As commercial real estate market woes keep investors' eyes fixed on mounting losses instead of new deal flow, firms with expertise in valuing these commercial assets have increased their focus on securities and loan analytics.
Such companies are securing new business by tending to the market's advisory and risk management needs.
Commercial real estate investment manager CWCapital Investments (CWCI) is one of these firms. CWCI recently hit the market with a new risk management group, CW Risk Management Solutions. The new unit will be headed up by CMBS industry veteran Tad Philipp, who will serve as managing director and head of the team.
Philipp joins CWCI after 17 years at Moody's Investors Service, most recently working as managing director in the firm's U.S. commercial mortgage finance group. He brings to CWCI a wealth of credit risk management experience, having served as co-developer of Commercial Mortgage Metrics, a widely adopted model for assessing credit risk, and also having co-developed the Moody's/REAL Commercial Property Price Indices, which are similar to the S&P/Case-Shiller Home Price Indices.
The idea behind the development of these products was that they would facilitate property derivatives trading so that market participants could hedge their risk by buying protection against property values going down.
Assisting Philipp in his new position will be Julia Hu, senior vice president, who joined the company in March 2008 from Wachovia Securities, and has been part of the group's development process. At Wachovia, Hu served as a vice president in deal management for multi-sector CDOs. Prior to Wachovia, Hu was at Credit Suisse First Boston.
They Already Have the Tools
The two will serve as coordinators, drawing on the team already in place at CWCI, which includes Maximus Advisors, an economic and real estate research consulting unit based in New York - where the risk management group will be located. This means there will probably be a limited number of new hires to the group, because CWCI already has people in-house with experience with the product, Philipp said.
Indeed, the new platform builds on the firm's investment experience in buying riskier chunks of commercial real estate.
CWCI is a high yield investor in CMBS deals. In CMBS portfolios, which have run to $5 billion or more of underlying loans, according to Philipp, CWCI would come in and buy the most junior tranches. Because of this, the firm has developed the skills necessary to quickly and accurately assess the risks in a portfolio, Philipp said. "This is not just an academic exercise; CWCI is experienced in taking first loss risk."
The firm currently has $11 billion in assets under management and approximately $200 billion of CMBS under management.
"The idea is to take the skills developed as a high yield CMBS investor and make them available to portfolio lenders and securities investors for risk management purposes," Philipp said.
Taking the Temperature
Initially, the group will provide valuations of loans and securities and risk management strategies, and it is already in discussions with some potential customers. "Given the turbulent market, many firms want to get a handle on the current state of their portfolio, both for regulatory and internal capital allocation reasons," Philipp said.
Potential customers include firms who bought CMBS portfolios a long time ago and are looking to reevaluate these loans given the change in the economic environment, as well as banks looking to buy another bank that need a third party to come in and evaluate the portfolio of the bank to be acquired.
While the enormous shakeout in the business is likely to spill over into next year, especially given the nearly empty CMBS new issuance pipeline, Philipp is confident that CWCI will be one of the survivors.
Ultimately, some form of securitized commercial real estate is likely to emerge, but it might not be in the next few quarters. "We are in a transition period where market participants tend to be more focused on managing the risks they already have than on taking on new risk," he said.
In 2003, CWCI was launched out of the CW Financial Services consortium of companies, which also includes CWCapital, a lender and primary servicer, and CWCapital Asset Management, a special servicer and loan management platform.
Cadim, a Montreal-based real estate advisor and portfolio manager and a subsidiary of the Caisse de depA't et placement du Quebec, a triple-A rated institutional fund manager in Canada, holds a majority interest in CWCI and CWCapital.
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