Country Bank, a New York state community bank affiliated with ValueXpress, has been actively buying new issue CMBS for its investment portfolio, attracted to their high relative yield, underlying asset diversity and attractive capital risk weighting.
The bank first began investing in CMBS during the 2008 financial crisis when the value of CMBS plummeted well in excess of their intrinsic value based on the expected performance of the underlying loans. The bank engaged Mortgage Investment Group, a company headed by Michael D. Sneden, Executive Vice President of ValueXpress, to perform analytics on the loans underlying 200 2005-2007 CMBS issues to determine the issues that were expected to perform better than their peers. The company created a list of about 50 CMBS issues that were expected to outperform, and in 2008-2010, the bank purchased and sold approximately $150 million in CMBS, recording significant capital gains over the period.
When the CMBS market fully recovered in 2010, the bank shifted its focus to new issue CMBS. CMBS loans underwritten since the market resumed in 2010 have been conservatively underwritten, contain no “pro-forma” loans, and are structured to provide better lender protection; most loans feature collected TILC and structural reserves, cash flow sweep escrows in advance of key tenant expirations to collect cash for TILC/debt service should tenants vacate, and many loans feature cash clearing accounts that capture property cash flow in the event of declining property performance. As a result, Country Bank has been comfortable investing in junior AAA-rated CMBS and AA-rated CMBS that are providing yields in excess of 4.5%, which are attractive relative to alternative fixed-income investments.