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CREFW-Fall2014 10.15.14

A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 19 David Brickman: I would add from our perspective, and I believe that you can probably generalize this to an agency perspective, when we think about who we compete with in aggregate, it is probably first and foremost banks, then life insurance companies and lastly conduits. The banks have also been the biggest variable in that dynamic having increased their share most significantly over the last few years. The life companies have been relatively stable in their share of the multi-family space, and conduits having grown a little bit. It is the banks that have really moved the needle as I think Peter was indicating, we try to break that out into major commercial banks versus local and regional. It seems more varied on the local and regional side than on the major commercial bank side. David Durning: A few things come to mind here. The overall recoveries in the capital markets and real estate fundamentals have greatly diminished risk levels in lender portfolios to the point that portfolios are now able to take on more risk generally. This has occurred at a time when portfolio demand for new investments is very strong, as strong as it has ever been as an industry in my memory; while risk adjusted returns have declined. Our response to this dynamic, versus where we were a few years ago, is to increase our focus and activity on structured lending, loans secured by un-stabilized apartment properties, construction loans, specialty property types, and loans in recognized global cities outside of the US. Currently we have approximately $1.5 billion exposure to properties that are either being newly constructed or where leasing has not reached stabilized levels. This activity is both complementary to our core fixed rate lending programs, and an offset to core lending opportunities in the market today that we no longer find attractive at current spreads given term-length interest only periods and relatively low expected debt yields. Sam Chandan: How do expectations change if we see a significant, perhaps unexpectedly large, increase in interest rates? If rates do begin to trend higher, maybe even a little bit sooner than we anticipate in our baseline, does that change the equation for refis? Kim Diamond: It changes the equation for some. Peter Scola: All depends on the actual numbers and how big of an increase. I think a significant long-term rate increase can certainly be problematic for certain owners. I would agree with all of the previous comments about capital availability, and certainly the capital availability to help fill the capital gap on some of the assets that previously were or are still distressed. Sam Chandan: With respect to the multifamily sector in particular, how are you thinking about some of those exit risks around, not the loans from pre-crisis that may still be lingering, but today’s originations that are made at these historically low rates but that will inevitably come back to market in an environment of higher rates as compared to a year or two years ago, more limited amortization? David Brickman: We see that as probably the biggest risk we have. We certainly think that loans we do today, the ones we have done over the last few years are going to mature in a higher rate environment. We think very much about what the leverage will look like at that point in time in the future. It is overly simplistic to just talk about IO versus no IO. It is a matter of what you think that leverage will be for that asset given the maturity, and given the leverage put on it today. We spend a lot of time thinking about how to size the loan, not just for today and the cash flows today, but so it can be refinanced at a point in the future. Fortunately, in multifamily, per my earlier comment, we continue to believe there are strong fundamentals that will fuel income growth, but against that backdrop, there is no substitute for ensuring you have a prudent leverage level at maturity. David Durning: I think overall that is exactly right. Our going-in debt yields and our exit debt yields are not as strong as they’ve been. We have talked about current underwriting, combined with longer interest-only periods, limited amortization, and as you said, continued robust valuations. Clearly, some caution is in order. We try to mitigate these risks by looking at debt-yield and our own internal underwritten cap rates. I think the question that we keep asking ourselves is, on an absolute basis, are the loans that we are seeing still attractive. Today, we feel pretty good about the loans CRE Finance Roundtable: The Risk Cycle “I think some banks may have entered into a devil’s bargain where they are willing to trade off tomorrow’s interest rate risk for current earnings.”


CREFW-Fall2014 10.15.14
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