7.7.17: Pace of CMBS Conduit Loan Originations on Par with a Year Earlier

CMBS conduit loan originations at midyear are on pace with a year earlier, as measured by CMBS securities issuance. CMBS conduit issuance as of June 30, 2017 totaled $38.8 billion compared with $30.7 billion a year earlier. After a slow start to 2017, volume picked up in the second quarter. CMBS conduit issuance of $15.2 billion in the first quarter of 2017 fell short of the $19.2 billion for the same period in 2016. But $23.5 billion of issuance in the second quarter of 2017 easily surpassed the $12.6 billion of issuance in the prior year. Industry professionals have predicted volume of $65-$70 billion for full-year 2017, which now appears to be easily achievable. Expectations now are that last year’s total volume of roughly $75 billion is within reach.

The strength in new CMBS originations stems from a variety of factors. CMBS issuers are now comfortable with risk-retention rules, having successfully sold CMBS using all three methods of risk retention — vertical, horizontal and L-shaped — without any method having much impact on bond prices. As a result, CMBS bond spreads have been stable, with senior AAA-rated CMBS market spreads holding steady below swaps plus 100 basis points (bp) for lower leverage deals and roughly swaps plus 100 bp for higher leverage deals.

Indications are that third-quarter issuance will be strong as well. According to Commercial Mortgage Alert, $25.9 billion in transactions have been identified in the pipeline for the third quarter.

Posted in CMBS, CMBS Conduit Loans, CMBS Securities, Commercial Lending, Commercial Mortgage-Backed Securities, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress | Tagged , , | Leave a comment

7.3.17: Gross Profit Margins Now Transparent for CMBS Issues

Risk-retention rules have made the accurate calculation of gross profit margins for CMBS issues possible. Although the results do not include transaction expenses, the gross profit indications are more accurate than previous methods to “reverse engineer” the pricing results of the public bonds and estimates for the pricing of the non-public bonds.

Risk-retention regulations require new disclosures that make the gross profit margin calculation relatively simple for deals that utilize two of the three options under risk-retention rules – the “horizontal strip” structure and the “L-shaped strip” structure. Under these two structures, the issuer must disclose the amount of bonds retained, and this allows for the calculation of the gross profit margin. For example, if an issuer sells $1 billion of CMBS for $40 million more than the $1-billion face amount, the gross profit margin would be 4% ($40 million divided by $1 billion).

The determination of net profit margin is trickier. Deal expenses need to be subtracted from the gross profit margin. These expenses include fees paid to service providers, including legal fees and fees paid to rating agencies. Some loan contributors are required to pay fees to have bonds distributed to investors. In general, it is estimated that these fees will total roughly 0.5% of the deal amount. In addition, it is even harder to determine the cost of any hedging efforts.

Excluding any hedging impact and assuming transaction costs of 0.5%, estimated net profit margin for deals that utilized the “horizontal strip” structure and the “L-shaped strip” structure ranged from 2.04% to 6.10% for the first half of 2017, well in excess of the target margin of 2.0% expected by issuers.

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6.28.17: Hilton’s Tru Brand Latest Entrant into Crowded Hotel Franchise Space

Hilton Worldwide Holdings (Hilton) opened its first Tru by Hilton Hotel in Oklahoma City in May. The new mid-priced brand is pricing rooms at less than $100 to attract cost-conscious travelers such as millennials. The larger lobbies and amenities such as craft beer and pool tables encourage communal interaction to offset the smaller guest room size. Lobbies look like a newly renovated campus hub at a small college — complete with a snack bar, circular signs, and funky chairs. Hilton hopes to have over 150 locations open by the end of 2019.

The brand will face quite a bit of competition as the number of hotel brands proliferate, making differentiation difficult and paralyzing hotel guests with too many brand choices. According to STR, 154 hotel chains are within the “mid-scale” brand category, of which Tru is considered part. In total, there are almost 1,000 hotel chains worldwide, according to STR.

To further differentiate the brand, the hotels will be located in smaller markets with a focus on highway locations that are popular with leisure travelers as opposed to corporate guests. To outperform its competitors in the same price range, such as Best Western or Quality Inn, Tru will try to hold costs down by making rooms smaller and easier to clean and the hotels will be all-new construction.

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ValueXpress Arranges $7,250,000 CMBS Conduit Loan for the Refinance of an 88-Room Quality Suites Located in Atlanta, GA

ValueXpress has arranged a $7.25-million CMBS conduit loan for the refinance of a three-story Quality Suites hotel constructed in 1990 and renovated in 2015-2017. The hotel is located in the Buckhead Village section of Atlanta, Georgia.

Amenities include a meeting room, exercise room, complimentary breakfast, high-speed internet access, a business center, hot and cold breakfast and an outdoor swimming pool. All rooms feature kitchens with refrigerators and microwaves, free WiFi, free wired Internet and flat-screen TVs with digital channels. Living rooms, coffee makers, and free local calls are among the other amenities available to guests.

The property is located at Pharr Road, adjacent to Frankie Allen Park, in Buckhead Village. The property is proximate to Underground Atlanta, Philips Arena, Emory University, Georgia World Congress Center, Georgia Institute of Technology, Atlanta Civic Center, Buckhead Crossing, Emory University Hospital and the Georgia Dome.

