Housing in the United States is in short supply — and the Canada Pension Plan Investment Board has taken note.
Last week the $575 billion pension fund announced a joint venture with mortgage lending stalwart Redwood Trust.
The deal with Redwood involves a $500 million asset joint venture, which will invest across Redwood’s residential bridge and term loans, targeting more than $4 billion in total acquisitions. CPP Investments will contribute 80 percent of the capital, and Redwood will commit 20 percent. Redwood will collect administrative and performance fees on the investments.
CPP Investments is also providing secured corporate financing of up to $250 million, which has a two-year term and a one-year extension option. To promote long-term alignment, CPP Investments will also receive warrants to acquire Redwood stock valued at about $15 million — and which could reach $36 million if certain joint venture targets are met.
Underpinning the investment is a broad demographic shift in the United States. Housing supply is low right now, which means that buyers and renters are competing for assets, driving home prices higher.
“We just think that household formation is in a really good place,” said head of capital solutions David Colla.
He added that the 2023 regional banking crisis has also had knock-on effects for the mortgage lending industry. Following the 2008 banking crisis, regional banks took on a lot of the non-qualified mortgage products that big banks stopped offering.
However, now that regional banks are suffering, many are looking to offload these mortgages as well. As Colla puts it, there’s nothing wrong with these assets per se, it’s just that regional banks can no longer afford to carry the risk on their balance sheets.
“The type of things that we saw after the GFC, with the big banks changing their standards on leveraged lending, we’re seeing a similar thing take hold on the asset-backed side with regionals,” Colla said. “It’s almost the same story.”
Back in 2010, CPP Investments stepped in and bought up some of those assets. As Colla noted, the fallout from that banking crisis lasted almost ten years — and what happened in 2023 with community banks will likely mirror that. In other words: There are more opportunities to come. CPP Investments may do more joint ventures or direct deals.
“We could tailor something very customized for the company given the collateral that we have,” Colla said. “For that we get paid, but they also get a very flexible solution that will help them grow on balance sheet.”
