Mortgage REITs have been the primary sponsors of commercial real estate CDOs of late, and J.P. Morgan expects that they will continue to drive issuance.
A number of REITs have discussed their plans to expand non-conduit originations on recent conference calls to discuss quarterly earnings.
RAIT Financial, for example, announced during its fourth quarter 2013 earning call in late February that it has been aggregating floating-rate loans for its second CRE CDO. It expects to close the deal in the second quarter of this year. The REIT said it planned to follow up with third floating rate CRE CDO in the third quarter.
Resource Capital similarly announced plans to “revist the securitization market” over the next few months during its fourth quarter 2013 earnings call.
Arbor Realty, which currently has two CLO vehicles in place with $385 million of collateral, said during its call that its “growing pipeline” had positioned the REIT “to originate and continue to pool collateral for another securitization vehicle.”
According to J.P. Morgan, CRE CDO funding has played key role in REIT financing because they are large originators and have more limited funding sources outside of securitization. REITs have used the CRE CDO structure to fund their growing commercial real estate loan platforms
CRE CDOs are debt obligations typically collateralized by a combination of commercial mortgage-backed securities (CMBS) and senior unsecured real estate investment trust (REIT) debt such as bridge loans, floating rate loans on transitional properties and mezzanine loans. In a CMBS conduit, by comparison, the pool of collateral is comprised of loans secured by real estate. REITs originate less riskier conduit loans that are sold to CMBS pools.
Bbefore the financial crisis, the biggest sponsors of CRE CDOs were B-piece buyers, special servicers, and asset managers. B-piece buyers saw these vehicles as "non mark-to-market financing for subordinate CMBS," while asset managers used CRE CDOs to increase their assets under management, according to the report.
The table below shows other key differences between legacy CRE CDOs or CRE CDO 1.0 and new issue deals or CRE CDO 2.0.
Year to date new issuance volume for CRE CDOs is at $400 million, according to J.P.Morgan. By comparison, over $2 billion of CRE CDOs were issued for all of 2013. At the market's peak, in 2006 and 2007, volume reached over $35 billion each year.