Property-Bond Market Heats Up Ahead of Miami Industry Conference

(Bloomberg) -- Commercial mortgage bond sales are heating up again, signaling another strong year ahead after issuance of the securities hit a post-crisis record in 2021.  

At least 11 transactions linked to single properties, or to individual borrowers, are in the queue for January and February, according to regulatory filings and Barclays Capital data. Sales of these commercial mortgage backed securities, known as single-asset, single-borrower deals, will probably exceed $6 billion in the first two months, Barclays said in a research note this week. That doesn’t even include so-called conduit deals, which are backed by dozens of loans of different property types. 

Single-asset, single-borrower deals dominated issuance last year. The topic of whether that will happen in 2022 will be front and center at next week’s annual CMBS conference in Miami hosted by industry group Commercial Real Estate Finance Council, which is scheduled to begin on Sunday.

Among the deals in the queue is a joint venture between investment manager Centerbridge Partners and real estate firm Merit Hill Capital, which announced a $615 million CMBS tied to one loan on 83 self-storage assets located across 22 states. 

“Self-storage real estate benefits from broad-based demand due to the need to store goods, particularly during many types of ‘life-changing’ events,” according to deal documents. “The self-storage sector has earned the label of ‘recession resistant’ given strong relative performance in past recessions,” and especially in 2020 during the Covid downturn.

The deal will also be one of the first CMBS entirely priced off the Secured Overnight Financing Rate, a replacement for the London interbank offered rate benchmark that as of the start of this year is no longer used for new deals.

Despite the fact that the pandemic exacerbated existing problems with retail and malls, and impacted rents and tenancy in big-city office buildings, sales of CMBS without backing from government-sponsored enterprises hit a post-crisis record last year of more than $155 billion, according to data compiled by Bloomberg News. 

Money managers were eager to buy the securities because they pay higher yields than high-grade corporate bonds or asset-backed securities, and many are floating-rate, which is attractive if interest rates rise. The intense demand for these securities reflects investor optimism that hotels and retail outlets are recovering. One of the deals on deck now is linked to a Chicago office tower, according to SEC filings. 

“To date the clearest CMBS improvement signal has come from CMBS delinquency which has decreased from 5.7% in August of 2020 to now be only 2.7% as of Dec. 16, 2021,” Moody’s Analytics analyst Darrell Wheeler wrote in a recent report.

However, the pandemic fueled demand for particular types of CMBS. For the first time ever, sales in 2021 were dominated by securities backed by single properties, usually a trophy building seen as relatively low risk. Investors were willing to buy single-name single asset CMBS because these securities are easier to analyze than more traditional CMBS backed by dozens of properties, known as conduit deals. SASB issuance was $77.8 billion in 2021, compared with  $31.2 billion for conduits, according to data compiled by Bloomberg News.

“Much of the issuance in 2021 was driven by heavy acquisition activity in the commercial real estate sector,” Barclays analysts Lea Overby and Anuj Jain said in this week’s report. “While we expect that to continue this year, we think SASB issuance may normalize in 2022 and come in around $60 billion to $65 billion. That said, it is likely to stay strong in the near-term.”

Another topic at next week’s conference will be whether commercial real estate collateralized loan obligations can keep up the unprecedented growth they saw last year. The niche market jumped a whopping 371% in issuance versus 2020, to $45 billion, according to data compiled by Bloomberg News.

These securities are backed by properties that are being upgraded or repurposed, such as a mall being turned into apartments, a scenario that has grown more common as the pandemic has changed many aspects of daily life. The CLOs pay comparatively higher yields.

Relative Value: ABS

• ABS spreads finished the year with four straight weeks of incremental tightening across the major asset types, Deutsche Bank analysts said in their weekly research note
• Triple-A autos and cards were generally wider at year-end vs the beginning of 2021, while longer FFELP and private credit student loan ABS were flat to tighter
• Auto ABS set a new record for supply in 2021 with $131 billion in issuance, exceeding the previous record reached in 2019 by $10 billion. Subprime auto supply was exceptionally strong in 2021, and along with prime auto ABS accounted for more than 70% of overall auto ABS supply, the bank said

Quotable

“The issuance of loans and CLOs pegged to SOFR, which has been on the back foot, is bound to accelerate,” Deutsche Bank CLO analysts Conor O’Toole and Keyur Vyas said in a report this week. “We eagerly wait the price discovery process to unfold in a post-Libor world and expect the CLO quotation convention to eliminate the reference to any credit spread adjustment, simply using SOFR + Credit Spread instead”

What’s Next

Several ABS transactions are premarketing for next week, including GM Financial (prime auto), BMW (auto lease), Hertz (rental ABS), Hyundai (auto lease), and Santander (auto lease)

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