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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 21 Dan Bober: I think, overall, there are only so many ways to describe a loan and any piece of property. It is a rather finite universe, yet six different parties absolutely do quite often call the same thing something slightly different, or start their service level timing from a different point. How long does it take you to process a mod? What are you going to use as a starting point? All of that is in the process of being vetted, though, since the working group just started, I don’t think anyone can claim any victories or massive ah-ha moments. We all know they are lurking out there. Brian Lancaster: Let’s look at the perspectives of a life insurance company real estate lender and investor. Richard, in terms of your origination and lending activity, where do you find right now that you can best compete with the conduits, banks and the GSEs? Richard Walsh: Well each one is a little different. Let’s start with the GSEs. During the first half of the year, we actually had a hard time competing on pricing or proceeds. Then leading into the summertime, the GSEs were mandated to cut back on their portfolio by about 10% , and we took advantage of that. We found ourselves competitive on the pricing side, which has been wonderful and something different. We always compete well against the agencies on new construction projects that are just completing. We don’t mind lending into the lease-up, whereas, at least historically, the GSE’s have required a project to achieve 90% occupancy for at least 90 days . So we will see what happens in 2014. I would not be surprised if the agencies do continue to curtail, that the street will pick up a little of that business as well. On the CMBS side, loan pricing for securitized lenders is a largely a function of where the CMBS bonds are trading in the market. At the beginning of the year, the long triple A bond was selling at approximately 80 over swaps. That enabled the street firms to compete against life co’s very effectively on loan pricing Leading into the summer time there was a little bit more turmoil in market with the budget issues and as a result the CMBS bond prices spiked, causing coupons quoted by the street to increase about 100 BPS. That opened the door again for us to be more competitive on the pricing side. If you need loan terms outside of a 5 or 10-year deal, it starts to tip the argument in favor of the life companies. If you need something unusual in a business plan, that also typically favors a portfolio lender, whether it is earn outs, collateral leases, or the like. Up until recently, it appeared the banks had been playing more defense. As I mentioned, we saw little competition from the banks through 2012. This year, however, they’ve gotten extremely aggressive. Unfortunately, if there is a well margined deal that the banks want, we’ve seen them price in side of us by 20, 30 or 40 BPS. Brian Lancaster: A few years ago when CMBS restarted, conduits were either doing loans the insurance companies didn’t want to do or nibbling around the edge of their market. Would you say now you are competing head to head with the conduits for most types of loans now? Richard Walsh: I would say that through most of 2012, life insurance lenders had the run of the large loan market. But toward the end of last year and certainly for most periods this year, securitized lenders have been very competitive on the single asset large loans, whether it is on malls or major office buildings. From that perspective, we are competing with them head on. Brian Lancaster: Richard, NY Life both invests in CMBS and makes commercial property loans outright. What determines whether you will invest in CMBS or make a loan? Richard Walsh: We are a fairly active buyer of CMBS in the investment grade sector. On the conduit side, we look at CMBS as an attractive alternative to corporates, and whoever mentioned earlier that the single A becomes the pricing bellwether is correct; this is an informal guide post. In the beginning of the year when the long AAAs were pricing at swaps plus 75 or 80, there really wasn’t much relative value for us in that trade, but in the summertime, when they gapped out to 125 - and even now at 100 BPS, we are finding good relative value compared to corporates. Having said that, we first start with the credit, so we do as much work as we can, given the short time frame between the pre-sales and pricing, and less than half of the deals we screen pass credit. On the single-asset side, often times we have competed for the lending assignment and lost. The CMBS structure gives us the ability to go down the credit curve and pick that place in the capital stack where the pricing and leverage level match up to our risk tolerances. Brian Lancaster: What is your general outlook for your company next year, comparing 2013 to 2014, in terms of commercial real estate loan originations? Richard Walsh: Let me start by saying that over the last two years, the life industry has had record lending volumes. For the ACLI reporting companies, that has been north of $45 billion, and if you add all of the companies, that is in excess of $60 billion. Through September, industry volume is up about 10% — which is the level where we would expect to finish out 2013. I think as an industry, we are still not at our desired allocation level; we have $300 billion in total outstandings and there is probably another $50-$100 billion in capacity. So there is room for the life companies to step up production if the pricing is right and the product is available. For our lending platform, we expect to end the year at about $5 billion CRE Finance World Roundtable Discussion: 2014 Outlook


CRE Finance World, Winter 2014
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