#17, Mike Comparato, Head of Real Estate, Benefit Street Partners

Host Shiloh Bates discusses commercial real estate (CRE) CLOs with Mike Comparato, Head of Real Estate at Benefit Street Partners. CRE CLOs are contrasted with the more common CLOs backed by corporate loans that are Flat Rock’s specialty.

Episode Transcript

(00:03):
Hi, I am Shiloh Bates, and welcometo the CLO Investor Podcast.
CLO stands for CollateralizedLoan Obligations,
which are securities backed by poolsof leveraged loans. In this podcast,
we discuss current newsin the CLO industry,
and I interview key market players.
Today I am speaking with Mike Comparatoof Benefit Street Partners to discuss

(00:26):
commercial real estate, CRE, CLOs.
Mike and I worked together at BenefitStreet before I joined Flat Rock seven
years ago. At Flat Rock, we investin CLOs backed by corporate loans,
where private equity firms are buyingcompanies and looking to add leverage to
the returns they seek. In CRE CLOs.

(00:47):
The underlying real estate propertiesare going through some type of upgrade or
transition.
I thought Mike would be an ideal guestto shed light on another variety of CLOs
that exist in the market.In full disclosure,
my firm is also an investorin Benefit Street's CLOs,
corporate CLOs, that is. Ifyou're enjoying the podcast,

(01:10):
please remember to share like and follow.
And now my conversationwith Mike Comparato.
Mike, thanks so much forcoming on the podcast.
Thanks for having me, Shiloh.
Mike,
why don't we start off withyour background and how you ended up being a CRE CLO
manager?

(01:30):
Sure. So I've been in andaround commercial real estate, literally, since birth.
I was very blessed and privilegedto be born into a development family
that started in 1946.
So my grandfather and great-grandfatheractually started our family development
company after he returnedfrom World War II.
I was on construction sites at threeyears old. They built shopping centers,

(01:53):
office buildings, apartment buildings,condominiums, kind of everything.
I've always really had commercial realestate in my blood. Professionally,
I've been in the businessfor 30 years, roughly,
and have been at BenefitStreet for about the past 10,
and we're one of the most activemiddle market commercial real
estate lenders in thespace. We say middle market,

(02:15):
that's typically focusing on 25to 100 million dollar whole loans.
Occasionally underwrite andclose stuff smaller than that.
Occasionally underwrite stuff biggerthan that. But generally speaking,
that's where we compete. Wefinance all asset classes,
but have a real focus on multi-family.
So a lot of what we do isin the multi-family sector,
probably 75 to 80% of what we dois in the multi-family sector.

(02:38):
How many CRE CLOs doyou guys manage today?
Outstanding CRE CLOs, I'm going to guess,
around a half a dozen.
We've probably issued13 or 14 over the years.
Some of them been called, some ofthem just aren't outstanding anymore.
I think we considerourselves one of the larger,

(03:00):
more active issuers withinthe CRE space on that front.
So Mike, when I tell thestory of corporate loan CLOs,
I like to start by just going into detailon the assets you can find in the CLO.
What are kind of the key characteristics?
So why don't you do thatfor CRE CLOs to start?

(03:20):
So it's all obviously commercialreal estate. Generally speaking,
it is senior mortgages withincommercial real estate.
We're not seeing any sort of subordinatedebt or mezzanine pieces that have made
their way into the CRECLO trust at this point.
And it's usually all shorterduration, floating rate,

(03:40):
typically transitional commercialreal estate assets or some sort of
value-add commercial real estate assets.
We are seeing a few instances now wherethere's some more stabilized product
coming into the space, justbecause people are of the belief,
right or wrong, that interest ratescould be lower in future years.

(04:01):
So they don't want to lock inlong-term fixed-rate debt today.
So we are starting to see a littlebit more stabilized product in the CLO
structure. But I wouldsay, generally speaking,
there's almost always somecomponent of value-add or upside
in most of the loans thatfind their way into a CRE CLO.
So how many loans wouldyou find in a CRE CLO?

