August 07, 2019
Our first all-green KG-Deal does triple duty: supports affordable housing, helps the environment and provides new green opportunities for investors.
Working for a mission-driven organization like Freddie Mac is rewarding, but the fact that investors are also focused on community and environmental initiatives and support our vision is truly amazing!
For 10 years, our K-Deals® have provided liquidity, stability and affordability to the multifamily rental market. Over the years, we’ve heard that investors are increasingly interested in green bonds and securities that integrate environmental, social and governance (ESG) factors into investment choice. In response, on June 17, Freddie Mac issued its first KG-Deal, an environmentally and socially focused securitization that is 100% collateralized by workforce housing properties that all conform to Freddie Mac’s Green Advantage® program, and the market response has been excellent.
“It was received very well,” says Luba Kim-Reynolds, Multifamily Capital Markets senior, who championed the idea of an all-green K-Deal. Over 30 investors participated in the transaction. In fact, 17 investors purchased the bonds specifically for their ESG-mandated portfolios, with five of the investors being new to Freddie Mac’s K-Deals. “They would not have taken part in the sale otherwise because they were specifically looking for ESG investments.”
The deal made headlines. “Freddie Bullish on ‘All-Green’ Deals,” stated Commercial Mortgage Alert in its June 21 issue. The news weekly had high praise for the $483.7 million offering: “The largest being a $210.1 million tranche with a 6.6-year weighted average life, priced at 50 basis points over swaps.”
Robert Koontz, senior vice president of Multifamily Capital Markets, also praised the new offering, “These deals tie directly to our mission and, given the strong demand for ESG investments, we envision doing one to two of these KG-Deals a year. There’s no doubt that expanding the investor base will allow us to further build liquidity down the road.”
For ESG investors, the KG-Deal holds unique appeal — and offers new opportunity.
“When we first developed this concept, we knew we wanted to tie the securitization to workforce housing,” says Luba. “There are only so many LEED certified buildings and solar panels for investors to buy into. But multifamily housing, now that’s a big pool. We knew that if we tied the green bonds to the $47.7 billion in green loans that Freddie Mac purchased over the last two years, it would have a big impact on the ESG market.”
Left to right: Luba Kim-Reynolds, Corey Aber and Justin Thomson are champions for green improvement programs for multifamily housing.
The KG-Deal — “K” for Freddie Mac multifamily’s flagship series of securities, “G” for green — exclusively securitizes workforce housing loans financed through Freddie Mac’s Green Advantage program, which was initiated in 2016. These loans enable and require borrowers to make improvements to multifamily housing by reducing energy and/or water consumption by a total of 30% with a minimum of 15% through energy improvements. These improvements often include water efficient shower heads, faucet aerators, toilets, LED lighting, programmable thermostats and ENERGY STAR® appliances. It may seem like these efficiencies wouldn’t make a big difference, but they do.
Among the more than 1,700 properties financed through the Green Advantage program, many were built in the 1980s or earlier: in other words, before many environmental or climate policies were established. Improvements are expected to save 5.1 billion gallons of water and 2.0 billion kilo-British thermal units (kBtu) in energy per year. Equally as important, tenants are projected to save about $173 a year in lower energy and water bills.
“We are supporting the environment, yes, and we’re also lowering one of the biggest housing expenses: utilities. People who live in affordable housing are often financially stretched — so every bit of savings helps, especially in this growing affordability crisis,” says Corey Aber, Multifamily Community Mission and Impact Finance director.
“Furthermore, the success of the KG-Deal execution will allow us to better support green financing in the future,” says Corey. “That’s a win-win for property owners and tenants!”
"The Green Advantage program has strong data collection processes — we collect both historical and ongoing water and energy usage," says Justin Thomson, Multifamily Asset Management manager. "The collected data will help us to understand the impacts of the improvements and issue an annual impact report aligned with green bond principles.
Freddie Mac had CICERO provide a second opinion on our green bond framework. CICERO gave us a rating of “Light Green” and credits us for closely monitoring energy and water reduction, creating maps of drought and extreme weather impacts to the properties and their communities, and for publishing reports with insight on climate impacts to the properties in our portfolio.
“These analyses are in line with preliminary climate resilience planning and considered a forward-thinking step not just for the building sector, but for the green bond market,” states the second opinion. “CICERO Green applauds this progressive analysis and encourages Freddie Mac to continue monitoring and reporting it.”
“ESG investing is well developed in Europe and just beginning to take off in the United States, so there is a lot of room to run,” says Luba. “Freddie Mac is well-positioned to deliver strong investment opportunities as one of the largest green lenders for multifamily housing.”
For additional information on our Green practices and market analysis, please view the following resources:
For Lenders and Investors
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