Real Estate Leadership Guides 7 DEBT & EQUITY CAPITAL EDITION 2018
est-only loans were structured as combined first mortgage and mezzanine loans, for a higher LTV.
Pensam has also started to invest in Freddie Mac’s
B-piece loans. “We get a decent return on investment
that compensates for the tremendous amount of work
that must go into investing upfront,” says Ray Cleeman,
Pensam’s head of capital markets.
Pensam Funding is moving into debt because it sees
opportunities from a risk-adjusted perspective on its
return per dollar, according to Cleeman. With cap rates
where they are in multifamily, he says, “It’s difficult to
identify double-digit returns. Instead we’re finding ways to
play in different parts of the capital stack to achieve the
returns that our investors are seeking.”
Leaders of other CRE funds such as Irvine, CA-based
Avanath Capital Management will tell you that inves-
tors are still hungry for the returns that real estate can
offer. That’s the case even in nontraditional asset
classes such as affordable housing, which is Avanath’s
wheelhouse. It targets markets in the US with a strong
need and lack of supply, and its fund investors include
both US and European banks and pension funds, says
president and chief investment officer John R. Williams.
“The Europeans look at what we offer as having a very
good risk-adjusted return and being in a good defensive position in US real estate,” he
states. “They also like it because there’s
current cash flow.”
New capital sources are entering
CMBS as well, illustrating the resilience
of this market following the risk-retention
rules that went into effect at the beginning of 2017, causing the CMBS market
to pause. Total issuance for the year is
now expected to reach upwards of $85
billion, according to Trepp, compared with
the 2016 total of $76 billion.
Briefly, the risk-retention mandate for
CMBS calls upon lenders to retain a 5%
stake in the securitization for five years.
B-piece players are an even more integral
component of the CMBS market under these rules and,
toward the end of last year, the market began to get
nervous when it appeared that the B-piece market was
hesitating over the heavy lifting required of them.
That was then, however. The CMBS market has
been active so far through the second half of the year
and new sources of liquidity—funds that were formed
with this investment in mind—are increasing their
activity in the market.
One such vehicle is KKR Real Estate Credit
Opportunity Partners. New York City-based KKR
announced in October that it closed at $1.1 billion,
exceeding its target capital raise and receiving strong
backing from a wide range of global investors, including
public pensions, insurance companies and family
offices. The fund is geared toward generating attractive
risk-adjusted returns for investors through the purchase
of junior tranches of CMBS; specifically, it focuses on
investing in newly issued CMBS B-pieces.
It was KKR that negotiated and purchased the first
CMBS transaction subject to risk retention. The fund has
closed on additional transactions since then and KKR
says it is among the most active CMBS B-piece buyers of
third-party risk retention structures. “With more than
$50 billion in annual conduit CMBS issuance and a limited universe of B-piece buyers, there is a growing need
for capital to satisfy the new regulatory framework,” Matt
Salem, co-head of KKR’s Real Estate Credit business,
said when the fund’s closing was announced.
Also in October, New York City-based Greystone
launched a CMBS mezzanine loan platform to complement its existing CMBS platform. The new mezzanine
loan product accompanies a newly-originated CMBS first
mortgage loan from Greystone.
Greystone decided there was demand for its product
based on the wave of maturities in 2006 and 2007,
says Rob Russell, the firm’s head of CMBS product. The
CMBS market has since pulled back on leverage points
that were common in those days. When the loans came
up for refinancing, the borrowers found themselves
short because the market had gotten tighter.
“So we came up with this product designed to fill the
gap,” Russell says. “We go as low as $500,000 or as
John J. Campanella
Cushman & Wakefield
Because we’re late in the
cycle, people are less likely to
take a lot of floating-rate risk,
so demand for fixed-rate
products is increasing.