Greystone closes CRE CLO milestone

Greystone Bridge Lending Fund last month completed its second CRE CLO (see SCI’s primary issuance database). Dubbed Greystone CRE 2018-HC1, the US$300m transaction is unique in that it is 100% secured by healthcare properties.

“The Greystone CRE CLO is the first-ever CRE CLO to be backed entirely by CRE loans secured by healthcare properties,” says Clifford Chance capital markets partner Steven Kolyer. “It represents another milestone in the re-ascendance of the market for CRE CLOs.”

The transaction is backed by an initial US$249.2m portfolio of commercial mortgage healthcare assets and a US$50.8m reserve for additional healthcare assets to be acquired during the ramp-up period. The closing pool is collateralised by 20 whole loans secured by 25 healthcare facilities.

CRE CLOs are viewed by lenders like Greystone as a more flexible financing tool than CMBS. CRE CLOs also tend to be of a shorter duration than CMBS and have larger assets on an individual basis.

“The typical CRE assets in a CRE CLO are CRE bridge loans, which are loans to borrowers that are renovating, refurbishing or repositioning commercial properties,” explains Kolyer. “The loans are generally floating rate, for a period of three to five years.”

A CRE CLO may be static, but more often is managed, with mechanisms for replacing loan assets that repay or are sold. He continues: “A CRE CLO is more flexible than a typical CMBS, where the loan assets involve more stabilised properties and the deal itself is static. The loan assets typically involve underlying properties in various sectors, such as multifamily, retail, office and hospitality.”

The bridge loans backing the deal are typically secured by properties that are in some form of transition and, as such, may require flexibility to achieve their sponsor’s business plans. These structures also provide more flexibility relating to asset management and asset workout relative to REMICs, which do not provide for future funding, an essential element of bridge financing.

Kolyer notes: “US CRE CLOs, which in a different form pre-dated the credit crisis, began to re-appear in 2012. Issuances were occasional until a pick-up in 2015, followed by a continued sharp growth in 2017 and 2018.”

Pre-crisis, CRE CLO issuance stood at around US$35bn a year. Today, the yearly issuance equals over half that amount - US$12bn to US$15bn by KBRA estimates.

New opportunities in the sector stem from the esoteric nature of the asset class. “A CRE bridge loan in the healthcare sector is typically secured by a senior living facility, assisted living facility or skilled nursing facility,” says Kolyer. “In skilled nursing, more substantial healthcare services are provided to the residents, and service providers are frequently reimbursed through programmes like Medicare and Medicaid. Accordingly, such facilities are subject to more substantial regulation and operational risks than other types of CRE properties. Nevertheless, healthcare bridge loans are viewed as an attractive, though complex, sector of the CRE bridge lending market.”

Many lenders in the traditional sector have been attracted to non-bank lending by the persistent bull market in the past few years, which has contributed significantly to the growth of the CRE CLO market. The amount of exposure taken on by lenders is also significant compared with other market sectors, meaning that most managers have high amounts of skin in the game with every transaction they undertake. Kolyer, for example, hints that some sponsors have exposure of up to 30%.

“With CRE bridge lending expected to remain active for a long time and the steady growth in volume and market acceptance of CRE CLOs, the occurrence of additional CRE CLOs backed by healthcare properties seems certain,” he says.

Certainly, further issuance from Greystone is expected in the future.

Moody’s assigned a Aaa rating to 2018-HC1’s US$123m class A notes, which priced at one-month Libor plus 155bp with a 4.5-year WAL. The transaction also comprises unrated US$42m class AS notes, US$27m class Bs, US$18m class Cs and US$37.5m class Ds. JPMorgan was arranger on the deal.

Tom Brown