(04:23):
I would say it probablyranges from a minimum of
15,
upwards of maybe 50 or60 appears to be the max.
It's very much a middle market vehicle.
It doesn't really work well in therating agency model to have 100, 200,
300 million dollar loans.
It's really built fordiversification and granularity,

(04:47):
and so it naturally gravitatestowards middle market lenders.
I would say the typical deal sizeis usually around 800 million,
minimal, to about 1.2 billion. Again,
not to say that there aren'tCLOs smaller than that,
and there's been a handful that arelarger than that, but generally speaking,
you're kind of seeing that 800 millionto 1.2 billion range for an individual

(05:09):
issuer.
So was it the CLO size is800 million plus or the loans
are 800 million plus and you'reputting pieces of them into the CRE
CLOs?
Well, the CLO is 800 million plus.
Oh, I see. Okay.
We'll aggregate individual loans.
You'll close 40 individualloans ranging from

(05:31):
20, 30, 60 million each, and theyaggregate up to that 800 million.
We're actually closing the loan,putting it on our balance sheet.
We're typically using some sort ofwarehouse financing to bridge that to
the CLO execution.
But then we pool all of those closedloans together and issue the CLO and we

(05:51):
retain the bottom partof that capital stack.
So in corporate loan CLOs,
the underlying loans usually havea loan to value of about 50%.
What's the loan to value in a CRE CLO?
So again,
most of the loans that find themselvesin the CRE CLOs have some component

(06:13):
of transition or some component ofvalue-add. So there's really two LTVs,
loan to values. One is theas-is current loan to value,
and then one is the as-stabilized loanto value after the completion of the
business plan, whateverthat business plan may be.
So it deviates depending on howdeep or heavy the business plan

(06:33):
is. But I would say, generally speaking,
we're seeing as-is LTVs in the
70, 65, 70, 75% range on individual loans
and the as-stabilized loanto values in the 50 to 60%
range on an as-stabilized basis.
Is SOFR, the securedovernight financing rate,

(06:56):
is that the underlying floatingrate benchmark in your market?
Yes. Everything is priced over SOFR.
And then what's the typical spread forthe underlying loans in these portfolios?
The market's gotten very tight.Again, we're back to the tights.
We saw that peakvaluations in Q4-21, Q1-22,

(07:17):
actually probably inside of those levelsin the whole loan origination side of
things. A middle of the fairwaymultifamily loan today could price it,
probably, SOFR 250 to 300 over.
Hospitality is probably SOFR 375 to
450. Industrial is probably goingto price closer to multi-family.

(07:38):
Retail is probably going to pricesomewhere in between multi-family and
hospitality, and then officeis a disaster unto itself.
We haven't seen a whole lot of office,transitional office loans, get done.
We actually wrote our firstoffice loan about six months ago,
maybe eight months ago.
It's the first one we've written inprobably three years. That was SOFR 1000.

(08:00):
And that loan's already been repaid infull. We've only done one office loan.
We haven't seen a bunch of it out there.
Your guess on pricing isprobably as good as mine.
Oh, so the performance of these loansmust be pretty good if that's the rates,
if those are the rates, wherethey're borrowing today?
Yeah, I mean, I think you'recomparing to the corporate world.
It's a little bit apples and oranges.

(08:20):
You're dealing in commercial realestate with a physical asset.
I'm sitting in New York, in our office.
I'm looking across the street at abuilding that was probably built in 1910.
It's still being used. It's still there.
There's still tenantsand they're paying rent.
So it's got just a risk profile that Ithink the market thinks is a little bit
different than a corporate CLO. That'swhy we think they price where they do.

(08:42):
I wouldn't say that it's necessarilythe actual performance at the
asset level as much as it could bejust the asset itself and its potential
performance per se.
So in the corporate loan CLOsthat I usually invest in,
they finance themselves by issuingdebt rated AAA at the top down to

(09:04):
double-B at the bottom,
and then there's roughlylike 8 to 12% equity.
Is that a similar, is that similar tothe capital structures used by CRE CLOs?
It's very close. I would say three,
four years ago you were sellingtriple-A through triple-B minus and

(09:24):
you were retaining everythingsub investment grade and below.
And that was usually the thickness ofthat equity piece and sub-investment grade
was around 20%.
With the increase in rates and thesubsequent backup in cap rates,
we've seen that shrink a little bit,
and I would say we're closer now to thecorporate world where the bottom or the

(09:46):
equity piece is probably closer to 13, 14,
15% than the 20% it wasthree or four years ago.
And what's a good AAAfinancing rate for your CLOs?
I think we're seeing AAAsget done right now around
145, 140 in that general area.
Okay. So 140 basis pointsis maybe 30 basis points

(10:11):
wide to a broadly syndicated loan, CLO,
AAA and maybe 10 bps tight to where middle
market CLO AAAs have been printing?
Yeah, we usually trade alittle bit wide of that market.
It's a meaningfully less liquid market.
The real estate side of things hasmeaningfully less participants,
meaningfully less liquidity.

