Investors Flipping Out Over RTL Securitizations
Securitizations of residential transition loans (RTLs), sometimes known as “fix-and-flip” loans or residential bridge loans, have increased in recent years, with several commercial real estate finance firms announcing new deals. This new structure, modeled after residential mortgage-backed securities (RMBS), offers investors an opportunity to participate in the lucrative market.
Loans designed to finance speculative real estate construction have been available for many years; however, in the residential sector, these loans were often issued by local “hard money” lenders. In the years subsequent to the global financial crisis, origination platforms have been established to serve this industry. The large originators have consequently sought the capital markets for securitization leverage.
RTLs are a kind of bridge financing that allows investors to buy, remodel, and resell properties for profit. These loans are often for shorter terms (1-3 years) with interest-only payments, and a balloon payment at the end. RTLs are securitized by pooling a collection of loans and issuing bonds guaranteed by their cash flows.
The asset class has experienced substantial growth since the initial large revolving RTL securitization was issued in 2018. Given the current state of the US housing market, where demand continues to exceed supply, it is unsurprising that RTL origination volumes have experienced a substantial increase.
Ratings Agencies Take Notice
Rating agencies are increasingly paying attention to RTL securitizations as the asset class matures and underwriting and servicing standards become more uniform. Recent rated securitizations include deals from key participants in the niche market, such as Genesis Finance, Kiavi and Toorak Capital Partners – all rated by Morningstar DBRS.
Sherman Oaks, CA-based Genesis Finance, a Rithm Capital company, closed NRMLT 2024-RTL2, a $450 million rated securitization backed by RTLs, last month. The deal’s structure features four classes of rated bonds ranging from single A to single B. It is the company’s second rated RTL securitization.
“This has been a transformative year for the residential housing sector, and this transaction further solidifies our commitment to being a leading partner in financing development across the industry,” said Clint Arrowsmith, president and CEO of Genesis.
“Following the successful close of our second rated RTL securitization, Genesis now has nearly $1 billion of active rated securitization capacity – more than any lender in the space,” he added.
In April, the firm completed a $500 million rated securitization, NRMLT 2024-RTL1, receiving support from 46 investors. The deal included three classes of bonds and marked the largest-ever rated RTL securitization.
Kiavi, a San Francisco-based tech-enabled lender to residential real estate investors, closed a $400 million rated RTL securitization in August, and in a sign of significant interest the transaction was upsized by $100 million and oversubscribed multiple times.
“Transactions like this, in addition to our focus on innovation, enable us to continue helping real estate investors scale their businesses with a trusted, reliable capital partner – and ultimately provide more move-in ready homes and rental housing for millions of Americans across the country,” said Arvind Mohan, CEO of Kiavi.
The company also announced a $350 million bundling of RTLs in February and a $300 million deal in May, followed by a $350 million transaction in July. In total, Kiavi has issued more than $5.1 billion in offered notes since it began its securitization program in 2019 and about $1.4 billion in 2024 alone.
Toorak Capital Partners, Inc., a non-bank lender specializing in single- and multi-family properties, closed its second rated RTL securitization, Toorak 2024-RRTL2, a $237.5 million deal, in September. The Tampa, FL lender closed the first-ever rated RTL securitization, which is backed by short-term bridge loans, Toorak 2024-RRTL1, at $250 million in February 2024.
To date, Toorak has issued over $3.7 billion in securitizations across 14 deals, including two rated and eight unrated revolving transactions backed by RTL loans and four rated transactions backed by long-term investor loans on rental properties.
“The successful completion of our second rated RTL securitization this year is a testament to the impact Morningstar DBRS’s methodology is having on the industry,” said John Beacham, CEO of Toorak. “The framework Toorak pioneered has become the industry standard, and we have been pleased to see multiple other issuers enter the rated RTL securitization market.”
Risks and Opportunities
The rising trend of RTL securitization indicates the advancing sophistication and creativity within the commercial real estate sector. As investors pursue novel avenues for diversification and returns, RTLs are a potentially appealing asset class.
Nonetheless, careful evaluation of the risks and obstacles inherent in this sector is important. The loans may be more risky owing to the characteristics of the borrowers and the properties in question. Conversely, the securitization process can yield a consistent and predictable cash flow for investors.