The Paris-based investment and banking firm’s US real estate debt team succeeds by unifying its balance sheet and CMBS lending and says the mortgage-backed securities market will endure new regulations. Justin Slaughter reports.
Despite new regulations going into effect this Christmas Eve, the Natixis real estate debt team for the Americas – which originates both CMBS and balance sheet loans nationwide – will remain a CMBS lender for the “long haul,” the group’s executives tell Real Estate Capital at its Midtown office.
While Sixth Avenue below teems with yellow cabs and tourists, the head of real estate finance Americas at Natixis, Greg Murphy, says his group sees the impending Dodd-Frank Act’s risk retention requirements, which will force lenders to retain five percent of each CMBS deal for five years, as an opportunity. So far this year, the team has watched as six firms which were CMBS originators last year retreated from this space, but Natixis will not be next.
“We see the regulations as being an opportunity because we remain competitive with the capital and support that we have from Natixis and Groupe BPCE,” says Murphy, who has led the team since 2000. “We’re going to be in this for the long haul. We are fully prepared to retain five percent of any transaction that we do.”
The Natixis real estate finance Americas team, comprised of 50 professionals with offices in New York and Los Angeles, is close to originating about $4 billion by the end of this year, roughly divided “50/50” between floating rate balance sheet loans and fixed-rate CMBS debt. That volume compares with $3.2 billion in loans the firm did last year and $3.5 billion in loans the firm did in 2014.
But the sheer deep-pocket capital resources stemming from the group’s giant parent company, the Paris-based investment and banking firm Groupe BPCE, is not the only reason for the real estate group’s confidence in CMBS and the product’s future in general. Its track record through good times and bad, the flexibility of its lending platform, and the signs that CMBS – despite a dip in originations and new risk retention – will remain a sought-after debt product in the coming years, keep the firm optimistic.
One of the unique aspects of the Natixis real estate team in the Americas is that all of the group’s CRE debt products are offered from the same platform by the same bankers, compared with the many banks that have one group in charge of CMBS, a separate group for balance sheet lending, and another for other types of real estate finance.
“Last year we did a construction loan, a transitional loan, and a CMBS deal all for the same client,” says Murphy. “I don’t know how many shops can say that.”
As far as its CMBS lending, the group lends on all income-producing property types nationwide.
“Perhaps, some might think a given property is a less obvious choice for a CMBS loan, but I think quite often it’s that we are able to understand the property and the borrower’s plan, and from that we are able to tailor a structure that makes that loan work in the market,” says Murphy.
The group’s CMBS lending provides five-to-ten-year senior mortgage and mezzanine loans with a minimum of $2 million. The interest rates range from 3.5 to 5.5 percent and loan-to-value (LTV) ratios go up to 85 percent.
On the other hand, the firm’s portfolio balance sheet lending platform similarly provides senior mortgage and mezzanine loans with LTVs up to 85 percent. The balance sheet loans only range from two to five years, but also back all property types (including non-income-producing) and start at $20 million. The interest rates for the balance sheet loans are 1.75 to 6 percentage points above Libor.
“As a senior banker, I think it’s a benefit that we don’t sit here with a set script of interest rates published every day and say ‘this is our rate today,’” says David Perlman, vice president and co-lead floating rate desk, “because that’s just way too generic for the type of business or client interactions that we have.”
Michael Magner, managing director, senior banker, says providing CMBS and balance sheet lending “under one umbrella” allows the group flexibility in offering clients both the interest rate certainty of CMBS with the same service aspects of balance sheet.
Last September, when the group provided a $315 million fixed-rate loan to Savanna Real Estate and private investors on One Court Square (or “Citigroup Building”) office tower, they were able to bifurcate the loan and hold one piece, or controlling note position, on their own balance sheet. This gave the team a relationship where the borrower could come directly to them as issues arose on the transaction.
“And that was something that other competitor shops could not offer,” says Magner. “They were either going to go all balance sheet or all CMBS.”
In a similar deal this August, Natixis bifurcated a $210 million fixed rate loan on the corporate headquarters of the Danish firm Novo Nordisk in Princeton, New Jersey, and the group was again able to retain an unfunded commitment on its own balance sheet, while securitising a $168 million portion in its CMBS deals – providing the interest rate certainty that borrowers typically get from CMBS loans.
Perlman says that though they might seem like a self-contained dedicated real estate group, the team often taps into other working groups in the bank to work on clients’ needs, which includes asset management to solve any issues with the property itself.