(10:32):
So I think there's a premium in our AAAs,
and I'm guessing in all of thebonds all the way down the stack,
that's just a liquiditypremium, if nothing else.
Is the illiquidity premium,
is that just a function of youneed to understand property level
specifics for some of theseCLOs given that there aren't

(10:53):
as diversified as maybea corporate loan CLO?
I'm not sure. I think it's a sizething more than anything else.
I'm by no means a corporate CLO expert.We do have corporate experts at BSP,
obviously.
I think we run one of the largest CLObusinesses in the corporate world,
but it's not my expertise.
I just think it's a sizething more than anything else.

(11:16):
In the CLOs that I invest in,
the real protections for the debtinvestors are that if there's too
many downgraded loans,
if there's too many triple-Crated loans or defaults,
then instead of the CLO makingits equity distributions,
that cash is retained in the CLOfor the benefit of the debt holders.

(11:38):
Do CRE CLOs have... is that kindthe similar structure there?
Yeah, it'll be the same. So ifyou trigger certain covenants, IC,
OC test interest coverage andjust have LTV issues, defaults,
et cetera, distributions would get shutoff and everything goes to hyper am,
top of the capital stack.

(12:00):
So hyper am, or hyper amortization,
just means that all thecash flows received from the CLO are being used to repay
the top part of the CLOs financing?
Correct.
Okay. So for these CRE CLOs,
it's the case that the equity owner isreally just the originator of the loans
and that equity just comes from a fundthat you guys are investing out of,

(12:24):
but I don't think that there's, well,
are there third party investors whocome into these CRE CLOs and the equity
tranche,
or is it always retained bythe manager like yourself?
So I would say, largely, the loansare originated by the issuer.
There are a few shops that willacquire loans and then issue a CRE CLO,

(12:46):
and then generally speaking, theissuer is retaining the bottom.
There's been a fewinstances. I mean it's very,
very few and far between wherethe equity goes somewhere else,
but generally speaking,
it's an origination liabilitystructure that's used by originators,
and then retained, the bottom retained,by that originator slash issuer.

(13:07):
So if you guys use theseas a financing trade,
I guess the other alternativeis to just borrow from a bank.
So you have a portfolio of these loans,
and the other way would be to justgo to a JPMorgan or a Wells Fargo,
for example.
How do you guys think about whether ornot you should do a securitization or
just go to a money center bank?

(13:27):
That's option one. Alternativeis money center bank.
Option two is selling an A note andjust keeping a B or keeping a Mez
piece that creates thesame structure as well.
And then lastly would be the CRE CLO.
Economics obviously paya very big part in that
decision,
but I think we gravitate towardsthe CRE CLO for its non-economic

(13:52):
benefits to us as issuer. It'snon-recourse. It's non-mark to market.
It's match term funded. Those are thingsthat we don't typically get at banks.
So if the economics are equal,
the non-economic drivers are goingto push you to CRE CLO execution.
If the economics are better in CRECLO, that's a very easy decision.

(14:14):
You just ask the question, howmuch worse can the economics be?
Or said differently, what'sthe cost you're willing to pay to have non-recourse,
non-mark to market, match termfunded liability structure?
And that's kind of the only decisionthat we make with respect to staying at a
warehouse facility orissuing a new transaction.
One of the trends we've seen forcorporate CLOs is that there just hasn't

(14:37):
been a lot of M & A and LBO activitythat's really creating these
loans. And as a result,
the CLO total AUM has been somewhatstagnant here over the last few years.
Is there a lot of creation of theunderlying loans in CRE CLO such
that the industry is growing?What's the trend there?
There was a fairlymeaningful pause in '23 and

(15:01):
'24. We have stayed very activeon the origination front.
We just made some good macro decisionsat the peak of the market that
let us have a pretty clean balance sheetand let us play offense when a lot of
the market was playing defense.
So we actually had our second-bestorigination year in the history of the

(15:22):
platform last year, and we issueda CLO at the end of last year.
I'm sure we're going tohave probably a few in 2025,
but the overall industryhas been very, very slow.
We have seen a wave that came out ofthe gates at the beginning of the year.
I want to say three deals, maybe four,
got priced in the first threeor four weeks of the year,

(15:45):
which is probably close to the equivalentof everything that got done last year.
We're seeing things pickup again on an industry,
broad industry standard. We neverslowed down. There is a massive,
massive demand for credit, and thehistorical providers of credit,
banks, mortgage REITs, et cetera,are largely on the sidelines.

