Four Commercial Real Estate (CRE) Collateralized Debt Obligations (CDOs) totaling $1 billion were issued in the fourth quarter of 2012, suggesting that the new issue market has re-opened. These deals fill an important void in commercial real estate finance for transactions that cannot be included in traditional CMBS transactions.
The first CRE CDO was issued in 2000, and subsequently, deal managers began introducing commercial real estate loans into CRE CDOs, including whole loans and mezzanine loans. The structure is a particularly useful financing vehicle for commercial real estate loans on non-stabilized properties. Generally, the senior portion of the bond structure was sold to investors and the junior portion (typically 30%) retained by the deal manager, who was allowed to actively manage the collateral pool. However, in mid-2007, the market collapsed in the midst of the credit crisis and no CRE CDO was issued again until 2012.
In September 2012, Arbor Realty Trust issued a $125-million Collateralized Loan Obligation, or CLO, secured by a portfolio of loans on transitional multi-family properties. The underlying loans are to be refinanced through the Fannie Mae DUS program on stabilization of the properties. Arbor sold the 70% of the transaction structure and retained the 30% junior portion. Similarly, NorthStar Realty Finance issued a $351-million floating rate CMBS deal in October 2012 secured by a portfolio of 14 loans on various transitional commercial real estate properties. All of the principal from loan repayments goes to pay down the bonds in sequential order as the transitional properties stabilize and pay off. NorthStar sold the senior 65% of the capital structure and retained the most junior 35%.
“CRE CDO structures should help bolster the market for the origination of bridge loans on transitional properties, and we would expect to increase our production of loans for these CRE CDO programs in 2013,” commented Kevin Monahan, Senior Loan Originator at ValueXpress.