For Kayne Anderson Capital Advisors, the challenge in the real estate debt space until now had not been sourcing capital, but rather deploying it. The Los Angeles-based manager returned $300 million from its Real Estate Debt II fund, a $1.5 billion vehicle closed in 2017, and capped its third fund at $1 billion, turning away close to $1 billion of additional interested commitments.

Andrew Smith, co-portfolio manager of Kayne’s real estate debt platform, told PERE the firm saw opportunities wane amid tightening credit spreads. “We had a lot of conversations with our biggest, most strategic investors saying we know you’d like to put out more capital now. We don’t want to take it from you, but let’s continue to have these conversations because when the time is right, we’re going to be able to take advantage of opportunities in scale and we’ll need to quickly raise capital.”

Opportunities in scale arose last month when the coronavirus pandemic put commercial properties throughout the US on lockdown. The economic fallout led to a wave of margin calls that forced holders of highly leveraged real estate debt to generate liquidity quickly. Kayne was one of the more voracious buyers, deploying the final $250 million from its third fund in March.

Earlier this month, it launched a new debt fund to capitalize on further disruption in the real estate debt market. It closed on $1.3 billion in just two weeks, with one-third of that coming from new investors.

“Having built up a good track record made it a lot easier to make those phone calls where we could, on short notice, say ‘Remember when we turned away the capital you wanted to give us? We’re ready for it now,’” Smith said.

Kayne will be looking hard at Mortgage REITs, debt funds and hedge funds – those vehicles among the groups forced into fire sales in March. MFA Financial, a New York-based REIT, for instance, sold $3.5 billion of mortgage assets last month. Similarly, AG Mortgage Trust, also based in New York, liquidated its portfolio of government-sponsored MBS to meet $880 million of repurchase financing obligations, and New York Mortgage Trust unloaded $291 million of MBS and restructured another $250 million.

With cash on hand and less leverage of their own to contend with, firms such as Kayne and Utah-based Bridge Investment Group were able to purchase high-quality CMBS, CRE CLO and government-backed multifamily bonds at steep discounts. “If you’re facing a significant crunch in liquidity and you’re getting margin-called left and right, you’re just going to sell whatever you can,” Inna Khidekel, a partner in Bridge’s capital markets group, told PERE. “That’s what makes this attractive; firms are selling at levels that are distressed for paper that’s not distressed.”

Opportunities from hampered collections

Collateralized and securitized real estate debt is typically purchased through highly leveraged repurchase agreements, with advance rates of 80-85 percent, PERE understands.

Although the coronavirus disruption in the US has been relatively short-lived, with only one collection cycle having passed for rent and mortgage payments, signs of distress are already evident in the CMBS market. Trepp, a research firm that tracks commercial real estate debt markets, found unprecedented spikes in the number of CMBS lodging and retail loans nearing delinquency.

There might be a buying opportunity this summer. But if the news looks better in terms of jobs coming back, it could be very short-lived. If the news is poor, we’ll see another down leg and people who bought this summer may feel bad about having done so.
– Richard Mack, Mack Real Estate Credit Strategies

In the retail space, 9 percent of loans either entered, or went beyond, their grace period, meaning mortgage payments were late but not at the 30-day mark that signifies delinquency. That is up from 1.7 percent in March. The jump in hospitality was more extreme: from 1.5 percent in March to 20 percent in April. Manus Clancy, senior managing director for applied data, research and pricing at Trepp, told PERE if the trend continues, the losses will not be limited to those in first-loss positions. “As these numbers grow, just like in 2008, the more risk for the BBB- holders, then the single A holders,” he said. “How high it gets up the capital stack depends on how long the crisis goes on and how aggressive the recovery is.”

Mack Real Estate Credit Strategies, an affiliate of New York-based Mack Real Estate Group, was also able to buy CMBS and other investment-grade bonds last month. Chief executive Richard Mack believes the real estate debt market is in fact at a lull between buying opportunities. “We had some panic selling right as we got into this crisis. But we’re not seeing a lot of that at the moment, even in the CMBS market,” he said. “I expect that distressed selling will come back as we get through this and see poor collections and cashflow defaults.”

The next deluge of distressed deals is likely a few months away, Mack said, predicting it will arrive once concerns of the virus subside and the economy regains some level of normalcy. “There might be a buying opportunity this summer. But if the news looks better in terms of jobs coming back, it could be very short-lived,” he said. “If the news is poor, we’ll see another down leg and people who bought this summer may feel bad about having done so.”