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CRE Finance World Summer 2015
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Brian Furlong.
Yes. I think we’ve got to. Almost every sensibly
originated loan should perform well in a low interest-rate environment
during the term. But there are certain interest-rate traps there.
Looking at it from a debt-yield versus a debt-service-coverage-
ratio perspective, I’m somewhat concerned about the real low
debt yield loans that are often associated with the most sought
after properties,
like multifamily for
which the agencies
allow for very low
debt yields and
properties in places
like Manhattan that
may be beautiful
assets but never-
theless have low debt yields. Whether or not the trophy Manhattan
asset or the decent-quality multifamily asset will save you is
unclear…the jury is out on that because when interest rates rise
these loans may get caught by an interest-rate trap that doesn’t
relate to the quality of the property. For example, loans exist that
have long leases in place that aren’t going to inflation-adjust when
rates change and the inflation environment changes. We’re ground
lenders and we see 30-40% LTV loans that could go bad at the
balloon date unless the ground rent first adjusts up to the point
where it provides for the debt yield needed to refinance the loan
at its balloon date. If such a loan defaults due to an interest rate
rise, that default will have happened for reasons totally independent
of the occupancy of the property, the quality of the rent roll, or
other traditional credit factors.
Larry Brown.
And the statistics from LNR and others bear out
what Brian just said. Would you ever have guessed that multifamily
loans have among the highest default rate during the two-plus
decades of CMBS? Would you ever have guessed that hotels are
among the sectors with the lowest default rate? And, within hotels,
would you have guessed that it’s non-flagged hotels with the
lowest default rate when compared to flagged? Why? Here’s why:
Everyone gets more aggressive because they need to originate
multifamily loans and so are more willing to underwrite more
aggressively. They’re dealing with crazy cap rates and things like
that. In contrast, the approach with hotels is ‘I have to be conservative.’
And so what happens to those loans 20 years later is that hotels
are actually performing relatively better than multifamily. It’s
fascinating, but not surprising with hindsight.
Spencer Kagan.
From our perspective, we certainly aren’t going
in with a lot of the heavy IO loans that are out there. Yet, in very
supply-constrained markets and in any type of inflationary environment,
I do think it’s likely those assets will benefit from topline growth.
Oftentimes deals with amortization today are located in tertiary
markets or have significant term risk, like concentrated roll during
the term of the loan, so you may not actually get the benefit of all
the amortization. All else equal, we would much rather have loans
with amortization than without. Yet, we do provide some allowance
for IO loans, particularly in very tight markets where there is more
opportunity to push rents than is the case in tertiary markets.
Clay Sublett.
From the portfolio side, we’re certainly looking at
the staying power of the sponsor. Most of what we do is floating
rate, so we are much more sensitive to the fact that if we see a
near-term rate increase, it will hit us during the loan term and not
just at maturity. So we’re always doing sensitivity analyses. We
always approach refinance risk with some cushion in it. That said,
we ultimately look at the staying power of the sponsor and the
benefits of recourse. A totally non-recourse loan means I scale
back the leverage to reduce refinance risk and the loan’s sensitivity
to interest-rate movements.
Lisa Pendergast. A quick last word…While it is impossible to
foresee where rates will be 10 years from now, the changes
we’ve seen from the rating agencies should help investors with
not only refinance risk but also term defaults. It’s a positive
industry development that CMBS credit enhancement is almost
double what it was pre-crisis. Investors are far better protected
today than they were pre-crisis, and the additional protection
helps to address ‘uncontrollable’ factors such as the competition
induced increase in IO or a market induced back up in interest
rates and thus heightened refinance risks.
Stephanie Petosa. Thanks to all of our panelists for their
participation and candor.
A Lender Roundtable: Real Talk from Real Lenders on Today’s Competitive Commercial and Multifamily Lending Environments
“Life companies compete with
CMBS in the fixed-rate space and
particularly the large fixed-rate
space all the time. CMBS is a very
potent competitor.”
Brian Furlong
“On the banking side, loans have full or at least partial
recourse with some burn down; but that’s been one of
the big pressure points of late — borrowers asking for
and getting higher leverage than has historically been
the case and getting it non-recourse.”
Clay Sublett