Mortgage REIT to Launch CRE Platform

Jack Taylor, the head of Prudential Real Estate Investors’ global debt unit, has joined Pine River Capital Management to oversee a commercial real estate investment program that will be seeded with $500 million of equity.

He’s been named global head of commercial real estate at Pine River, a Minnetonka, Minn., investment manager, and has been joined by his Pru team members, Stephen Alpart and Steven Plust, who were named managing directors.

Their responsibilities will include oversight of the commercial real estate investment program being planned by Pine River’s affiliate, Two Harbors Investment Corp., a mortgage REIT. It said that it plans to launch a “commercial real estate initiative” that would have an initial equity commitment of $500 million. Additional details could not be learned immediately.

Taylor is well known in the global high-yield debt world. He and Plust joined Pru in 2009 from Five Mile Capital Partners, a Stamford, Conn., investment manager, while Alpart previously was managing director and co-head of opportunistic lending at Capmark Investments of Horsham, Pa.

The three all had worked at Paine Webber and Co. prior to and after the investment bank’s merger with UBS in 2000.

Taylor co-headed UBS’ Americas and European real estate investment-banking operation and had led PaineWebber’s real estate group. At Five Mile, he was portfolio manager for the firm’s Structured Income Fund.

Their addition to the “Pine River team will enable Two Harbors to diversify our portfolio into commercial real estate assets,” explained Thomas Siering, chief executive of the REIT. “The opportunity in the commercial real estate market is attractive.”

The REIT’s assets as of Sept. 30 included a portfolio of residential mortgages with a balance of $4 billion; $12.7 billion of residential mortgage-backed securities, and a residential mortgage servicer affiliate. It also owns shares in Silver Bay Realty Trust Corp., a REIT that invests in single-family homes, which began business as a venture between Two Rivers and Provident Real Estate Advisors.

Sub-3% Rate Expected on NY Loan

A Silverstein Properties partnership that’s seeking a $360 million loan on the office building at 1177 Avenue of the Americas in Manhattan is in line for a rock-bottom interest rate.

With Treasury yields plummeting and commercial MBS loan spreads on trophy properties tightening, the partnership will likely end up with a rate well below 3% on a seven-year loan. That would be one of the lowest coupons on a long-term mortgage in the current cycle.

The assignment is being pitched to balance-sheet lenders and CMBS shops via Eastdil Secured. CMBS programs appear to have the edge, one market pro said, because the borrowers are focusing on achieving the best pricing rather than flexibility on loan terms, and securitization platforms are currently willing and able to offer cheaper debt because of the prevailing spreads in the CMBS market.

Lenders in the mix said they are hearing that the loan’s coupon will be pegged to only about 90-95 bp over seven-year Treasurys, thanks to the loan’s low leverage and the strong institutional sponsorship. Since the beginning of this year, the seven-year Treasury yield had hovered between 2% and 2.3%. But a flight to quality this week touched off by plunging stock prices drove down the yield, which briefly hit 1.5% on Wednesday before rebounding to 1.8% yesterday. If that level holds, it would put the loan’s coupon around 2.7%.

New York-based Silverstein currently owns the 47-story tower in partnership with California State Teachers. UBS is buying an unspecified piece of the ownership, and the loan is being sought in conjunction with that recapitalization.

Lenders said the proposed mortgage would equal only about 40% of the property’s value. The debt yield, which measures net operating income as a percentage of the loan amount, would be a solid 10.4%.

The 1 million-square-foot building, which stretches from West 45th to West 46th Streets on the west side of Avenue of the Americas, is 92% leased. Law firm Kramer Levin leases 283,000 sf.

Lenders cite spread compression as an ongoing theme in the market. The loan sought by the Silverstein partnership is viewed as something of an outlier, given the low leverage and strong sponsorship. But it illustrates how competition has driven down pricing on trophy properties.

Only a few giant securitized mortgages on New York office properties have carried coupons in the 3% area over the past two years. In March 2013, a Silverstein-UBS Trumball Property Fund partnership lined up a seven-year loan with a 2.72% coupon on the leasehold interest in the 1.9 million-sf office building at 120 Broadway.

Well Fargo securitized the $310 million interest-only mortgage via a stand-alone deal (WFCM 2013-120B). The loan-to-value ratio was 51.7%. The day the loan closed, the seven-year Treasury yield was 1.4%, indicating that the loan spread was approximately 130 bp.

Market Volatility Drives Down CMBS Prices

Volatility in the stock and Treasury-bond markets put downward pressure on commercial MBS prices this week.

The 10-year Treasury yield finished at 2.16% yesterday, after falling to as low as 1.86% on Wednesday, as a plunge in the stock market touched off a flight to safety. The yield was down by 12 bp from last Friday and 46 bp from the recent high in mid-September.

The decline caused CMBS spreads to widen this week, for two reasons. First, credit spreads in general rose on concerns about the U.S. economic outlook, the European debt markets and spread of the Ebola virus. Also, investors were insisting on a higher spread to compensate for the decline in the Treasury yield.

Many CMBS buyers require a minimum absolute yield to take down new issues. In the last two conduit deals, the benchmark bonds yielded 3.29%. The long-term super-senior class of a $1.3 billion offering led by J.P. Morgan and Barclays (JPMBB 2014-C24) carried a spread of 83 bp over swaps. The comparable tranche of an $842 million issue led by Citigroup and Goldman Sachs (CGCMT 2014-GC25) priced at 87 bp over swaps.

Because of the drop in Treasury yields, the next conduit offering — a $1.2 billion transaction by Deutsche Bank, UBS, Cantor Commercial Real Estate and Natixis (COMM 2014-CCRE20) — will have to carry a wider spread to match that 3.29% yield. With the 10-year swap yield down to 2.328% yesterday, the benchmark spread would have to be 96 bp to reach 3.29%.

"That says it all right there," one CMBS banker said. "The spread will have to be 10-15 bp wider to get it done."

A pullback by some bond buyers is also putting pressure on spreads, according to one CMBS trader. "It’s a tough ride right now," he said. "Any time you have that kind of Treasury volatility, people put their pencils down and say, ‘Let’s think about what we’re doing.’ "

Virtually no bonds from recent conduit issues changed hands in the secondary market this week. But dealers have widened their bid-ask spreads, indicating that they were willing to buy long-term super-seniors from those deals at spreads of 94-96 bp and sell them for 90-91 bp.

Elsewhere in the new-issue market this week, Colony Mortgage Capital continued to market a $320.8 million securitization of seasoned performing mortgages collateralized mostly by multi-family properties. Bookrunners Credit Suisse and J.P. Morgan circulated price talk of 100-bp area over swaps on the only offered class — $220.6 million of bonds with a weighted average life of three years and a triple-A rating from Moody’s.

Meanwhile, RAIT Financial started shopping a $219.4 million offering backed by 22 floating-rate mortgages on various types of commercial properties. The $126.4 million senior class of 2.4-year bonds is rated triple-A by Moody’s and DBRS. The subordinate classes are rated only by DBRS, including a 2.8-year tranche of junior triple-As. UBS structured the transaction and is running the books with Citi.

UBS and Citi were also pitching a $335 million offering backed by the senior portion of a fixed-rate debt package on the 506,000-square-foot office tower at 1500 Broadway in New York’s Times Square. They originated the 10-year package last Friday, including $170 million of mezzanine debt, on a 50-50 basis for Tamares Real Estate of London. The transaction is rated by Moody’s, DBRS and Morningstar.