“We pull in teams from the credit swaps desks or other teams within the bank for our work,” says Perlman.
Unifying the CMBS and balance sheet lending under one umbrella also allows the firm to offer some CMBS products that other banks can not, including the capability to season fixed-rate loans in its portfolio for up to one year, says Jerry Tang, director and head of CMBS securitisation.
Last February, the group originated a $40 million loan on the Sixty SoHo hotel in Lower Manhattan and then securitised that loan an entire year later, allowing the borrower the capital and time to renovate and stabilise the property. Tang says this is unlike many CMBS shops that are in a “moving business” and move a loan into a security in less than three months.
“Normally, that loan will go to a debt fund for a bridge loan, but we were able to walk the rate as a CMBS loan for the sponsor, holding that loan for more than 12 months,” he recalls. “So that’s one thing that differentiates ourselves and allows us to acquire higher quality assets in gateway markets.”
What further differentiates his group from other CMBS shops is how the firm quotes deals, using its own proprietary internal work flow system, NXS Live, to process deals, which allows the group to turn quotes around in 48 hours, adds Tang.
But on top of a flexible staffing and quickly turned-around quotes, the group can also offer access to different sources of capital, not only from its own banking institution, but also from hundreds of other banks in terms of syndication, debt funds in terms of selling B-notes and the high yield portion of the capital stack, insurance companies, and overseas capital.
Tang adds that as a large, international institution, the team brings in capital from non-US sources to optimise the execution, and “that’s a significant part of who we are”. Natixis has an extensive global network with offices in 35 countries.
“We can put together the entire capital stack, from mezzanine or B-note at the bottom to senior note at the top,” he says, “whether it’s all Natixis or we bring in other pockets of capital.”
The combination of balance sheet and CMBS lending also allows the team to take down an entire loan, and then find the capital home that it needs, whether it’s fixed or floating rate, adds Murphy.
This April, the group partnered with Oaktree to provide a $335 million senior loan to Cindat Capital Management Limited on a seven-hotel portfolio in Manhattan by syndicating the loan down enough so that interested participants, which previously did not have the capability to take on the entire loan, were able to close the loan.
“There are a number of debt funds in the market that will take the mezz and then try to find the senior; we can take down the whole transaction and do the reverse, putting together the senior syndicate and the mezzanine investors,” says Magner.
The group is also active in the commercial real estate CLO space, which is a sector they see as having tremendous potential. As of Q3 2016, Natixis ranks number one as CRE CLO underwriter and lead manager. This year the group was lead manager on two CRE CLO deals, a $250 million A10 2016-1 deal and the $471.5 million Fort CRE 2016-1 LLC deal.
Lending through crisis
This “under one umbrella” flexibility allows the group to respond to not only the individual needs of clients, but also to the macro market conditions, and it even allowed the group to keep lending through the last financial crisis.
“What we were able to do here under Greg’s leadership was to quickly change our lending strategy as the CMBS market was weakening,” says Magner. “At the same time we had the strength to keep lending into the balance sheet market right through the downturn.”
Since the financial crisis of 2007 and 2008, the team does a lot of balance sheet loans in emerging markets like Mid-Town South or Brooklyn, and transitional projects like offices redeveloping into new centres for business, often in the creative media spaces. For example, the firm is providing an $85 million floating-rate loan on the conversion of the Uline arena in Washington DC (an old concert venue where the Beatles did their first performance in the US in 1964) into office and retail, while the group also provided a $190 million loan with Wells Fargo to the Rubenstein Group on an office development at 25 Kent Street in Brooklyn this year.
The group has also done CMBS deals in every state except for the prairie-filled Western state of Wyoming. On the balance sheet side, the team has predominantly done deals in the five boroughs of New York. On top of the $335 million in financing for Cindat’s seven Manhattan hotel portfolio deal, the group also provided a $57.5 million loan to Long Wharf Real Estate Partners and Treeline Companies to reposition an office building in Downtown Brooklyn and a $101 million financing on a commercial condominium in the Financial District of Lower Manhattan this March.
Perlman says there are different markets and different property types the group likes more than others, but the real focus is on finding good credit and good sponsorship.
“For us the focus is on credit, on putting in the right structure,” he says. “And for that we look to the sponsor, try to understand their history with the asset, how they performed during the downturn, and how they responded to issues. That’s important to us because we want to have experienced sponsorship that we can work with when markets change.”
