2.17.17: Michael Sneden and Dennis Suh Represent ValueXpress at the MBA Conference in San Diego, CA

Michael D. Sneden, Executive Vice President, and Dennis Suh, Vice President, will be representing ValueXpress at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention & Expo at the Manchester Grand Hyatt in San Diego, California, February 19-22, 2017. The convention is expected to attract over 3,000 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals share their views on the direction of the industry.

“I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets,” said Sneden. “This year, with various risk-retention structures being tested and the wall of maturities from 2007 not producing the level of new originations expected, I am curious to hear what industry pros have to say about these and other key elements of the CMBS business.”

“The MBA provides ValueXpress an opportunity to connect with all our debt investors to make sure we understand their appetite for deals,” commented Suh. “Some lenders prefer low-leverage deals and will provide very attractive interest rates to win those deals; some of our other partners will do more difficult deals for just slightly higher interest rates. We need to understand where everyone stands to be sure we direct our clients’ transactions to where they will receive the best execution.”

Mike and Dennis will be in San Diego from Sunday, February 19 through Wednesday, February 22. If you want to get meet for a drink or conversation between session presentations, please email Mike at msneden@valuexpress.com or Dennis at dsuh@valuexpress.com.

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2.15.17: Hot Topics for the MBA Conference in San Diego, CA

The 2017 MBA will be ground zero for opinions and information on important issues that the CMBS industry is currently working through. At the forefront is structuring CMBS deals for the required 5% risk retention as there is still no consensus on the best execution – the vertical strip, horizontal strip or L-shaped structure that combines the vertical and horizontal structure. On Tuesday, a panel will debate this during a session called “CMBS: The New Normal.”

Implementation of the Dodd-Frank risk-retention rules in late 2016 will allow CMBS players to enter 2017 with a better understanding of the impact of these rules on pricing, loan origination and execution. Panelists will provide some straight talk on CMBS, including the expected impact of these regulations and current industry thinking about the market and loan demand.

In addition, quite a bit of discussion is expected on how smaller CMBS loan contributors will participate under these risk-retention rules as many do not have the capacity or interest in retaining the risk-retention piece of their CMBS deals. At the same time, the larger, well-capitalized banks are finding their deals well received in the market because they are retaining the risk. This is resulting in a competitive disadvantage for the smaller players in the marketplace.

Then there is the wall of 2007 CMBS conduit loan maturities that was to provide robust originations for 2017, particularly during the first half of 2017. But the originations have not shown up!! This topic will be hotly debated as we discover what is happening to these maturing loans (see our 2.8.17 article).

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2.8.17: What Happened to the Wall of CMBS Maturities?

The “wall of maturities” refers to the avalanche of ten-year securitized loans that were originated at the peak of the last cycle, in 2006-2007. The last batch of those mortgages comes due in 2017, and conduit lenders had assumed that many of the borrowers would provide a steady supply of lending opportunities by turning to the CMBS conduit market for refinancing. But the results have been disappointing. According to a report last month by Bank of America Analyst Alan Todd, only 55% of the maturing CMBS loans have a debt yield of at least 9% — the minimum level seen in most recently originated CMBS loans. This means that roughly 45%, or $43 billion, of the $96 billion of CMBS loans that mature this year will be ineligible for securitization, sharply reducing potential refinancing business. And the total balance of maturing CMBS loans will plunge to $21 billion in 2018.

Many borrowers appear to be turning to alternative markets, some voluntary, some involuntary. Borrowers with loans facing significant tenant rollover are being forced to seek recourse bank financing if they are strong enough to personally backstop the rollover risk with a recourse guarantee. Less-strong borrowers are sometimes forced into high-cost bridge loans until leases are extended or properties are re-tenanted. On the other side of the coin, high-quality performing loans are migrating to insurance companies or Fannie/Freddie programs (for multi-family properties).


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ValueXpress Arranges $6,200,000 CMBS Loan for the Refinance of a 114-Room Holiday Inn Express in Orange City, FL

ValueXpress has arranged a $6.2-million CMBS conduit loan for the refinance of a 114-room Holiday Inn Express and Suites located in Orange City, Florida. The property is a four-story hotel constructed in 2003 and renovated in 2013. The loan provided cash out to the borrower for a future Property Improvement Plan (PIP) to finish conversion of the property to the new franchise-wide mandated Formula Blue prototype. Also, additional cash proceeds were returned to the borrower and were utilized as equity to obtain a construction loan to build a new hotel property.

The property is located just off Interstate 4, halfway between Orlando and Daytona Beach. The hotel provides easy access to many local attractions — the Central Florida Zoo, historic downtown Deland, Orlando International Airport and historic Blue Springs Park. In addition the hotel is just 24 miles from Daytona Beach, home of the Daytona 500 and the Coke Zero 400, as well as the famous Daytona Beach itself.

