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CRE Finance World, Winter 2012

Roundtable: Outlook 2012 Steve Kraljic: consistently at a higher LTV than the number on the page. And If I could address that, this has always been an issue for me, that plays somewhat into Victor’s earlier comment about cap rates because I just don’t think there is enough differentiation. Certainly being low. Because of the low rate environment, despite the economic at the 30% AAA level there isn’t, because the lion’s share of weakness, cap rates are below long term stabilized levels in our investors in that class don’t do extensive credit work, or they don’t view. Secondly, the other challenge is that the collateral mix has do enough credit work, but it’s just the nature of the beast of what drifted a little bit towards less desirable assets in terms of physical AAAs are supposed to be — a high flow, liquid tranche. Yet these and market quality and I think that is partially a product of competi- deals are lumpy enough that defaults on just a few larger loans tive sources of financing, particularly balance sheet lenders, as well could present issues to the AAA class . I also think that dealer as just a lack of high-quality collateral. support can be so varied, even at the AAA level that should be priced more into how the bonds trade, but I don’t think that’s being Brian P. Lancaster: reflected enough. As you get further down the capital stack, In terms of the loans that you are seeing in CMBS deals, are there certainly with the deeper credit nature of the tranches coupled certain property types/markets that you are favoring and or avoiding? with the challenging nature of dealers trying to sell mezzanine bonds, you are seeing more price differentiation, as you should. Nelson Hioe: It’s a case by case basis. The underwriting really has to be done Brian P. Lancaster: asset by asset and you have to do your work. I don’t think you can Nelson, as a B-piece buyer and a re-underwriter of CMBS 2.0 look at a strat and say that because it is 50% retail or 20% hotel, deal collateral, you’re at the bottom of the capital stack, what it must be de facto greater risk than a deal with a different mix. are your thoughts on that, and would you agree? What are your One of the trends we are watching carefully on the retail side is thoughts in terms of the quality of the deals and do you think the migration to the web, and the impact that will have on retailers’ there is sufficient differentiation? commitment to a brick and mortar presence. Clearly there are a lot of data points coming out that imply that retailers would like Nelson Hioe: to have less of a physical presence than more. But, I think given Commenting on credit quality, I would echo some of the other the fact that we don’t have a crystal ball about what properties comments. We definitely saw a deterioration in the early part of types will really do well or not, we are really focused on markets. this year as volume began picking up and there were a lot of new In particular, we place heavy emphasis on the depth of the leasing issuers looking to originate new product. When the outlook was market. And in that regard I might take an 80% occupied asset at more positive, folks were expecting a more robust and sustained 65% LTV in a strong leasing market and view that more favorably rebound, and a lot of new competitors were chasing a relatively than a 100% leased asset at 60% LTV in a market that is pretty limited set of potential financing candidates. That, along with a thin in terms of tenant base. This ties into my previous comment low rate environment predictably resulted in underwriting taking that we are seeing more loans originated on assets that are in a bit of a hit. We noticed leverage picking up, more IO loans, and secondary markets where demographics, population or job growth less structure. Again, to echo Steve’s comments, underwriting are going in the wrong direction and that has been a challenge. is certainly better than the “go-go” days where there was more pro forma income and much higher leverage, but we were a little Brian P. Lancaster: surprised given that the market really reconstituted itself less than Would you apply those same views to hotels? Victor gave a fairly six months prior. positive view of the hotel business It’s fairly difficult to get a hotel loan so a lot of hotel operators are turning to the CMBS market. I think the events over the past few months and increased risk aversion on the part of issuers benefited guys like ourselves and Nelson Hioe: AAA buyers; loans on the whole have slightly better structure and Hotels are clearly more operationally leveraged and they are a somewhat more conservative leverage than during the spring of much more complicated asset type to operate, so there has to be this year. And I think that volatility within reason is a good thing a margin of safety. One trend we’ve seen is that loans are being because it keeps everyone on their toes. With that said, we are originated on hotels that not particularly special, but are rather seeing a couple challenging trends. Appraisers are still being fairly the ‘only game in town,’ whether it’s a Hampton Inn in Michigan sporty with their take on value which makes us feel like we are or Illinois or somewhere like that, and one concern we think a lot A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 13


CRE Finance World, Winter 2012
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