Debt Funds vs Mortgage REITs
Can someone explain (or point me towards a resource) that explains why so many of these RE debt players that have debt funds also have an affiliated publicly mortgage reit? KKR, Apollo, etc. From a borrower's perspective, is there any difference between the loans they issue from their private debt funds vs the ones from their mortgage reit? Also, how do CRE CLOs differ from mortgage reits? Seems like there's a lot of redundancy across these various structures, but there must be a reason that some of these firms operate all 3. Any help would be appreciated
it's all about fundraising sources.... REITs = public registered (i.e. mom-pop investors, or anyone who wants liquid securities), Debt fund = private investors (traditional LPs like pension funds, SWFs, lifecos, etc.)
So why do both? Easy, get to raise money from two very different sources! Plus fees may be higher on the REIT side.
Thanks. Who are the fundraising sources for CLOs? And generally speaking, if I'm an owner operator, is there any difference in the loans I'd get from KKR debt fund vs KKR CLO vs KKR mreit?
So, I'm not "in" the debt biz, so just speaking from general industry knowledge (meaning, could be wrong, or exceptions/differences exist...)..
As I am aware, most CLOs are essentially closed-end unit trust type securities that get sold direct to invests (very similar to CMBS, with tranche/series type breakouts). So the buyers are whomever.. hedge funds, pension funds, SWFs, or even other debt funds or whoever wants to buy them. Generally speaking, I don't think CLOs recycle funds, they are loaded with assets, tranched, sold, and then just disperse all cash flows until everything is paid out. So, I really don't think of them like debt funds or mREITs, which can be more perpetual life businesses of sorts.
As for the borrower... really could care less, you would just be looking at terms/conditions of the loan. Not sure if KKR (per your example) splits/clubs/allocates to its various funds/strategies by rule/lottery or what. In theory, a loan could get orginated and then split to various pools (like 50% to the REIT, 50% to a debt fund). Still each vehicle will have its own rules and requirements. Final note, from what I know of CLOs (which isn't all that much), I normally think of them buying pieces of loans or lower grade tranches of CMBS, but not really being part of direct origination. They could, and maybe KKR does this (no idea), but I'd suspect the b-piece of the loan could go to the CLO while the a-piece goes to the REIT and/or debt fund (one common scenario). Either way, buyer is likely negotiating a whole loan but may be party to intercreditor agreements if needed.
Other thought, their could really be one overall "fund/pool" that is just sub-divided by REIT and debt fund based on type of investor (sometimes called "sleeves"), this is common as well. Easy way of eliminating conflicts of interest for fund management and originations.
Just to expand on this. Debt funds and mREITs use CRE CLOs as a tool to obtain permanent financing on their loan pools that they originate. For the ones that have the capital market expertise, once they originate 300-500mm+ of loans they securitize them and sell off 70-80% of the senior tranches to other investors (as the person above/below mentioned). This is an alternative form of financing to traditional warehouse lines.
However, they are not alternatives to debt funds or mREITs, returns are much lower and different risk profile (retail investors cannot invest in these). It is an emerging market competitive with CMBS in which the originator/issuer also retains a significant portion of the securitization as a risk retention piece.
There are private REITs as well
REIT is just an IRS tax classification, but has some seriously binding terms on how you can operate (including wide ownership requirements). Still, by "private" REIT do you mean restricted to large scale institutional buyers, or "non-traded" REIT which means a publicly-registered, SEC approved REIT but its shares are sold direct and not listed on a public exchange (like NYSE). I know KKR has non-traded REITs (or had them), but may do true private REITs also.
Again, these are all about fundraising... really nothing to do with the originations business, other than expectations being set by various pools of investors.
no difference in loans/terms (pending specific platform parameters etc - i.e. each group may play in a different sector or have a more specific "wheelhouse")... mreits and debt funds are direct competitors of each other (also mistakenly both named "debt funds" often). It is just their corporate/capital structure. Both execute CLO etc, use similar leverage options to juice returns, etc. As an employee at either, you'll literally be doing the exact same thing.
From a borrower’s perspective, another thing to keep in mind is that you can be re-traded due to liquidity issues, especially involving warehouse lenders. You saw this happen in a big way when COVID hit, and you also saw trouble with draw requests from lender’s like TPG’s MREIT (see below). As a borrower, asking how a particular lender is internally levered is important to keep in mind.
https://therealdeal.com/2020/04/30/lawsuit-against-tpg-trust-could-be-a…
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