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June 03, 2016  

Redwood Shops Performing High-Yield Debt

Redwood Trust is marketing $241.3 million of performing high-yield commercial real estate debt — primarily mezzanine loans.

The offering follows the REIT’s decision earlier this year to shut down its conduit-lending unit and stop originating mezzanine loans. The portfolio, which is being shopped by HFF, includes the bulk of Redwood’s mezzanine debt.

The package contains 54 assets tied to 73 properties in 26 states. That includes 46 mezzanine loans with an unpaid principal balance of $204 million. The rest of the offering consists of two “rake” bonds totaling $20 million, three slugs of preferred equity totaling $12.9 million and three B-notes totaling $4.5 million.

The weighted average coupons are around 10% apiece for the mezzanine loans, preferred equity and B-notes, and 4.7% for the rake bonds. The weighted average seasoning is slightly more than three years, and the weighted average remaining term is 5.1 years.

The types of properties run the gamut, with large concentrations of office (35.6% of the portfolio balance) and apartment (30.2%) buildings. The other asset classes are hotels (15.4%), retail properties (10.3%), self-storage facilities (4.1%), industrial properties (2.5%) and manufactured housing communities (1.8%).

The assets are spread across the country, with the largest concentration in the Southeast (23.4% of the portfolio balance), followed by the Northeast (21.8%), the Midwest (20.1%), the West (18.3%), the Mid-Atlantic (8.6%), the Southwest (6.6%) and multiple regions (1.2%).

Redwood will consider sealed bids on the entire portfolio, a subpool of at least $150 million of assets, or select assets still to be identified, according to marketing materials that HFF distributed to investors yesterday. Indicative bids are due June 30. The deadline for “best and final” offers is July 21. The closing for a sale or sales is scheduled for the week of Aug. 8.

Citing challenging market conditions, Redwood announced in February that it would halt the origination of conduit and mezzanine loans. The Mill Valley, Calif., REIT said it might continue to invest in mezzanine and subordinate tranches of commercial CMBS transactions.

In a review of its first-quarter investment activity, Redwood said it was focused mainly on securities linked to residential mortgages and was reviewing its mezzanine-loan book with an eye toward opportunistically selling some or all of it. At the end of March, the REIT held $299 million of mezzanine loans, which were originated from 2010 to 2015.

Redwood’s offering is the second large batch of performing loans to hit the market in the past few weeks. Two insurers affiliated with Guggenheim Partners are taking bids on a $746.1 million portfolio. The 21 fixed-rate mortgages, with a weighted average remaining term of five years, are backed by various types of commercial properties with a weighted average occupancy rate of 96.1%. Eastdil Secured has that marketing assignment.