Further, since many of the country’s top-tier private equity real estate sponsors, including Blackstone, Brookfield, Carlyle, Cerberus, Colony, Fortress, KKR, Starwood, Tishman Speyer and Walton Street Capital, among others, are significant CMBS issuers, typically in single-name securitizations (e.g. Hilton Hotels, Equity Office Properties, The Grace Building, Rockefeller Plaza, etc.), CMBS can represent an excellent way to gain exposure to a particular manager and to better understand their investment style as a precursor, or as an enhancement to investing in one of their funds. CRE Finance World Winter 2015 24 CMBS investing represents an attractive entry point for investors desiring to learn more about the U.S. property market and is a very useful tool for understanding property trends across the country in real time. CMBS offers robust property-level reporting for investors including occupancy, rental rates and cash flows, all of which can be used to better understand individual markets/ assets and to generate investment ideas. Attribute #3 – CMBS Allows Investors to Pin-Point Risk and Reward Along the Capital Structure A challenge to traditional real estate equity investing is that the owner, while bearing all of the investment’s potential upside, also bears all of the transaction’s downside, often with binary outcomes. Investing in CMBS, on the other hand, allows investors to pin-point their exact level of desired risk and reward through the tranching of the CMBS, sequentially from AAA (the most senior level with the least risk and least return) to the unrated or mezzanine tranche that carries the most risk and most return (while remaining senior to the equity). Additionally, unlike equity investing which has limited liquidity, CMBS investments carry daily liquidity. As illustrated below in the original CMBS capital structure for Blackstone’s acquisition of Equity Office Properties from Sam Zell in 2007, the CMBS transaction afforded investors a way to access Blackstone’s expertise and assets through the debt. However, unlike the equity, in which there was only one way to invest — through Blackstone’s private equity fund at an implied basis of $400 per square foot – the CMBS allowed investors access to the investment in 19 distinct tranches of debt ranging from the senior AAA bonds at $91 per square foot or 23% loan-to-value (LTV) through the BBs at $183 per square foot or 46% LTV. Additionally, since the CMBS was outstanding for seven years, investors could trade in-and-out of the CMBS at various entry points as a proxy for the health of the overall U.S. office market. Exhibit 4 Equity Office Properties Capital Structure at Closing ($ Millions except per square foot data) Source: Offering Circular dated June 2007 Whether floating or fixed-rate, whether senior or junior in the capital structure and whether secured by a single-asset, single-borrower, or pooled transaction, CMBS allows investors to precisely pin-point risk and reward for a specific transaction at a specific point in the cycle to best fulfill their investment criteria and risk/reward tolerance. Attribute #4 – CMBS Provides Liquidity and Discretion Two other important advantages of CMBS investing, as compared to equity investing, are liquidity and confidentiality. U.S. CMBS — Five Compelling Attributes for Foreign Investors “In the current environment debt returns often exceed equity returns.”
CREFW-Winter Edition
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