Freddie's B-Pieces Attracting New Buyers
New investors are lining up to buy Freddie Mac B-pieces.
Four firms have recently either made their first purchases or started angling to invest: Cyrus Capital and Pensam Capital, which have each won one B-piece; Priderock Capital, which has started bidding; and Walker & Dunlop, which is raising capital for an investment program that will center around Freddie B-pieces.
Meanwhile, Freddie’s regular buyers continue to pursue deals. The most-frequent buyers on the fixed-rate side last year were Berkshire Group of Boston, Related Cos. of New York, Torchlight Investors of New York and Ares Management of Los Angeles. The top buyers on the floating-rate side were Kayne Anderson Capital of Los Angeles, Bridge Investment of Salt Lake City, Harbor Group International of Norfolk, Va., and Canada Pension Plan (see tables on Page 7).
The growing buyside interest comes amid skyrocketing Freddie issuance. Last year, the agency securitized a record $51.7 billion of multi-family mortgages, up 38% from $37.5 million in 2015. And the expectation is that volume will climb again this year.
“The bigger supply of deals is definitely a factor in attracting new buyers,” said one source.
But despite the increase in issuance, new entrants have to be patient. The reason: Their first purchases usually have to be made via competitive auctions, which Freddie conducts only occasionally. Most of the time, the agency instead awards B-pieces on the basis of one-on-one negotiated sales, and it usually turns to veteran buyers with that approach. Freddie periodically conducts auctions to get a broad gauge of market prices.
The investment profile for Freddie B-pieces differs in a couple of ways from the private-label commercial MBS market. Most notably, the return on Freddie B-pieces is 200-500 bp lower than on the comparable below-investment-grade portions of conduit deals. “If a regular conduit [B-piece] gets you 17%, a Freddie B-piece might get you 13%,” said one pro.
Another difference is that the acquisition of floating-rate Freddie B-pieces requires bigger capital commitments. The reason: While fixed-rate B-pieces are sold at deep discounts, floating-rate ones are priced at par value. “You need $80 million to $100 million to buy on the floating-rate side, versus $25 million to $40 million for fixed-rate,” said one longtime investor.
Freddie prefers to award B-pieces to investors that also operate multi-family properties or team with operators on purchases. “There is a definite preference for working with firms that understand the ins and outs of this business,” said one source.
Priderock, of West Palm Beach, Fla., and Miami-based Pensam are investment firms with affiliates that own and operate apartment properties. Cyrus is a New York investment manager that operates hedge funds. Walker & Dunlop, of Bethesda, Md., is a lender, loan servicer and investment advisor that specializes in the multi-family sector.