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CMBS Market "Malaise" Spreads Widening Several factors have lead to recent choppiness in the CMBS market, after 2000 started out calmly. Most lenders have raised origination matrices approx. 20 bps in the last two weeks. The overall break-even spread is approx. 205-210. The latest standard conduit pool priced AAA 10 years at T + 150, up from +120 last month. Why? (1) B-piece buyers are sitting on the sidelines (see previous FinFax), either demanding higher yields or causing pools to be delayed. In one case, a pool tranched out a B piece/unrated combo of approx. 1.5% of the total. However, the B piece buyer is requiring a super high yielding B-piece of 2.5%, cutting profit for the originator. With few buyers out there, the originator has no choice if they want to securitize. Latest hopeful news: LendLease and others are rumored to be entering the B piece market. (2) SWAP spreads continue to widen with the 10 year spread up to approx. +115 (the comfort level in recent months was +75-85). Many originators and CMBS bond buyers use the SWAP to hedge and convert their fixed rate instrument into a floating rate instrument, thereby "staying with the market" as rates fluctuate. Therefore, bond buyers evaluate the bonds based upon a spread over LIBOR after the swap, right now T + 150 (latest pricing) equals approx. LIBOR + 42 (+40 is considered the minimum required spread for this post swap yield). More on swap mechanics in next week’s FinFax. Latest hopeful trend: There has been some preliminary discussion among traders that the less volatile 8 year swap may be a more appropriate hedging mechanism since the "average life" of a 10 year mortgage as a bond is closer to 8 years (after accounting for warehousing time and pre-payment during year 10). (3) Other costs (example): On each pool, the seller/originator needs to dump a particular REMIC instrument for tax purposes. The IB’s have been paying various institutions approx. $500,000 over the last couple of years to take this "off their hands". That price is now: $2,000,000. (4) Fixed rate instrument disinterest: With record gains by NASDAQ (dot.com, biotech, etc.) and other equities, the returns are so high within such short time frames that it is tough for fund managers to get excited about long term fixed rate instruments such as CMBS. Also, the inverted yield curve is hurting 10 year securities (see above rates). Many investors are flocking to higher paying 3-5 year instruments, both fixed and floating...The year 2000 has seen a lower volume of CMBS financings. Based on supply & demand rules, many predicted tighter spreads. Now one major IB originator told us: "I thought I’d never say this, but I’m glad volume is down because of the cost of securitizing!" Stay tuned...
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TRANSACTION OF THE WEEK !
$22,761,550 (96% of Total Project Cost) Acquisition/Reposition Senior Bridge (77% of Total Cost) and Equity Financing (86.50% of Total Equity Requirement for Two Apartment Complexes (339 Total Units) GSP arranged $5,250,000 of equity (or 86.50% of total equity requirement) and $17,511,000 of non-recourse senior bridge financing (77% of total project cost) for the acquisition and reposition of a two apartment complexes located in mid-city Los Angeles and San Bernardino. The Properties/Markets: (1) Mid City Los Angeles: 142-units (12.6% studio, 71.8% 1 bedroom, and 15.6% 2 bedroom), two 3-story buildings, 1.5 acres, built in early 1980’s, swimming pool, basketball courts. Units feature central heating and air conditioning, several have private balconies. In-fill location near downtown LA, which is experiencing a turnaround due to Staples, Disney Hall, new Cathedral, soundstages, etc. Submarket occupancy: 96+%. (2) San Bernardino: 197-units (90.9% 2 bedroom, 9.1% 1 bedroom), twenty 2-story buildings, 1 leasing office / club-house building, 14 acres, built in 1988, two swimming pools, kiddie area, basketball & volleyball courts, BBQ area. Located near large university and several employment centers, Submarket Occupancy: 95+%. Reposition: Borrower will implement a nominal cosmetic improvement plan and gradually raise rents to market. Capital Structure/Financing Structure: (1) Mid City Los Angeles: Purchase Price: $9,750,000; Renovation, Closing Costs, etc.: $1,196,000 (Total Cap: $10,946,000); Senior Debt: $8,126,000, Equity: $2,439,300; (2) San Bernardino: Purchase Price: $11,000,00; Renovation, etc: $1,635,000 (Total Cap: $12,635,000); Senior Debt: $9,835,000, Equity: $2,811,250. Financing Terms (Both Transactions): Debt: 30 day LIBOR + 2.75%, 3 years, interest only (until 18 months or renovation is complete, then: 30 year amort), Non-recourse; Prepayment: Year 1 – locked, Year 2/3 – 0.50% fee waived if refi with same lender. Equity: Terms are confidential. (Gary E. Mozer, Lee T. Norman)
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