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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 45 • CMBS Investors Fared Well. Despite the significant valuation changes of the ESA portfolio during the financial crisis and subsequent bankruptcy filing, CMBS investors that were able to withstand mark-to-market valuations and adopt a “hold-tomaturity” perspective were rewarded with full recovery of principal and interest to all but the two junior-most classes who suffered losses due to servicer advances. The mezzanine investors in 2007, however, lost 100% of their investment. • Less Leveraged Investments Perform Better. While an exceedingly obvious statement, the CMBS and private mezzanine debt market euphoria of 2007 wantonly disregarded this age-old investment axiom. Interestingly, although today’s ESA valuation exceeds that of 2007, it does so with half of its 2007 debt burden, allowing the Company significantly greater safety, security and flexibility for growth. • Scalable Businesses Enjoy Multiple Exit Strategies. ESA is a nationwide business with a platform that is easily scaled. Businesses such as ESA enjoy access to capital from multiple public and private sources thereby improving, and optimizing, their cost of and access to capital whether via a recapitalization, public offering or disposition. Such alternatives help create value for and provide protection to investors. Despite the recovery of ESA, investors should not expect to see similar recoveries for other like-vintage CMBS transactions that do not have access to these markets due to size, market share, outlook or geographic limitations, among other factors. • Sponsorship Matters. Again, while nearly all CMBS loans are non-recourse, assets with sponsors that have staying power and broader access to the capital markets have historically performed better. Of course, a sophisticated sponsor will do what is in their best financial interest, including “walking away” from a financially infeasible asset. However, as demonstrated in ESA, stronger, better-capitalized sponsors are able to take advantage of market opportunities that many others cannot. • More to Come. While not all of the highly leveraged transactions of the 2004-2008 vintages will perform as well as ESA or be able to access the public markets in the same manner, there are many examples of other large successful businesses that were financed “at the peak” that were able to access the public debt and/or equity capital markets as a part of their growth and recovery strategies, including companies such as Hilton Hotels, Intrawest, GGP and Toys ’R Us to the benefit of investors. Given current capital market dynamics and the continued recovery of commercial real estate fundamentals, we expect to see more private, scalable real estate businesses that were financed with CMBS debt access the public markets either as a part of their growth strategy or as part of a strategic disposition. In this regard, not all properties, portfolios or sponsors will qualify. Key characteristics for successful candidates will include, among others, meaningful portfolio size and diversity, business scalability, and sponsorship. As with ESA, CMBS investors should expect to see other companies grow and flourish in these kinds of public structures. Where are we headed? Back to the future… just in a different vehicle, if our calculations are correct. Edward L. Shugrue III is the CEO of Talmage, LLC (“Talmage”). Talmage is an independently owned and operated commercial real estate investment manager and Special Servicer created in 2003. Since its formation, Talmage has made in excess of $10 billion of real estate investments and acted as the Special Servicer or advisor on over $40 billion of successful CMBS resolutions. Talmage is headquartered in New York City. www.talmagellc.com Extended Stay America — Back to the Future “Through the IPO, the valuation of ESA has more than doubled since its purchase out of bankruptcy in 2010.”


CRE Finance World, Winter 2014
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