Genesis foresees 'serial' issuance as ratings bring new fans to RTL RMBS

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Genesis foresees 'serial' issuance as ratings bring new fans to RTL RMBS

Older home in the neighborhood of Shaughnessy being raised for renovations, Vancouver City.

CEO Clint Arrowsmith discuss the impact of ratings and what separates Genesis from other issuers

Residential transition loans (RTL) have been securitized at least since 2018. But they have had a breakthrough 2024, with Morningstar DBRS rating deals from the sector for the first time.

Genesis Capital, a company owned by asset manager Rithm and focused on professional real estate investors, priced the second ever rated RTL RMBS in April, the $500m NRMLT 2024-RTL1, shortly after Toorak Capital Partners had brought the first back in February.

Then in September, Genesis priced its $450m second rated RTL RMBS. Clint Arrowsmith, Genesis' CEO, sat down with GlobalCapital to discuss this emerging — if still niche — segment of the RMBS market.

GlobalCapital: Could you explain a little history behind Genesis, and the broader fix and flip (RTL) market?

Clint Arrowsmith, CEO, Genesis Capital: Genesis was first founded in 2014 and was capitalized by Oaktree Capital Management. Then in 2018, Goldman Sachs acquired Genesis and really helped them scale and grow the business.

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Rithm Capital acquired the company in 2021 and is further expanding the business and the types of loan programs we offer under our platform. An advantage we have under our parent Rithm is that they are well versed in working with the institutional investment community in the residential mortgage business.

We fit nicely into Rithm’s larger ecosystem, creating an expansive set of additional opportunities and synergies across our platform.

In the past, fix and flip — or residential bridge loans — were dominated by small and fragmented lenders across the spectrum. But now we are seeing other institutional capital enter this space, and securitizing these loans gives us better pricing power and reduces borrowing costs, which we can then pass on to sponsors.

GC: Morningstar DBRS announced a rating methodology for residential transition loan (RTL) securitizations earlier this year. How has that affected the asset class?

Arrowsmith: It has been a really positive development for this sector. We spent about a year working with DBRS Morningstar supplying data and feedback to help develop a criterion to rate RTL deals. The unrated market has been there but getting a rating on deals opens it up to wider group of investors who cannot participate unless a deal is rated.

Earlier this year we had 37 roadshows to help many institutional investors better understand this asset class and Genesis’ approach to the business. As a result, we have seen a lot of new investors enter the sector.

Back in April, we were the second ones out of the gate with a rated deal [NRMLT 2024-RTL1], and we completed that transaction with an eye towards future issuance. That deal remains the largest rated securitization in the space completed thus far.

GC: How are you finding the market so far? What factors are making RTL deals appealing to investors?

Arrowsmith: Getting the rating opened opportunity for a lot of additional investors that were precluded before. I think the institutional investor community is very receptive to this blossoming asset class.

That, and between all the consternation and angst in commercial real estate over the past couple years, our business has been performing very well.

Just like our first deal, the second one in September [$450m NRMLT 2024-RTL2] was oversubscribed. This deal was the first ever RTL deal done containing a three-year term. And it had some repeat investors, so we were very pleased with the outcome.

There is a real lack of supply for housing, creating a tailwind for this sector. The need for additional housing is attracting a lot of capital devoted to renovating existing housing stock, as well as building new homes — either for sale or for rent.

GC: What separates Genesis from some of the other RTL issuers out there?

Arrowsmith: I would say that our core business is very unique compared to many of our competitors.

Genesis is laser-focused on lending to highly professional, institutional-quality sponsors. We work with sponsors that are bankable, have significant financial strength, and long-term track records of executing real estate investments successfully. We are not an asset-based lender where we would lend on collateral with only secondary consideration of the sponsor profile. We don’t lend to first-time borrowers, or hobbyists, regardless of how strong the underlying collateral might appear.

Instead, the way I look at it is that we lend to people rather than to projects, meaning we emphasize the quality of the sponsor and their track record.

Also, as not just an issuer but also an originator of all of our loans, we aim to foster deep relationship with our sponsors. We are not an aggregator, and instead focus our energy on cultivating and maintaining strong relationships with real estate investors that fit our target profile.

Compared to our peer group, our securitizations contain larger loan sizes and more ground up construction, a reflection of the stronger sponsor profile in our portfolio.

Based on the feedback from the institutional community so far and the oversubscription on our deals, I think Genesis’ track record speaks to the fact that others agree [that] focusing on a higher credit quality sponsor is a sound approach.

GC: Could you explain this sponsor-first approach a bit more?

Arrowsmith: I have been a commercial banker for nearly 30 years, and one thing I have learned is that it’s the people that repay loans, not the projects.

If you rely on sponsors with significant financial strength and a deep track record of success, who also provide some form of a guarantee for the loan, everyone is aligned and motivated to succeed in the project.

Plus, you want people with integrity to withstand the inevitable market fluctuations while maintaining their commitment to seeing the project through rather than backing out when things don’t go exactly as planned.

That said, we always structure our loans so we have an appropriate secondary source of repayment. This disciplined underwriting approach enables you to navigate market fluctuations and maintain strong credit quality over the long-term. Again, our focus is on the sponsor first — with a secondary focus on the nature of the underlying collateral.

GC: How do you expect issuance to be moving forward?

Arrowsmith: Many investors look at RTL issuers from a repeat issuance perspective, and we expect to be a serial issuer. We base our approach on the overall needs of the business and general market conditions.

The two deals we have done so far this year have been the two largest in the space, at $500m in April and $450m in September. These are revolvers and given that the underlying loans are short-term in nature, we will continue to replenish with newly originated loans, while also further building our portfolio — enabling us to consider another securitization at some point.

This year we expect to do more than $3bn in originations at a rate of $250m-300m a month. Based on continuous strong originations, we certainly expect to evaluate additional opportunities to issue again.

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