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Mortgage REITs Post Record Loan Origination Activity

Non-Bank Lenders Cut into Bank Commercial Real Estate Lending
August 2, 2018
Blackstone Mortgage provided $1.8 billion construction financing the Spiral, Tishman Speyer's $3.6 billion office development in the Hudson Yards market in New York City. The cost loan will be supported by $1.9 billion of cash equity in the project that is 28 percent pre-leased to Pfizer.


Some publicly held mortgage real estate investment trusts are posting record loan origination numbers this year and raising millions more to extend their hot streak, undeterred by a crowded field of commercial real estate lenders.

Blackstone Mortgage Trust, the largest of the group, just concluded the first half of the year originating more loans than in all of 2017. Blackstone Mortgage originated a record $3.9 billion of loans in the second quarter, and originated $5.8 billion in the first half of the year -- exceeding all of last year with totals that rival the commercial real estate lending volume of many of the nation's largest banks.

So far in this quarter, the REIT also has $1.2 billion of additional loans closed or in the closing process.

Blackstone Mortgage yesterday filed paperwork for a common stock offering of as many as 6.9 million shares. Based on its reported price per share July 30 of $32.96, the offering could raise about $225 million. It plans to use substantially all of the net proceeds to originate additional commercial mortgage loans.

The market for commercial real estate lending is hyper-competitive right now and bank holding companies reported this month their loan growth volume would be slowing down in part from the competition from non-bank lenders. That is not necessarily the case among REITs.

"We're always looking forward to, in terms of developing our view of where we see markets going and the risks of things reversing," Stephen Plavin, president and chief executive of Blackstone Mortgage, explained on his quarterly earnings conference call last month. "We're still seeing strong demand, a tenant demand and demand in general for almost all the asset types that we're active in. The market feels stable, there is increased economic activity in a lot of the major markets post-tax reform."

"People are concerned because we've been in this same economic cycle for a long time," Plavin added. "But we haven't seen the same kind of conditions as we look through the market that we saw in '06 and '07, not seeing super high [loan to value], not seeing irresponsible lending. And so we feel like it's still a good time to be active in the market."

Blackstone is not the only REIT reporting strong or record activity.

During the quarter, Apollo Commercial Real Estate Finance committed to about $970 million of new investments, bringing 2018 year-to-date originations to $1.9 billion across 19 transactions.

"To put that into perspective, year-to-date originations for [Apollo Commercial] are already equal to full year production for 2017," reported Stuart Rothstein, president and chief executive of Apollo Commercial. "And we remain optimistic with respect to both additional transactions currently in closing and the continued strength of the pipeline."

While the market remains competitive, Rothstein said the REIT is competing more on qualitative factors than quantitative. They are not competing on price and proceeds, but are competing on being responsive to the borrowers and doing their due diligence and understanding the value of the property and the borrowers' strategy for the property.

"Consistent with our overall strategy, we remain focused on loan secured by institutional quality assets in primary markets," he said. "Our business continues to benefit from generally stable underlying real estate fundamentals, continued strong transaction volume and ongoing fundraising and investment by opportunistic and value-add real estate funds."

KKR Real Estate Finance Trust Inc. this past month closed two floating-rate senior loan transactions totaling $415.5 million.

Commenting on the recent activity, Chris Lee and Matt Salem, co-chief executive officers of KKR Real Estate Finance Trust, said they see strong origination momentum going further into the third quarter.

In the first seven months of 2018, KKR Real Estate Finance Trust has originated $1.6 billion of loans, bringing its total originations for the last 12 months ended July 31, 2018 to $2.4 billion of senior loans, a 126 percent increase over the corresponding period in 2017.

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