Fitch turns the spotlight on US boom’s top players

Agency’s report allows investors to compare top CMBS issuers, writes Alex Catalano

CMBS issuance is booming in the US. Some $80bn of commercial mortgages, including loans for multi-family properties, were packaged up as CMBS last year – an 118% increase on 2012 – and this year looks to be similar.  “A big part of the growth came from existing participants and a significant amount from new entrants,” notes Jamie Woodwell, vice-president of commercial/multi-family research for the Mortgage Bankers’ Association. The veteran banks are there – Deutsche Bank, Wells Fargo, JP Morgan, Citigroup etc – and new players are joining in almost daily.

Rialto Capital Management, a subsidiary of US homebuilder Lennar, started originating in 2013 and securitised $530m of loans that year. Starwood and Ladder Capital have gone public; other non-bank lenders, such as Cantor Commercial Real Estate, are set to follow. And yet more are hanging out their shingles. With around 30 active CMBS originators and another seven or so intending to start this year, the market is intensely competitive. “Increased competition among originators often serves as a prelude to a decline in underwriting standards,” says Fitch Rating’s managing director Stephanie Petosa.

In a new report, CMBS Originators Matter, which Fitch will repeat semi-annually, the rating agency compares 19 originators on 17 key metrics, including loan-to-value ratios, debt service coverage ratios, mortgage rate and property quality, analysing over 2,000 conduit loans in CMBS deals it rated in 2013 and Q1 2014. ‘This analysis will help investors determine whether anecdotal impressions of originator quality are supported by hard data,” says Petosa. Fitch found that some originators consistently underwrote higher-risk loans than others.

For example, the highest average LTV ratio (as calculated by Fitch) was 108.5% for Rialto, compared to a low of 95.3% for Wells Fargo (see chart 1). But the LTV ratios originators reported are lower and vary less because the cap rates Fitch uses 9%-plus – are stressed rates across full economic cycles. Fitch also applies haircuts to the cash flows. Leaving aside Fitch’s reckoning of LTV, Rialto’s and Wells’ differ in that Rialto has a higher proportion of 75%-plus LTV loans – 20% of its total loans – while Wells’ is only 10%.

Debt service coverage ratios (DSCRs) also differ (see chart 2). Fitch, which includes discounts and higher-than-current refinancing constants, ranges DSCRs from 1.31x to 1.10x; the originators’ from 1.77x for UBS, to 1.46x for Rialto. Some 65% of loans in Rialto’s sample have a DSCR less than or equal to 1.50x, Fitch says, but notes that the sample is comparatively smaller than UBS’s (48 loans versus 120).

On property types, most originators’ lending is in line with the average: retail is  most popular (32%), followed by offices (20%). But there are outliers – 41% of C-III’s sampled loans by balance are backed by manufactured housing, ie mobile home parks, while investment banks Morgan Stanley, UBS and Goldman Sachs were heavier than average on retail (see chart 3). The markets that conduit lenders finance diverge a bit more, reflecting their spread of clients and/or intermediaries. Again, the big banks tend to have a higher concentra-tion of loans in core markets, while players such as Keybank lend on smaller assets in secondary and tertiary markets (chart 4). “This analysis will help investors compare their risk tolerances against originators’ recent lending patterns,”  says Petosa.