“The transaction’s main challenge centered around the loan structure required to ensure that funds were available to complete the Formula Blue PIP that is not required to be fully implemented until 2022,” commented Gary Unkel, Senior Loan Originator at ValueXpress, who handled the transaction. “We had a difficult time convincing the lender to create a reserve for the Formula Blue program at a lower-than-customary amount because much of the work had been completed,” explained Charles Lobetti, an originator in ValueXpress’s Nashville office who assisted Gary on the transaction. “But after several calls with the franchisor, we worked out the details and arranged a compromise with the borrower and lender that satisfied both parties.”


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2.3.17: CMBS Spreads Tighten Amid Limited Supply …

Two CMBS transactions recently priced with long-term super-senior AAA-rated bonds pricing at levels not seen since mid-2015. The first deal, a $1.3-billion offering by Citigroup and Deutsche Bank, priced the super-senior CMBS at 90 basis points (bp) over swaps, down 24 bp from the average of December’s CMBS issues. The pricing also broke the 100 bp barrier for the first time since mid-2015, with the exception of one very high-quality offering last August. The balance of the investment-grade structure of the CMBS bonds fared very well also. The BBB- bonds priced at 380 bp, down sharply from the range of 565-575 bp in December. Traders noted lack of new supply and confidence that new risk-retention rules will result in higher quality CMBS issues as reasons for the tight pricing.

Following the Citigroup/Deutsche Bank deal, Morgan Stanley, Bank of America and Wells Fargo priced a $977-million CMBS offering at tighter levels. The issuers priced the super-senior CMBS at 88 bp over swaps and the BBB- bonds priced at 350 bp, 30 bp better than the Citigroup/Deutsche Bank deal. However, the Morgan Stanley deal featured better credit metrics than the Citi deal, and the Morgan Stanley trio is becoming known as issuing the highest quality CMBS, which may have factored into better pricing.

“With these deals establishing new pricing levels, borrower spreads have fallen roughly 15-25 bp, well under 300 bp. With the 10-year Treasury yield roughly 2.45%, rates to borrowers are close to the important 5% level for full-leverage transactions and sub-5% for lower leverage deals,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

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2.1.17: And Risk Retention May Be Helping, Not Hurting Pricing …

CMBS market participants are breathing a sigh of relief as fully-complaint risk retention deals are being well received in the market. Whereas industry pros were concerned that the effects of the rules would make CMBS loans uncompetitive, the reverse is occurring, at least right now.

The most recent CMBS deals that priced at very tight levels (see our 2.3.17 article) successfully utilized two of the three possible structures to meet risk-retention rules. In the Citigroup/Deutsche Bank CMBS deal, the transaction benefitted from its use of the L-shape option under risk-retention rules. Citi and Deutsche are retaining a “vertical strip” equal to 1.9% of each class. And a KKR fund is taking down a “horizontal strip” made up of approximately 3.1% of a below-investment grade portion, which it must effectively hold for the deal’s ten-year life. In the second transaction, Wells, Morgan Stanley and Bank of America divided and retained a 5% vertical strip in proportion to their collateral contributions. The third possible structure, not yet utilized under risk-retention rules in 2017, is a b-buyer taking down the entire “horizontal strip,” made up of 5% of the most junior portion of the deal that it must effectively hold for the deal’s ten-year life.

On the two most recent deals, in addition to good market supply/demand characteristics, investment grade CMBS buyers were positive on having investors with “skin in the game” and were willing to pay up a bit for that. In addition, concern does not appear to be materializing that b-buyers would require significant additional yield for being forced to hold b-pieces for ten years and/or being forced to buy CMBS further up the capital stack than desired.

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1.26.17: But How the Smaller CMBS Players Will Participate Is Still Unknown

With tight pricing and market acceptance of the vertical and L-shaped retention structure, what remains unknown is how the smaller CMBS originators will participate. As of now, only the largest bankers — Citi, Deutsche, Morgan Stanley, Wells and Bank of America — have contributed to these risk-retention compliant deals. These firms held five of the top seven slots in the CMBS origination league tables for 2016. These highly capitalized banks have the capacity to hold vertical and horizontal strips of CMBS on their balance sheets and are very good at originating high-quality CMBS loans.

But what about the other firms further down the league tables? At spots 11-16 are Rialto, Nataxis, Starwood, Credit Suisse, Ladder Capital and Benefit Street Partners. These firms originated a combined $10 billion of CMBS loans in 2016, which is significant. They also typically serve the smaller balance, higher leverage, “B” quality asset market. Without these participants, borrowers would have significantly fewer options for financing. Most of the firms seem to have opportunities. Rialto and Starwood are affiliated with b-buyers and could team up on risk-retention deals. Ladder is a public company that holds CMBS securities in its investment portfolio, so holding a “vertical strip” is not unfamiliar to the company. Nataxis and Credit Suisse are large banks that could do what the Morgan Stanley team is doing.

Hopefully, these firms and the rest of the top 20 can find a best execution to remain active in the CMBS market. We should find out their direction in the next few months as their newly originated loans are securitized.

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