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How The Best CRE CDO Managers Operate
By Michael Bates
According to a recent
report from Fitch Ratings, three main issues have characterized the
collateralized debt obligation (CDO) market during the past year:
record issuance, structuring innovations and headline
meltdowns.
With all this activity and market turmoil,
investors have been relying on the CDO asset manager to protect
collateralized pools, the rating agency says. But because CDO
issuance volumes have been high and growing, the market is also
contending with new entrants in the CDO asset manager space -
making overall surveillance all the more vital.
Fitch, whose CDO asset manager (CAM) rating and
review program assesses different CDO asset managers by asset
class, says today’s market necessitates that managers meet
and exceed industry standards.
According to the report, the rating agency
“expects managers to present robust platforms that address
the interests of both rated noteholders and equity
holders.”
“In doing so, Fitch places additional
emphasis on the unique needs of each asset class,” the
company says. “Current standards will continue to be
challenged by best-in-class managers who are anticipating and
planning for the next innovation or market disruption.”
As a point of reference to players in the CDO
market, Fitch has identified commercial real estate (CRE) CDO
manager strategies that comprise best practices in today’s
environment.
“As the number of large, actively managed
CRE CDOs backed by CREL [commercial real estate loan] assets
continues to grow, Fitch scrutinizes the asset manager’s
ability to source high-quality collateral to keep a CDO fully
invested,” the company says. “The high turnover of
assets in CREL CDOs demands strong origination capabilities on the
part of the manager.”
The rating agency cites the performance of two
companies - Arbor Realty Trust and Guggenheim Structured Real
Estate - as examples of strong origination platforms at work.
For instance, Arbor Realty Trust has three CRE
CDOs under management today, totaling more than $1.5 billion in
assets. On the origination end, 80% of its borrowers are repeat
clients, Fitch says. Moreover, the company’s solid
origination efforts are complemented by “sound and consistent
underwriting and servicing standards.”
Guggenheim Structured Real Estate, the rating
agency notes, “targets experienced, well-capitalized sponsors
with institutional-quality assets exhibiting positive
cashflow.”
According to Fitch, the servicer plays an
“integral role” in the commercial mortgage-backed
securities and CREL-assets market.
“Both the manager and servicer are engaged
in the workout for defaulted loans, and Fitch will scrutinize the
workout resources and capabilities inherent at each asset
manager,” the company says.
In this regard, Capmark Investments LP, for
instance, “maintains a very active and ongoing monitoring
access supported by regimented formal monthly and annual reviews of
assets,” Fitch adds.
“The company’s surveillance process
is facilitated by the ability to access performance data at the
security, pool, loan and property levels, which is enhanced by its
affiliates’ servicing of many of the assets under
management,” the company remarks.
Fitch also points out that commercial real
estate assets are unique and “transitional” in nature.
Therefore, CRE CDO managers must keep the investor base apprised of
“the developing business plans of each asset.”
“This type of narrative reporting is
highly customized and based on each unique asset or
situation,” according to the rating agency. “Quarterly
narrative-based reporting is viewed favorably.”
Fitch says Wachovia Bank NA’s structured
finance group, which provides nonrecourse, transitional and
high-leverage capital to its CRE clients, “provides investors
with asset summaries for each property that include key facts,
figures and, most importantly, updates on the status of each loan
held in the portfolio over the specified period.”
“This type of detailed investor reporting,
which extends beyond the trustee report, is a crucial service for
CREL CDO investors,” the rating agency notes.
Fitch analysts Manuel Arrive, Daniel Hicks,
Lauren Keiper, Vincent Matsui, Alastair Sewell, Shashi Srikantan
and Russ Thomas worked in concert to produce the report,
“2007 Best Practices of CDO Asset Managers,” which can
be found at www.fitchratings.com.
Developers Invest In Seattle Project
Enterprise Community Investment
Inc., a development capital provider with offices in
Seattle, and Washington Mutual
Community Development Corp. have agreed to a $15.5 million
new markets tax credit transaction that will help finance
construction of the 17th & Jackson project, a six-story
mixed-use building in Seattle’s Central Area
neighborhood.
According to Enterprise, the building will
consist of 59 apartment units, 11,000 square feet of retail, office
and live/work space and a 62-stall parking garage. The sponsor and
developer of the project is the Central Area Development Association, a
community development organization dedicated to the revitalization
of the Central Area neighborhood
“The 17th & Jackson project is a
strategic investment that uses new markets tax credits to create
subsidized housing that is affordable to working families earning
70 to 80 percent of the area median income,” says
Joe Wesolowski, senior vice
president at Enterprise.
“By spurring additional residential and
economic development and creating jobs, 17th & Jackson
contributes to a number of important goals in the Central Area
neighborhood as well as the city of Seattle’s priorities for
creating workforce housing,” he adds.
Colorado Bank Forms Capital Markets Group
Colorado Business Bank,
based in Denver, has developed a real estate capital markets group
intended to diversify and strengthen the bank’s commercial
real estate banking platform.
Led by executive vice president Craig Poulter and senior vice president
Kathy Thurston, the group
will create a comprehensive capital markets product offering - to
include mezzanine debt and other financings - and establish a loan
syndications desk, according to the company.
“All of the activities of the real estate
capital markets group will support, complement and build upon the
strong real estate banking reputation we have already established
in both our Colorado and Arizona markets,” says Jon Lorenz, CEO of Colorado Business
Bank.
Poulter and Thurston have a combined 40 years of
experience in real estate banking and real estate transactions.
They have arranged construction financing for a number of major
Denver-area projects, including the final phase of Clayton Lane in
Cherry Creek and the recently commenced redevelopment of Southglenn
Mall.
FL: MELBOURNE PROFESSIONAL COMPLEX, MELBOURNE
WHAT: Constructed in 1986,
the property is located on 5.33 acres of land and contains 64,800
square feet of net rentable area, as well as 288 parking spaces.
Melbourne Professional Complex is currently 95% occupied, with
tenants’ lease terms ranging from three to five years.
WHO: James F. Perry & Co., a
Miami-based mortgage banking organization, arranged the financing
for the borrower, Sand Point LLC.
$$$: $4.95 million.
TERMS: The loan was set for a term of
10 years at an interest rate of 5.85%. A 30-year amortization
period follows a two-year interest-only term.
James F.
Perry & Co.: (305)
670-8008.
CT: 340 PUTNAM ST., BRIDGEPORT
WHAT: This 18-unit,
three-story concrete apartment building was built in 1991.
WHO: Houlihan-Parnes/iCap Realty
Advisors, a White Plains, N.Y.-headquartered real estate investment
firm, placed the financing for a Stamford, Conn.-based buyer to
purchase the building for a total of $1.25 million.
$$$: $875,000.
TERMS: The loan, which carries a
30-year amortization schedule, features a fixed interest rate of
6.15% for the first 10 years.
Houlihan-Parnes/iCap Realty Advisors:
(914) 694-6070.
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