Syndicators have run into distress, and now investors in commercial mortgages are feeling the pain.
GVA Real Estate Group, a multifamily-focused syndicator out of Austin, is delinquent on two loans totaling $55.6 million, according to reports from KBRA and Green Street’s Real Estate Alert.
On the now-delinquent loans, which are tied to four apartment complexes, Ready Capital handed out the debt and securitized it into a collateralized loan obligation last year, a report from Moody’s Investor Service shows.
Because of the delinquencies, the CLO pool is pausing interest payments to some investors. The CLO failed an interest-coverage protection test, a metric used to determine whether the loans are reeling in enough interest for investors.
When that happens, payments to more junior investors are stopped and are rerouted to more senior noteholders. It indicates the borrowers were not paying enough on their respective loans to pay off investors in the CLO.
About $565,000 was set to be distributed to more junior noteholders, but was “diverted to pay down the principal balance of the Class A notes instead,” according to KBRA.
Investors in CLO securities are usually banks, mutual funds, pension funds, insurance firms and hedge funds, according to the Federal Reserve. Institutional investors generally only buy in the top-rated tranches, while smaller firms go for lower-tier tranches. Often, the lender will hold a significant piece of the lower-tier bonds, too.
GVA, founded and led by Alan Stalcup, is more than 30 days delinquent on both loans, meaning no interest payments have been made for at least a month. It is less than 30 days delinquent on another $47.5 million loan in the pool, according to Green Street.
The firm did not comment before publication of this story.
GVA is one of a handful of syndicators that aggressively bought properties while interest rates were historically low, gobbling up thousands of apartments across the Southeast and Southwest.
The firm more than doubled its portfolio in a year, according to data from the National Multifamily Housing Council, becoming one of the 50 largest apartment landlords in the United States. GVA owned about 29,700 units at the beginning of this year, up from 14,700 in 2022.
By comparison, Tides Equities, another syndicator with a slightly larger footprint, grew its portfolio by roughly 60 percent from 2022 to 2023. Tides has also run into trouble with its loans.
Most of GVA’s acquisitions were supported by floating-rate debt, so as the Federal Reserve pushed up rates, GVA’s monthly debt payments soared.
Ready Capital lent GVA $33.6 million as part of a $120 million debt package for a 662-unit portfolio in Charlotte, North Carolina, according to the report. The interest rate was 4.75 percentage points above the one-month secured overnight financing rate.
That rate, known as the SOFR, has climbed from 0.05 percent in March 2022 to 5.3 percent today. It’s unclear whether GVA had an interest rate cap on the loan to protect against rising rates.
GVA is also delinquent on a $14.8 million loan tied to two apartment buildings in Tennessee, Green Street reported.
While some investors may not see distributions this month, delinquencies can be cured and the CLO could meet interest-coverage tests in the future.