CW Capital Takes B Piece on $1.4BB CMBS deal

by REIT Wrecks on June 24, 2008

Latest CMBS Deal Launched and Priced

CRE Direct (www.credirect.com) reported that CW Capital, the mortgage lending subsidiary of Caisse de dépôt et placement du Québec, took the entire subordinated “B” note on Bank of America’s $1.3billion CMBS deal, which priced on the 19th, just one day after guidance was issued. It is only the eighth deal of the year and perhaps the last for months, and the quick pricing was thought to be a consequence of scarcity value. One wonders where AHR, JER, CHC and others were in the bidding. The transaction was obviously competitive; did CW Capital’s access to Canadian bank deposits give it a funding cost advantage or did the REITs just intentionally price themselves out of this deal?

Accretive earnings would seem hard to come by, since just seven conduit deals totaling $9.4 billion have priced so far this year. By the same time last year, 29 conduits totaling $113.7 billion had priced. Because conduit shops have yet to start originating loans in any sort of volume (although Wachovia was rumored to have just recently been given the go-ahead to begin new originations), the expectation is that full-year conduit volume will be no greater than perhaps $20 billion to $25 billion.

For all of last year, in comparison, $188.6 billion of conduit deals priced. Another $41.9 billion of single-borrower or floating-rate deals priced as well, which brought last year’s total CMBS volume to $230.5 billion.

The transaction, Banc of America Commercial Mortgage Inc., 2008-1, is backed by 110 mortgages with a weighted average underwritten debt-service coverage ratio of 1.34x and a loan-to-value ratio of 67.4%. Many of the loans were originated some time ago, with parts having been securitized through earlier deals. From REITwrecks’s perspective, these are demonstrative of strong collateral, and it looks like a departure from the weaker underwriting of 2005/2006. This also likely had a beneficial effect on pricing.

Not surprisingly, among those is the deal’s largest collateral loan, a $109.3 million piece of a $344.9 million debt package that BofA had provided for a portfolio of 27 extended-stay hotels with 3,439 rooms that were formerly owned by Apple Hospitality Five, Inc., which was acquired by Inland American Real Estate Trust in a $709 million deal last year. Hotels generally attract higher cap rates and lenders generally also require lower LTV ratios and higher debt coverage.

Despite the weakening economy, the hotels generated $47.9 million of net operating income over the past 12 months, even though they were underwritten to generate $46.1 million of NOI. Other pieces of the debt package were securitized through Merrill Lynch Mortgage Trust, 2008-C1, which priced last month, and Morgan Stanley Capital I, Inc., 2008-TOP29.

Also in the collateral pool is a $64.2 million piece of a $385 million debt package on Arundel Mills, a 1.3 million sf shopping center in Hanover, MD owned by a venture between Simon Property Group and Farallon Capital. Pieces of that debt have been securitized through Merrill Lynch Mortgage Trust, 2008-C1, and Banc of America Commercial Mortgage Trust, 2007-5.

The deal also includes a $97.5 million interest-only loan on 550 West Jackson Ave., a 401,651 sf office building in Chicago owned by a group led by Mark Karasick. The property had been encumbered by $116.5 million of financing that RBS Greenwich Capital had provided and was said to be shopping when the property came under pressure as a result of the departure of a major tenant, commodities broker Refco, Inc.

Karasick had purchased the property for $125 million in 2005 before Refco’s disclosure of financial improprieties. The company filed for bankruptcy protection and ultimately was acquired by Man Financial. It gave up its space at 550 West Jackson, but much of it was ultimately leased to Calyon, which already had occupied space there.

The bulk of the deal’s collateral loans, representing 41.6% of its balance, were assumed by BofA through its acquisition of LaSalle Bank, while 3.4% of the deal’s loans were originated by Countrywide Commercial Real Estate Finance, whose parent BofA is in the process of acquiring. Barclays originated 15.3% of the deal’s loans, by balance.

The deal’s junior-AAA bond class has a subordination level of 13.75%. That compares with an average of 13.5% for the seven conduit deals that have priced so far this year, but is lower than the 14.75% for the JPMorgan Chase Commercial Mortgage Trust, 2008-C2 transaction, which priced at the end of April.

Meanwhile, CMBS conduit spreads have continued to widen. Spreads on super-senior AAA bonds had tightened steadily since reaching their all-time wides in mid-March, but reversed course three weeks ago. They ended last week at an average of 156.5 basis points over swaps, according to the Commercial Real Estate Direct CMBS Pricing Matrix. The widening is the result of overall softer conditions in the broader credit markets.

Thanks again to Commercial Real Estate Direct for the bulk of this story.

REIT Investment
Disclosure: Long AHR

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