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October 26, 2018  

Redwood Gearing Up for PACE Initiative

Redwood Trust is exploring the possibility of writing and securitizing Property Assessed Clean Energy loans.

The Mill Valley, Calif., REIT began researching the business a few months ago, and apparently is leaning toward moving ahead with the effort. Initially, it would focus on PACE loans to commercial-property owners.

The accounts would include, for example, financing for mall operators that want to retrofit their properties with solar panels or other energy-saving equipment. Sources said Redwood sees the strategy as offering the potential to build more loan volume with less risk than it would find by offering PACE loans to homeowners.

Indications are that Redwood would set up the program with a correspondent-lending structure in which it would buy PACE loans from originators that write the accounts to its specifications. That would mirror the company’s approach to the jumbo-mortgage market, where it for years has been the most active bond issuer.

Redwood hasn’t settled on a projected timeframe for its first PACE-loan securitization, with sources suggesting that such an offering is at least a year away.

In addition to energy-saving renovations, property owners increasingly have been using PACE financing for improvements that minimize damage from hurricanes, earthquakes, floods and fires. That is likely to dive up overall PACE-loan volume in the coming years, according to Morningstar.

Only a few REITs presently write PACE loans. They include a partnership between Hannon Armstrong Sustainable Infrastructure Capital of Annapolis, Md., and Counterpointe Sustainable Real Estate of Old Greenwich, Conn., called Hannon Armstrong Sustainable Real Estate.

“This is going to be a major feather in Redwood’s cap,” one industry participant said. “It gives it diversification in its investment portfolio, while also giving them a foothold in a niche market.”

PACE-loan borrowers repay the debts through their property-tax bills. Issuers including Renovate America and Ygrene Energy have bundled the accounts into five securitizations totaling $843.3 million this year, compared to five deals for $1 billion at this point in 2017, according to Asset-Backed Alert’s ABS Database.

Redwood’s jumbo-mortgage securitization program has produced 12 deals totaling $4.9 billion this year, up from eight transactions for $2.9 billion a year ago.