Bonds, equities, commodities – now short-term real estate loans are the latest offering from billionaire money manager Jeffrey Gundlach’s fast-growing investment firm.
His DoubleLine Capital announced last week that it is partnering with fellow downtown L.A. firm Thorofare Capital in a move that will give DoubleLine’s clients access to an exclusive pool of short-term real estate loans. With interest rates that can approach double digits, these loans are hot commodities for investors looking for yield.
Such loans are usually called bridge loans, as they’re designed to fill a gap until a borrower can secure cheaper, more conventional financing. For example, a borrower might take out a two-year bridge loan to acquire an empty office building, then replace that loan with a standard 10-year commercial property mortgage once tenants are in place.
Because there’s added risk – after all, there are reasons many banks won’t make these loans – lenders can charge relatively high rates for bridge loans. For example, Lone Oak Fund, a private Brentwood bridge lender, charges borrowers rates that range from 7.9 percent to 9.9 percent and maxes out at a 60 percent loan-to-value ratio. Since standard commercial mortgages are often in the 5 percent-6 percent range, those higher rates have naturally attracted the attention of investors desperate to find yield anywhere.
Gary Mozer, principal at George Smith Partners, a Century City firm that lines up financing for real estate transactions, said DoubleLine is just the latest firm to step into the bridge-lending market, and that all the competition has pushed down the rates lenders can command.
“The banks, the life insurance companies, debt funds and Wall Street are all playing in the arena,” he said. “With that much competition, the pricing has gone down and the proceeds have increased.”
Even with lower rates, bridge loans still offer attractive yields for investors, said Morris Chen, a DoubleLine portfolio manager who leads the firm’s commercial real estate team. He said today’s white-hot real estate market provides plenty of opportunities for Thorofare to find borrowers.
“There’s ample supply for us to choose from,” he said.
Under the new partnership, Thorofare will underwrite and originate middle-market commercial real estate loans with terms of between two and five years, and with principal balances ranging from $5 million to $20 million.
DoubleLine will then buy the loans for its clients who have accounts managed under the firm’s Opportunistic CRE Debt strategy. The firm has more than $5 billion invested in commercial mortgage-backed securities, a fraction of the more than $73 billion in assets under management it has amassed since 2009, when Gundlach founded the firm just days after he was fired by rival money manager TCW Group.
Thorofare Chief Executive Kevin Miller said the partnership is complementary to Thorofare’s existing private fund offerings, and that both firms had been in discussions for a long time.
“We had been contemplating a strategic relationship with DoubleLine for the past three years,” said Brendan Miller, Thorofare’s chief investment officer and Kevin’s brother. “For the past 12 months or so, we’ve been actively working on it.”
Chen said DoubleLine has long held Kevin Miller and Thorofare in high regard, and they were a natural choice to partner with when the firm decided to expand into bridge loans.
“For DoubleLine to work with Thorofare, a market leader in the bridge lending space, it’s something we felt was the right move,” he said.
According to Chen, coming up with underwriting guidelines for the bridge loans was a significant part of the process and something the principals on both sides thought through extensively.
Thorofare typically issues short-term loans with periods of between six and 18 months. It mainly underwrites and services loans against multifamily, office and retail properties worth between $5 million and $30 million, and sells those loans to investors in the firm’s funds. Thorofare was founded in 2010, in the depths of the financial crisis, and has made $500 million in loans over its history.
Its partnership with DoubleLine will involve loans that are designed to have longer terms than Thorofare has typically offered.
But Brendan Miller said the extended term of the loans will allow DoubleLine to create additional value through the machinations of the capital markets. The longer the loans are out there, the more time Gundlach and his team will have to squeeze value out of them – perhaps by selling loans to other investors.
Kevin Miller said Thorofare’s investors overwhelmingly welcomed the news, especially the fact that the firm was chosen as a partner by an A-list bond firm.
“We’ve had a very positive reception from our investors,” Miller said. “They really viewed it as a great testament to the institution we have built.”
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