A newly assembled and growing commercial mortgage-backed securities team at Warburg Dillon Read has already closed $600 million in loans and is looking for an issuer to partner with for the company's inaugural CMBS offering, most likely slated to hit the market some time in the first quarter of 2000.
"We're probably good for around $800 million by the end of October," said Brian Harris, executive director of principal finance and credit arbitrage at Warburg. "But it is not big enough to go on our own, at least for this year."
Harris said the company has already spoken to three other issuers that could potentially partner with Warburg for the transaction, which will be the first such deal since the company decided to enter the CMBS business following last year's global market debacle.
Though Harris would not name the prospective partners he has been in discussions with, he said that the deal would probably end up being in the range of $1 billion to $1.2 billion, and would have collateral largely made up of multifamily loans.
"The economics in the market look okay so far, so there is a 50/50 chance that we'll go in the first quarter [2000]," Harris said. "We may go with a partner this year, but it would have to be a very advantageous situation for us to do that."
Harris said that the offering will be a "very large investment-grade component transaction," made up of a pooling of several commercial mortgage loans that the bank has originated over the last several months.
A loan for $100 million is made up of between 30 and 35% multifamily and approximately the same amount in office properties, Harris noted. Another large chunk is an investment-grade loan for $175 million for the Cherry Creek Mall in Denver. Harris also stated that the company is currently working on another similar single-asset transaction for $200 million.
"We have a fairly good pipeline, and I think that rates have picked up the business a little bit," Harris added. "There are also a fair amount of people looking to size up their pools, and I fit them nicely because of the components of my portfolio, which is a large amount of multifamily and investment-grade loans. So I don't hurt too many people."
Building a Team
Warburg began recruiting real estate talent and started building a CMBS roster following last year's market meltdown, when it appeared that barriers to enter CMBS were lowered because of global market volatility and decreased competition.
"Warburg thought that the margins were good at that point, and they believed they had a reasonable platform for launching a business of this nature," Harris said. "They wanted to run a fairly small group that could handle a fairly large-size position."
The bank hired Harris in early June of this year from Credit Suisse First Boston, where he had worked for three years heading the commercial trading desk. Warburg also hired Chad Johnson, a director in principal finance and credit arbitrage, from GMAC Commercial Mortgage.
The bank currently has an existing "good" real estate group in place focusing on well-to-do accounts such as real estate investment trusts, Harris said, but plans to meld that department with a developing CMBS team in order to establish a noticeable presence in the commercial business.
"We do a fair amount of unsecured REIT lending, but being that we are part of the second-largest bank in the world [Union Bank of Switzerland AG], we actually had very little exposure to real estate," Harris said. "We are probably 15 people right now in our principal finance group, and we will probably add another three to five before year end, and then add another 10 in the first quarter. Our goal is to get to 30."
Warburg's foray into the CMBS market seems to come at a suitable time, Harris said, due to the fact that the company is most competitive in the north-of-$20 million loan range, which has had "awfully thin" originations lately. "CMBS is overcrowded in the $10 million-and-under range, which we are competitive in, but we are even more sharp in the higher balance loans," he added.
As for the state of CMBS, Harris believes that this year's performance will be more symptomatic of what will go forward, and that CMBS activity in previous years was predicated by enormous amounts of refinancing and low rates, and were, therefore, aberrations.
"You are dealing with an acquisition market now rather than a refinance market, but as you get into 2001 I think you'll see more refinance paper take place, and not just acquisitions," he said. "A few years ago, people were paying off prepayment penalties well into 2001. But I think that next year, you'll see around $50 billion in CMBS for the year."
