KBW: Commercial Mortgage REITs Benefit from Strong Fundamentals

Though market volatility and growth concerns increased uncertainty early this year, commercial mortgage real estate investment trusts still benefited from strong CRE fundamentals, said Keefe Bruyette and Wooods, New York.

Commercial mortgage REITs invest in commercial real estate loans as well as commercial mortgage-backed securities, mezzanine loans and construction loans using both equity and debt capital. They may participate in loan securitizations.

“Issues facing the industry include elevated loan maturities, CMBS risk retention, regulatory scrutiny on bank lending and increased supply in certain property sectors,” KBW’s Late Innings? 2016 Commercial Mortgage REIT Primer said. “[But] despite this uncertainty, commercial real estate fundamentals remain strong in most markets while private demand and liquidity still appear ample.”

KBW said $1.7 trillion in anticipated U.S. commercial real estate debt maturities through 2020 “should provide an extended backdrop for refinance and investment opportunities [for commercial mortgage REITs].”

In addition, financing terms to many non-bank lenders continue to improve and recent regulatory changes are resulting in a marginal reduction in banks’ willingness to make commercial real estate loans, which could benefit commercial mortgage REITs, KBW said.

Several factors support continued investment opportunities for commercial mortgage REITs, KBW said: 
–Credit spreads wide enough to generate attractive levered returns despite low interest rates; 
–A healthy pipeline of commercial real estate debt maturities through 2020 that should provide refinance and investment opportunities; and
–Banks and conduits remain reluctant to lend on transitional assets given the current regulatory environment.

KBW said it recommends commercial mortgage REITs “with seasoned management teams and demonstrable platforms that have the ability to generate consistent deal flow with prudent underwriting and asset management and loan servicing capabilities.” It gave “outperform” ratings to Blackstone Mortgage Trust, Colony Capital and Starwood Property Trust and “market perform” ratings to Arbor Realty Trust, Ares Commercial Real Estate Corp., Apollo Commercial Real Estate Finance, Ladder Capital Corp., NorthStar Realty Finance Corp., RAIT Financial Trust, Resource Capital Corp. and iStar Inc.