“The transaction was challenging in that the loan amount provided for a substantial return of equity to the sponsor. Normally, return of equity is not an issue in CMBS conduit loans; however, the loan amount in this case exceeded the cost basis for the property,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “We were able to mitigate the concern based on the high level of property performance and outstanding location.”

In addition, the property is exterior corridor. “Exterior corridor hotels are not desired in CMBS conduit loans, but we were able to mitigate this concern as well,” commented Jim Brett, head of underwriting at ValueXpress.

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6.23.17: Don’t Forget: CMBS Conduit Loan Rates Are Listed on Our Website

CMBS conduit loan rates are listed on our website at valuexpress.com every Monday. To access our CMBS conduit loan rate sheet from the ValueXpress home page, click on “Loan Rate Sheet,” which is located at the lower right corner of the home page. On the new page that appears, you will be instructed to “Click on a title to access a printable document.” Click on “Loan Rate Sheet – CMBS Conduit” and a one-page .pdf document called “Indicative CMBS Conduit Loan Rates – $2 million – $100 million” appears.

Why not bookmark this page for direct access each Monday? Many of our mortgage banking associates who focus on the origination of CMBS conduit loans stick this Rate Sheet on their bulletin board each Monday. Then they have the current rates nearby when borrowers call for rates. In CMBS, rates are determined by adding the current swap rate (5-, 7- or 10-year swap, depending on the loan term) to the spread. The rate is determined at closing by adding the indexes together and the rate is fixed for the entire loan term.

Our Rate Sheet is useful for other purposes as well. It serves as a refresher that ValueXpress offers 5-, 7- or 10-year loan terms in CMBS, with loan payments based on 25- to 30-year amortization schedules. The sheet lists all the asset types that qualify for CMBS conduit loans. Furthermore, you can quickly see the underwriting criteria for each asset type, including minimum debt-service coverage ratio, maximum loan-to-value and minimum debt yield requirements.

“Although the interest rate spread is shown as a range, we can quickly determine a specific loan spread for any deal by running the rent roll and income and expense statements through our loan sizing and pricing models,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Please email me any deals that you need loan pricing on at msneden@valuexpress.com.”

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6.21.17: Houston Awaits Hotel Market Recovery

A recently released report identified Houston, Texas as one of the most troubled markets within the Kroll Bond Rating Agency (KBRA) ratings universe, which covers most major U.S. metropolitan areas. KBRA’s observations of the top 25 lodging markets revealed that loans within the Houston MSA were more frequently identified as loans of concern, meaning the loans had an elevated probability of default than those in any other market. Loans of concern primarily exhibit substantial declines in cash flow relative to levels underwritten when the loan were closed.

Of the 80 CMBS hotels secured by CMBS conduit loans located within the Houston MSA, 27 (33.8%) serve as collateral for loans that have been identified as loans of concern, of which 24 are loans that were securitized after 2010. The next-highest concentration was represented by the Washington, D.C. MSA (21.7%), where 13 of 60 lodging loans were designated as loans of concern. Philadelphia rounded out the top three MSA exposures with 8 (17.8%) of its 45 lodging loans identified as loans of concern.

Among the factors behind performance declines for the Houston MSA are exposure to the energy sector and oversupply, both of which have led to declines in average occupancy. According to a May 2017 STR report, average occupancy declined 3.6% year to date from May 2016, which was the worst among the Top 25 markets despite slight bumps in ADR during February 2017 from Super Bowl LI. Average occupancy within the Houston market for year-to-date May 2017 was 63.7%.

As the price of oil stabilizes and the realization that domestic oil and gas production in Texas, particularly in the Permian Basin, is cost effective even at $40, the Houston market should begin to recover as new supply is absorbed over the next 18-36 months.


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6.15.17: Is the Mall at University Town Center the Last in Our Lifetime?

Class A mall developer Taubman Centers Inc. opened what might be the last newly constructed mall for a long time. The property, University Town Center, is an 862,000-square-foot mall that Taubman started in 2004, but construction was slowed by financial crisis and it finally opened in October 2015. The property is located in the affluent city of Sarasota, Florida.

The mall is anchored by Macy’s, Saks Fifth Avenue and Dillard’s, one less anchor than the original design. Taubman expects the mall to be successful because it will be considered “Class A.” Class A malls contain higher end tenants and have remained successful in the era of Amazon and on-line shopping. Taubman asserts that the decline in Class B and C malls has helped Class A malls, as evidenced by increasing tenant sales at its malls to levels that significantly exceed sales at Class B and C malls.

Tenants at University Town Center include Michael Kors, Godiva, Apple and even a Tesla car showroom. In addition, the Capital Grille made its Sarasota debut in the mall. Taubman does not publish sales figures for individual malls, but said the sales per square foot at University Town Center is comparable with the average of $776 per square foot for its entire portfolio for the year ended in March.

Taubman does not have any more malls planned in the United States. “We have every expectation that not many malls are going to be built, but we didn’t expect this to be the last,” said Bill Taubman, chief operating officer of Taubman Centers.


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