Harbor Group International’s First CLO Echoes Market Comeback

“As long as the fundamentals on the ground remain strong, that is going to create a lot of capital markets activity, in terms of sales and refinancings and the types of transactions that lead to bridge lending,” Litton said. “We’re seeing very good pipeline demand.”

Goldman Sachs (GS) was the sole structuring agent and co-lead manager for the CLO offering. JPMorgan Chase (JPM) and Amherst Pierpont served as co-managers.

Of the $36 billion in CLOs outstanding at the end of April, more than 40 percent consist of loans secured by multifamily properties, with many accommodating lower-income tenants, according to the CRE Finance Council (CREFC). CLO issuance peaked in 2019 at $19 billion, before dropping to $8.7 billion last year during the COVID-19 pandemic, per CREFC data.

CREFC Executive Director Lisa Pendergast said CLO volume for 2021 is on pace to pass 2019 levels by mid-June, underscoring favorable market conditions where borrowers are attracted to the flexibility of shorter-term, floating-rate loans. Pendergast noted that many multifamily property owners prefer floating-rate vehicles as an option to address pandemic-induced revenue losses, and then they can later shift to a long-term, fixed-rate financing.

“It gives you so much optionality to be able to pay off that loan and move into a fixed-rate loan,” Pendergast said, “which is generally secured by what we consider to be stabilized assets.”

Pendergast noted that leverage on CRE CLOs remains fairly low, with bond spreads “more attractive” than securities in the fixed-rate, commercial mortgage backed securities (CMBS) space supported by more stabilized loans. She noted that CLOs have gotten a boost this year, largely because of investor appetite for higher spreads from lower-rated debt in a low yield environment, coupled with an increasing comfort level with these securities.

Litton said HGI’s multifamily loans leading up to the CLO have been “much more stabilized” in terms of occupancy rates, due to Fannie Mae (FNMA) and Freddie Mac (FMCC) reducing volume capacity this year because of lower regulated lending caps. If Fannie and Freddie’s volumes stay at current levels in the near term, Litton sees potential for growth in bridge financing as developers eye it as an alternate strategy to obtain construction financing on multifamily assets.

HGI completed a $245 million equity raise for the multifamily whole loan program in January, aided by a $110 million commitment from the Canada Pension Plan Investment Board (CPPIB). The Norfolk, Va.-based firm, which manages roughly $2.3 billion of real estate debt investments, had an inclination early on in the pandemic that multifamily investments in suburban markets was a prudent sector to hone in on.

“We had a high conviction that the sector would continue to perform well and that the bridge lending business would be another way to allocate capital to the apartment sector,” Litton said. “We intend to continue to leverage our deep multifamily expertise to be a CLO manager and bridge lender on a long-term basis.”

Värde Partners also launched a CLO this month with an aggregate initial principal balance of $929 million. The firm’s fourth CLO consists of 23 floating-rate mortgages secured by 29 commercial properties in the multifamily and hospitality sectors.

“We are at the beginning of a CRE CapEx cycle and we believe the nearly $4 trillion U.S. commercial real estate market presents a massive opportunity with favorable supply/demand dynamics,” Jim Dunbar, senior managing director at Värde, said in a statement. “COVID has accelerated a number of trends that are driving tenants to rethink how they utilize space and landlords to consider how they can improve their properties to attract tenants.”