(16:06):
They've got a lot of defaultedand/or delinquent loans,
or imminently defaulted or delinquentloans, and they're really hoarding cash.
They know that they'vegot to solve problems.
And so the last thing on their mindright now is putting new risk on.
It's really getting through the legacystuff that was originated a few years

(16:26):
back.
In your business,
do you generate alpha on the assetsby being in the right sectors,
so being in industrialversus not in office,
or is it more the property-specificcalls that you make
that result in strong performance?

(16:48):
Can I say all of the above? Ifthere was one formula that was just,
if you do this right,you'll be successful...
I wish there was that easy button tohit somewhere. We haven't found it yet.
Certainly hindsight being 2020,
avoiding office was probablyone of the best calls we
ever made. So yes,
avoiding that industry overallended up being an excellent,

(17:11):
excellent decision. I thinkwe're of the view, generally,
that if you get the macro right,you're going to be okay, generally,
in this business.
If you're lending on newer-vintage,
higher-quality assetsin good, liquid markets,
you're probably going to be okay. Ithink where the market went very wrong,

(17:33):
and we called this very publicly atthe peak of the market, and again,
Q4 of '21, Q1 of '22,
is any asset with the wordmulti-family in it was just being
valued at a three-and-a-half cap or afour cap or a two cap. There was no cap
rate tiering between a 2020,
brand new vintage, class A assetin Miami, incredibly liquid market,

(17:57):
and a 1974 vintage, Bminus asset in Chattanooga,
Tennessee. Not that there's anythingwrong with Chattanooga, Tennessee,
but it's meaningfully less liquidthan Miami is as an overall market.
That was just an incrediblyunhealthy dynamic that was going on,
and again, what typicallyhappens in bull markets. I mean,

(18:18):
you get raging bull markets,valuations get thrown out the window,
and you just value everythingsilly. And that's what we saw.
We called that at the peak ofthe market. We proactively said,
if those are our choices and the marketis going to value those things the same,
we think there's a multifamily correctioncoming. We want to lend on nicer,

(18:39):
newer assets and big liquid markets.
And so we proactivelystop lending on 1970s and
1980s-vintage multifamilyand stayed in bigger,
more liquid markets onnicer, newer assets.
So I think just thosetwo macro decisions alone
let us stay in the driver's seatand play offense for calendar year

(19:01):
2023 and 2024.
I think we've got enough really goodreal estate guys that just know how to
underwrite the sticks and bricks. Idon't want to say that's the easy part,
but that's pretty straightforward.
So we kind of view this as get the macroright and just don't make the silly
unforced errors,
and you're probably going to beright more often than you're not.

(19:22):
So the loans in corporate CLOsare created in leveraged buyouts,
so private equity firms buying a company,
and they're putting up around50% of the purchase price.
Who are the owners of theproperties in CRE CLOs?
Again, reminder that CRE CLO isreally built for middle market.

(19:43):
So you don't see, typically, the Simons,the Vornados, the Blackstones, the
Brookfields.
You don't typically see thosenames as sponsors in CRE CLO.
You're going to have a more of amiddle market borrower profile.
I would say that profile isreally one of three things.
You've got the middle marketinstitutional borrower,
a fund or a series of fundsthat has a few billion of AUM,

(20:05):
but they're actively in the middle market.
You've got the high net worth familyoffice that either is only a development
family or partially does developmentas a part of the family office
operation.
And then lastly is the traditionalGP LP syndicated equity structure
where if there's a 10 or 20 millionequity requirement in a deal,

(20:26):
a GP will bring in 5% of thatstack and they'll go syndicate the
95 friends, family,country club, et cetera.
Then what's the differencebetween a CRE CLO and a CMBS,
commercial mortgage backed security?
CMBS is typically 5-and 10-year fixed rate
loans with meaningful call protection,

(20:49):
usually yield maintenance or defeasanceuntil the last 90 days before maturity
where CRE CLO historicallyhas been a short-duration,
floating-rate instrumentwith a lot of flexibility,
really intended more for non-stabilizedassets where CMBS is really
built for stabilized transactions.

(21:09):
So then for investors who want to getexposure to the kinds of loans in your CRE
CLOs or that your platformunderwrites in general,
how would a retail investorgo about doing that?
I don't think there's really a directmeans for a retail investor to invest
directly into a CLO.
One of the vehicles that we run isour publicly traded mortgage REIT,

(21:30):
ticker symbol is FBRT, an active issuer.
So an indirect way to invest inone of our CRE CLOs would just be
through stock ownership.It's not, obviously,
a direct investment into justthe assets in that vehicle.
It would just be into the mortgageREIT that holds the CRE CLO equity.
So indirect, not perfect,

(21:51):
but I don't think there really isa means to get into these things as
an individual investor.
Got it.
And is there anything interesting ortopical about CRE CLOs that we haven't
covered in our chat here?
I think we covered mostof it from 10,000 feet.
You asked all the right questionsand certainly the salient ones.

