Since the start of the credit crunch that preceded the global financial crisis, many private real estate firms in the US have experienced problems in obtaining financing for their investments. A significant number of new purchases could not obtain mortgages, existing holdings faced extreme difficulty getting refinanced and the great US securitisation machine seized up.
Over the past couple of years, however, these firms have been witness to a thaw in real estate financing activity. Mortgage financing has returned, although on a more selective basis, existing properties have been refinanced or recapitalized and the commercial mortgage-backed securities market has shown some signs of life again.
Last week, the real estate finance market witnessed another milestone on its road to recovery when Oaktree Capital Management, on behalf of certain of its private equity funds, securitised a group of nonperforming loan (NPL) portfolios for the first time in its history. The $195 million offering, backed by 91 performing loans, 595 NPLs and 78 real estate owned assets, represented just the third such securitisation ever – all by private equity real estate firms and all over the past few months.
Securitisations have been more commonly associated with newly originated loans, as in the case of CMBS, where the investors earn back their capital through the cash flow of mortgage payments. In the case of an NPL securitisation, however, returns are generated through the liquidation, resolution or restructuring of loans. Generally, much of the capital that is returned to investors would come from quicker-to-resolve loan situations, while the equity for sponsors would come from slower-to-resolve cases. Most of the Oaktree loan pool is expected to be liquidated through foreclosure or other resolution, which ultimately would lead to the sale of the underlying real estate properties.
The Oaktree securitisation follows similar transactions by Rialto Capital, which closed on a $132 million offering in April, and a joint venture between Square Mile Capital Management and The Blackstone Group, which completed a $159.5 million offering during the summer. Interestingly, all three deals were underwritten by JPMorgan, which obviously has taken the initiative in this space.
From the investors’ point of view, these securitisations are pretty attractive, particularly in light of the current interest rate environment. Indeed, institutional buyers are looking for yields that are more attractive than that of US Treasuries, and returns through securitisation generally are higher than those of other fixed-income alternatives.
Of course, such securitisations are not for everyone. Offering such a transaction requires a certain skill set and expertise, which not every private equity real estate firm possesses. In addition, such transactions require scale on the part of the sponsoring firm, otherwise the cost of doing such a deal will be inefficient. That said, there are a good number of firms that could benefit from this new financing option.
In terms of the overall financing landscape, such securitisations indicate a loosening of the credit markets for products beyond plain-vanilla loans and a turning point in US real estate lending in general. Property values in the US have, for the most part, stopped declining, and that has created more certainty for banks and other lenders in terms of the risk profile they are underwriting. Still, despite this increased willingness to lend again, market players caution that we are still in the early innings of any recovery and there is a long road still ahead.
Oaktree’s NPL securitisation points to a new financing option for private equity real estate firms, as well as the potential resurgence of US real estate finance in general.