But the group has also provided loans on a hotel in Denver, Colorado, a retail property in Las Vegas, an office in Seattle, and another retail in Florida and elsewhere across the nation.
As of 30 September, the group had originated over $35 billion of loans since 1999, including $18 billion of fixed- and floating-rate commercial real estate loans securitised since 1999. The group has done over $6.7 billion of portfolio lending since 2009.
CMBS is here to stay
The team’s CMBS lending has come down, however. Of the total US CMBS originations in the first three quarters of this year, Natixis ranks number 11, with $1.47 billion, according to Commercial Mortgage Alert. That number is slightly down from its total of $2.25 billion over the first three quarters last year. The group’s CMBS volume was $2.6 billion in 2015 and $1.4 billion in 2014.
But this is likely related to a decrease in the CMBS market overall. As of 14 November, the total amount of CMBS issued this year in the US has only reached $52.6 billion, according to Trepp, while an analyst from that agency has predicted that total issuance will not even reach $65 billion by the end of the year – a 30 percent drop from last year’s total of $95.1 billion.
That’s a low threshold compared to CMBS at the peak of the market in 2007, when $230 billion of CMBS was issued. After the financial crash, issuance collapsed to essentially zero by 2009; but the CMBS market rebounded in the years since, with $90 billion issued in 2014 which creeped upwards to $95 billion the next year.
The product’s share of the commercial real estate lending market has also dipped. CMBS captured just 9 percent ($16.47 billion) of the $183 billion in first mortgage US originations during the first two quarters of the year, representing a significant decline from its 2012 totals, when CMBS lenders captured 23 percent of the market.
But that doesn’t mean other lender groups are shoving CMBS out of the CRE debt space for good, according to the Natixis team. Many life insurance companies are already lending at a peak volume historically, while as many as 33 commercial bank lenders have over 300 percent CRE to capital ratio. Meanwhile, many debt funds can’t afford to do ten-year loans like CMBS because of the cost of capital.
For these reasons, the team predicts CMBS will rebound from the likely $60 billion to $65 billion total originations this year to as high as $100 billion in the following years.
But the likelihood of CMBS increasing its share of the US CRE market in the short term will potentially be impacted by the uncertainty surrounding two things: the new risk retention rules and the so-called ‘wave of maturities’ of ten-year vintage CMBS originated at the peak of the last cycle.
While the team says it’s fully prepared to retain five percent of all of its future CMBS deals, the only such deal to have interest holdings that would fulfill the US risk retention rules is the $871 million deal that Wells Fargo originated this August. And the question remains about what structure will most lenders adopt.
“The main thing with risk retention is no one yet really knows which structure will dominate eventually, or if there will be a smorgasbord,” says Murphy. Lenders will have a choice of retaining a “horizontal” or “vertical” slice of capital or a combination of both.
And yet, the anticipation of risk retention rules coming into effect before the end of the year – meant to incentivize higher quality loans by exposing originators to the credit risk of their originations – does not appear to have a current pricing effect on the market, the team says.
Murphy expects his group to continue its activity in the CMBS market gateway and secondary markets nationwide, providing loans from $2 million to $400 million, with an average loan size of $15 million.
But long before the uncertainty around risk retention rules grew, a fear was brewing that the so-called ‘wall of maturities’ of vintage CMBS loans originated with high leverage in the frothy days from 2005 to 2008 were going to have a hard time finding lenders willing to refinance. But so far, the fears seem to be unwarranted.
“As far as the ‘wave of maturities’ of CMBS vintage, sponsors are much more comfortable now that these loans can be refinanced, and I think low interest rates have helped,” says Perlman.
Though CMBS origination volumes may have reduced, underwriting has only improved, according to the team. The average LTVs in CMBS in the last year have dropped six to seven percentage points to the high 50s. That’s compared with the average LTVs in the mid-60s the team saw about a year ago and the mid-70s in 2006 and 2007 originations.
Even in the floating rate space, two years ago the general structure there was relatively worse, with much tighter spreads and higher leverage of five or more percentage points than today, the team says. But now, even though the real estate market could get hurt by higher interest rates, the market has created a self-discipline that has kept spreads not too tight and leverage in line.
“Sometimes I hate to use the word optimistic, but I feel very different than I did in 2007,” says Murphy, “I’ll tell you that.”