- There is strong demand for CRE debt capital, driven by a high volume of over-leveraged and near-term loan maturities.
- Investors must recognize that the sector can be broken down into two categories: pure balance sheet lender and balance sheet/conduit lender.
- Apollo Commercial is the only peer with a double-digit dividend yield.
The commercial real estate (or CRE) market has largely recovered from the global financial crisis that began in mid-2007. However, one legacy of the credit boom that preceded the economic recession in 2008 and 2009 is that many existing loans originated at the peak of the market and are scheduled to mature in the near term, resulting in the continuation of a wave of CRE loan maturities that will need to be refinanced or recapitalized.
These days, there is strong demand for CRE debt capital, driven by a high volume of over-leveraged and near-term loan maturities that provide for strong transaction volume fueled by improved economic conditions.
In the US, $398.9 billion of CRE loans, including $136.1 billion of CMBS, are scheduled to mature in 2017 alone, and according to Morningstar Credit Ratings,
the CMBS maturity payoff rate (which estimates, on a weighted average basis, over a specified period the percentage of maturing senior loans that are capable of being refinanced without additional debt or equity recapitalization) is expected to drop below 65% in 2017 (based on Morningstar LTVs of more than 80%, which Morningstar uses as a measure of estimating refinancing prospects).”
Based on this Morningstar payoff rate and CRE loan data from Trepp, LLC, it’s estimated that approximately $47.7 billion of maturing CMBS loans alone may require alternative or additional financing beyond traditional replacement senior loans at maturity during 2017.
While the commercial mortgage REIT sector is fairly simple to understand, investors must recognize that the sector can be broken down into two categories: pure balance sheet lender and balance sheet/conduit lender.
A pure balance sheet lender originates or purchases loans for their own balance sheet and holds these loans on their balance sheet (although they may sell participation units in the loans to diversify some of the risks) - Blackstone Mortgage Trust (BXMT) and Apollo Commercial Real Estate Finance (ARI).
There are differences between these two types as well and risk can be further diversified. Balance sheet lenders originate loans with the intent of holding them on their books. Balance sheet/conduit lenders originate loans for both their own books and to sell into securitized markets such as CMBS.
The risk with balance sheet lenders is relatively straightforward - the risk that the loans don't perform as expected. Balance sheet/conduit lenders have the risk of non-performance as well as the risk that the conduit market experiences a disruption and cannot take as many loans as expected.
While I have Buy recommendations on several commercial mortgage REITs, Apollo Commercial is the only peer with a double-digit dividend yield. Today, I plan to focus on ARI and provide a granular analysis of the catalysts supporting my Buy recommendation.