RPT-Fitch: US CMBS Originators' Differences Key in Active Market

Mon Jun 9, 2014 9:19am EDT

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June 9 (Reuters) - (The following statement was released by the rating agency)

An increased number of issuers and potential challenges to asset performance heighten the importance of subtle differences among CMBS issuers, especially variation in property type concentrations, property quality grades and geographic locations, Fitch Ratings says.

As of March 1, 2014 we counted 29 active originators. That was more than double the 14 observed at the end of 2011. At the peak of the market in 2007, there were 37 active originators.

Fitch expects most property sectors to be relatively stable. However, some sub-sectors may suffer from oversupply. The percentage of hotels contributed to recent deals has been on the decline. While Fitch has a stable outlook on the sector, we believe that current revenues could be unsustainable if the supply of rooms continues to grow. In some cities, such as New York City, 5,414 rooms recently opened and another 13,230 are under construction (according to STR Global). Multifamily is also performing well but supply growth is contributing to increased vacancy in some areas.

Other sub-sectors may face contraction. We expect class A offices in urban areas to improve while class B offices in suburbs will continue to struggle. And we believe lease renewals in the Washington D.C. area are uncertain as government programs are cut. Retail rents are slowly improving but financial difficulty at Sears, JC Penney and other major retailers could lead to a large number of store closings.

In our view, these challenges to asset performance make the subtle differences between some issuers more important for bondholders to understand. The majority of originators we analyzed had a similar mix of property type concentrations. On average, retail was the highest sector concentration at 32.29%.

However, some originator's property type concentrations were much higher than the average. For example UBS and Morgan Stanley's retail concentration averaged approximately 50%. Office was the second highest concentration, on average by originator at 19.83% but Ladder Capital's office concentration was 37.41%. C-III was the biggest outlier in our study - 41.36% of C-III's sampled loans, by balance, were secured by manufactured housing properties. The average for that property type overall was 5.25%.

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