(22:11):
I think we covered a lot of it.
Great. Well, Mike, thanks somuch for coming on the podcast.
Yeah, enjoyed the timeand appreciate the invite.
The content here is for informationalpurposes only and should not be taken as
legal, business, tax,or investment advice,
or be used to evaluate anyinvestment or security.

(22:34):
This podcast is not directed at anyinvestment, or potential investors,
in any Flat Rock Global fund.Definition Section AUM refers to
assets under management.LMT, or liability management transactions,
are an out of court modification of acompany's debt. Layering refers to placing
additional debt with a priority abovethe first lien term loan. The secured

(22:57):
overnight financing rate, SOFR,
is a broad measure of the costof borrowing cash overnight,
collateralized by Treasury securities.The global financial crisis, GFC,
was a period of extreme stress in globalfinancial markets and banking systems
between mid-2007 and early 2009.Credit ratings are

(23:18):
opinions about credit risk forlong-term issues or instruments.
The ratings lie on a spectrum rangingfrom the highest credit quality on one end
to default, or junk, on the other.A AAA is the highest credit quality.
A C or D, depending on theagency issuing the rating,
is the lowest or junk quality. Leveragedloans are corporate loans to companies

(23:40):
that are not rated investment grade.Broadly syndicated loans,
BSL, are underwritten by banks,
rated by nationally recognizedstatistical ratings organizations,
and often traded by market participants.Middle market loans are usually
underwritten by several lenders withthe intention of holding the investment
through its maturity. Spread is thepercentage difference in current yields of

(24:03):
various classes of fixed income securitiesversus Treasury bonds or another
benchmark bond measure. A reset isa refinancing and extension of a CLO
investment.EBITDA is earnings before interest, taxes,
depreciation,
and amortization. An add-backwould attempt to adjust EBITDA for
non-recurring items. ETFs areexchange traded funds. LIBOR,

(24:28):
the London Interbank Offer Rate,
was replaced by SOFR on June 30th,
2024.Delever means reducing the amount of debt
financing. High-yield bonds arecorporate borrowings rated below
investment grade that are usuallyfixed rate and unsecured. Default
refers to missing a contractualinterest or principle payment.

(24:50):
Debt has contractual interestprinciple and interest payments,
whereas equity represents ownershipin a company. Senior secured
corporate loans are borrowings from acompany that are backed by collateral.
Junior debt ranks behind seniorsecured debt in its payment priority.
Collateral pool refers to the sum ofcollateral pledge to a lender to support

(25:13):
its repayment. A non-call periodrefers to the time in which a debt
instrument cannot be optionally repaid.A floating rate investment has an
interest rate that varies with anunderlying floating rate index. In the
context of CRE CLOs,
a senior mortgage refers to aloan that is secured by a lien on

(25:34):
commercial real estate and haspriority over other types of debt.
Illiquidity premium refers to theadditional return that investors demand
for holding an asset that is noteasily tradeable or liquid. Defeasance
is often used in commercial real estateloans to allow the borrower to sell or
refinance the property withoutpaying off the loan early.

(25:59):
General Disclaimer Section Referencesto interest rate moves are based on
Bloomberg data.
Any mentions of specific companies arefor reference purposes only and are not
meant to describe theinvestment merits of,
or potential or actualportfolio changes related to,
securities of those companiesunless otherwise noted.

(26:19):
All discussions are based on USmarkets and US monetary and fiscal
policies.
Market forecasts and projections arebased on current market conditions
and are subject to change without notice.
Projections should not beconsidered a guarantee.
The views and opinions expressed by theFlat Rock Global speaker are those of

(26:39):
the speaker as of the dateof the broadcast and do not necessarily represent the
views of the firm as a whole.
Any such views are subject to changeat any time based upon market or other
conditions,
and Flat Rock Global disclaims anyresponsibility to update such views.
This material is not intended to berelied upon as a forecast, research,

(27:00):
or investment advice. It isnot a recommendation, offer,
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Neither Flat Rock Global nor the FlatRock Global speaker can be responsible for
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None of the information provided shouldbe regarded as a suggestion to engage

(27:24):
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