricing climbing to new highs, a growing number of REITs are joining other institutional investment players in providing financing to CRE borrowers by originating mortgage loans as an alternative investment choice. And more investors are jumping on the trend, reports CoStar News US finance editor Mark Heschmeyer.

The trend is most evident in the public REIT arena, where four firms focusing on commercial real estate financing have held IPOs this year, including the three largest: KKR Real Estate Finance Trust Inc. (NYSE:KREF) raising $242m; Granite Point Mortgage Trust Inc. (NYSE:GPMT) raising $224m; TPG RE Finance Trust (NYSE:TRTX) raising $212m; and two more such REITs are in the works.

In all, commercial financing REITs have raised more than $2bn from investors in the public markets this year through IPOs and secondary debt and equity offerings, according to data from NAREIT.

Though finance REITs are the most active, they are not the only REITs getting in on the action. In an analysis of second quarter earnings reports of publicly offered REITs, CoStar News tallied 68 firms originating more than $14bn in loans in the first half of this year.

The 10 largest lenders in that group have significantly stepped up their activity this year over the same period last year. These 10 firms account for more than 76% of the total originated in the first half.


Newest REITs wasting no time

Since the end of the second quarter, No. 10 on the list, KKR Real Estate Finance Trust, has increased its year-to-date total to $1.2bn.

This past week, KKR Real Estate Finance Trust closed a $119m floating-rate senior loan for the acquisition of a five-building, 824,000 sq ft office complex in Atlanta's Buckhead submarket. The loan has a three-year initial term with two one-year extension options, carries a coupon of LIBOR+3.00% and has an appraised loan-to-value (LTV) of approximately 66%.

It also closed a $105m floating-rate senior loan secured by a newly developed 269-unit, Class A multifamily rental building in Honolulu. The loan is being used to refinance the existing construction loan on the property. The loan has a three-year initial term with two one-year extension options, carries a coupon of LIBOR+3.95% and has an LTV of approximately 66%.

The weighted average underwritten internal rate of return of the two loans is 11.7%.

We have been active since our IPO in May 2017, originating six new loans with total commitments of $690 million. During the first eight months of 2017, we have originated 10 senior floating-rate loans,” the company said in a statement attributed to co-CEOs Chris Lee (pictured) and Matt Salem. “We expect to build on the momentum we’ve generated throughout the remainder of 2017.”

Since TPG RE Finance Trust went public last month, it has closed on another $447.6m of first mortgage loans with a weighted average credit spread of LIBOR plus 4.2%, a weighted average term to extended maturity of 5.6 years and a weighted average LTV of 59.6%.

Year-to-date loan originations now total $1.12bn in commitments. The new REIT also has pending loan originations subject to executed term sheets totaling $298.9m in commitments.

Greta Guggenheim, CEO of TPG RE Finance Trust, said: “With the IPO successfully concluded, we are entirely focused on loan originations and further reducing our cost of funds... (and) expect to make deeper inroads in the large-loan commercial mortgage market nationally,” said Greta Guggenheim, CEO of TPG RE Finance Trust. “We are pleased with our originations pace and are rigorously evaluating a $3bn loan pipeline for more quality originations.”

Colony NorthStar rolling up financing activities into new REIT

Colony NorthStar (NYSE: CLNS) this week announced plans to roll up a portfolio of investments together with those of affiliates NorthStar Real Estate Income Trust and NorthStar Real Estate Income II, a pair of public, non-traded REITs, to form a new commercial real estate finance REIT.

Colony NorthStar Credit Real Estate will have approximately $5.5bn in assets and $3.4bn in equity value. Senior and mezzanine loans will make up 52% of those assets with another 30% consisting of triple net leased real estate investments.

Combined, the three Colony Northstar REITs have originated $356.6m in loans in the first half of this year and like others in the real estate finance sector, Colony NorthStar sees opportunity in commercial real estate lending. While more than $1 trillion of CRE loans projected to mature over the next three years and traditional lenders such as banks and CMBS issuers facing increased regulatory scrutiny and tighter credit standards, more so-called alternative lenders are rushing in to fill any financing 'gap' that may result.

Tremont Mortgage Trust latest prepping to join public ranks

Alternative CRE lenders generally subject to significantly less regulatory constraints than banks, enabling them to be more 'creative' in providing financing that fits a borrower's specific needs for collateral properties, according to Tremont Realty Capital, the next firm seeking to launch a public offering.

A division of The RMR Group, Tremont Realty Capital has been making CRE loans since 2000 and this month filed to launch Tremont Mortgage Trust to address what it sees as an "imbalance in the CRE debt financing market that is marked by reduced supply of CRE debt capital and increased demand for CRE debt capital when compared to a decade ago,” the company said in its filing.

Although a large amount of capital has been raised recently by alternative CRE debt providers, most of the money has been raised by a small number of firms that generally target larger loans, Tremont said.

In contrast, Tremont said it intends to focus on smaller, middle market deals and transitional CRE debt financing, the company said, primarily focusing on originating and investing in first mortgage loans of less than $50 million, including subordinated mortgages, mezzanine loans and preferred equity interests in entities that own middle market and transitional CRE.

Get in Touch
+44 203 205 4600