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Morgan Properties Solidifies Position in Multifamily Credit

The Largest U.S. Apartment Owners Jump Into Debt Purchases
September 14, 2018
Image credit: Freddie Mac

Morgan Properties, owner of 150 apartment communities with more than 45,000 units across the U.S. Mid-Atlantic and Northeast, took another step into the bond credit markets, extending the trend of some of the nation's largest apartment owners jumping into debt purchases.

The King of Prussia, Pennsylvania-based firm acquired some B-rated notes from the Federal Home Loan Mortgage Corp., known as Freddie Mac through its K-Series multifamily mortgage-backed securities program.

B-notes are generally the lowest rated certificates sold in mortgage-backed securities. B-note holders are paid from distributions only after buyers of Class A rated notes. This causes B-notes to carry more risk.

Because of that, B-note buyers, or B-piece buyers as they are often called, typically have the right to play an active role in making decisions on important issues that can affect the value of the loan or the collateral. That includes such issues as identifying what collateral goes into the offering and having first purchase options on defaulted loans.

In addition, the B-note holders are paid a higher return on their investment than A-note holders are.

While a riskier investment, Freddie Mac's B-pieces have proven successful. There has only been $11.94 million in total losses realized by B-piece investors out of $258.6 billion of K-Deal issuance since the start of the program in 2009 as of June 30, according to Freddie Mac data.

Morgan Properties purchased a portion of the B-notes in Freddie Mac's K-W06 offering last month. At closing, the total loan balance represented by the K-W06 Multifamily Mortgage Pass-Through Certificates was about $666 million and the B-piece that Morgan Properties acquired had a face amount of about $50 million.

The offering is supported by a pool of 45 multifamily mortgage loans.

The loan metrics underlying the offering included a loan-to-value of 71.5 percent at closing, which is anticipated to amortize down to 64.5 percent by maturity.

This is the third recent K-Series Deal involving Morgan Properties, following its K-75 acquisition in April.

"The closing of our third K-Series deal marks a milestone for the company as it further solidifies Morgan Properties' position in the multifamily credit space, since entering 11 months ago," said Jason Morgan, senior vice president of acquisitions and investment management at Morgan Properties.

Earlier this summer, multifamily investment giant Greystar Real Estate Partners launched its first fund to invest in commercial real estate debt. The $500 million Greystar Credit Partners I extends Greystar's multifamily investments into almost all of the income streams from a multifamily property, from rents, to management fees and now to loan repayment streams.

"We like the risk/return metrics these instruments make available, particularly when our internal data provides the appropriate guidance," Brett Lashley, managing director at Greystar, said at that time.

In the second quarter of this year, Preferred Apartment Communities closed on its first B-piece investment in the Freddie Mac K program. This investment was about $4.6 million.

Harbor Group International, which owns and manages more than 30,000 multifamily units, has purchased $1.2 billion of bonds in 15 Freddie Mac K deals.

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