November 16, 2009
Developers Diversified Realty is issuing about $400M in commercial backed mortgage securities (CMBS) in a sale that is reportedly three times oversubscribed. The highest quality tranche is reported to go at about 4%, which is about 280 bps above the 1-year LIBOR, which is pretty good.
Of course, part of what is driving the interest is investors ability to get a healthy dose of leverage:
The deal is the first issue of commercial-mortgage-backed securities under the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, program. Under the program, investors can borrow from the Fed as much as 85% of the CMBS bonds’ value by pledging the securities as collateral. By taking advantage of that leverage, investors will be able to boost their returns.
That puts the AAA tranche at 4% unlevered, or about 6% levered. The issue is oversubscribed though partly because what seems to be rather conservative underwriting at 50% LTV and 1.44 debt-service coverage, and the availability of leverage.
The Developers Diversified deal also differs from past deals because the offering has been carved up into only three slices, with the Triple-A class representing about 80% of the deal and the rest consisting of Double-A and Single-A classes. Past deals often had more than 10 classes from investment grade to noninvestment grade.
This issue is all in all a good sign. This deal does underscore what we have discussed in the past though, and that is our view that asset values of well-leased, well-located assets will stabilize somewhere around current levels as money is again available to finance and get these deals done when and if sellers are forced to sell.
On the flip side, for “credit challenged” and “tenant challenged” real estate, debt is still largely not available and it is very unlikely that the CMBS market for those type of deals will return anytime soon. Therefore, with double digit bridge rates for these type of distressed assets, values will continue to be weak, and perhaps will continue to weaken.
Overall though, existing owners who are underwater or bought at the peak of the market won’t really benefit from an ability to go get 50% LTV/1.4 DSCR financing unless they have and are willing to pony up significant amounts of additional equity, which many don’t have or are not willing to throw after what is already a sour bet.
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