COVID-19 Impact on the Lending Market with Charles Neirick

Charles Neirick of PropCap Advisors shares his insight on the lending market and how it has been affected by COVID-19.
Charles Neirick of PropCap Advisors offer his industry expertise in this episode of Non-Beta Alpha by sharing his insight on the lending market and how it has been affected by COVID-19. Prior to the crisis the market was flush with money, and lenders struggled to find opportunities to deploy capital. Once March 2019 came around, forced redemptions and unnatural exits exasperated the real estate market and had a cascading effect into other asset classes.

While there is little that can be predicted in the months following the pandemic, Neirick believes that the economy will not reach the lows experienced after 1929 as long as the American people maintain confidence, balance sheets are leveraged, and liquidity is maintained in the global financial system.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin. And on today’s episode, we have Charles Neirick, Managing Partner and Chief Investment Officer of PropCap Advisors, a LA-based debt management firm that has its eye on the capital markets. We’ll be talking to him about how COVID has gapped out spreads and changed the lending market. And he’ll give us some insights of what we can expect going forward. This is Non-Beta Alpha.

                                           Charles, welcome to the show. Thanks for joining us.

Charles Neirick:               Thank you, Ryan. It’s a pleasure to be here today.

Ryan Morfin:                    So we’re really excited to have you on. I think the way you look at real estate and the way you look at debt is fascinating. And I’d love to maybe paint the picture of what happened before the exogenous shock. Where was your head January, February of 2020? What did you think about the real estate market and the real estate lending market in general before we had this disruption?

Charles Neirick:               A rational, exuberance, over rich, and we were struggling to find opportunities to deploy our capital on.

Ryan Morfin:                    And so the long bull market in real estate that had a lot of people cautious, but people thought there was going to be a bridge built, but then this exogenous shock comes in and tremendous demand destruction occurs. What’s been happening in the capital markets because a lot of our viewers maybe don’t have Bloomberg terminals or aren’t watching the debt markets, but how did the month of March play out in front of you?

Charles Neirick:               The month of March was substantially driven by forced redemptions, unnatural exits, and also margin calls of highly levered, institutional investors, fast money, tight money managers. That pile on effect, certainly exasperated the marketplace and valuations for tradable credit. And it has had a spill over effect into other asset classes. At the same time, of course, you had the phenomenon of the equity markets turning substantially downward with sharp declines realized in every asset class. Meanwhile, you also had a substantial rally in the treasury markets as people were initially rotating into fixed income instruments for safety and sleep at night. However, midway through the month of March, people started abandoning those strategies as well and rotating into cash. And you saw assets that are typical safe haven such as gold actually declining in value as people were pulling money out of every market.

                                           Now, I think we’re at the earliest stages of a post recovery mode. A lot of this of course was also driven towards quarter-end related phenomenons of redemptions. And those are to us short term phenomenon that will help the economy settle down a little bit. At the same time however, there’s a lot of headline risks that are causing a much deeper, fundamental shift in operating capacity of companies to pay their staff, to employ people in general, as well as to pay their rents. So stage one was the shock margin calls, forced liquidations, punishing mortgage REITs such as Angela Gordon, Annaly, TPG, Ramco, Invesco, PennyMac. Stage two now I think is going to be more fundamentally driven, relating to occupancy, ability to pay rent, rationalization of businesses, survival, et cetera.

Ryan Morfin:                    And so how is the property sector? Is it over leveraged in your opinion? Or I mean if there’s… Well, we’ll call it the implied values that were given in the last round of appraisals versus what we might think of as a normalized valuation in today’s market. Are we over leveraged in the property sector, given where a real value should be?

Charles Neirick:               It’s too soon to tell whether we in fact are or not. I would say that high grade institutionally-owned assets have generally been more moderately leveraged the cycle stage to date than they were entering into the global financial crisis. The mid market has seen a very substantial flow of capital into non-bank hands. And there has been a substantial risk on, into the middle market transitional lending business. And we did see that margins were substantially compressed, covenants were substantially eased at the same time as credit was leaking out. So you may see that the middle market assets are more over levered than one would like. But it’s too soon to tell whether the correlation between leveraging operating fundamentals and ability to pay rent are blown out. Now, certainly more volatile asset classes, such as retail and hotels are going to be enduring pain in the coming years.

Ryan Morfin:                    No doubt. And what’s your view on office loans? Given that the economy is virtually shut down globally for the most part, there’s pockets like in Africa and South America that haven’t, but the under-preparedness, if you will, or the pandemic response is giving the hospital system some time to breathe and catch up, but it’s coming at a dramatic cost of demand destruction. How long do you think this will take to creep through the system?

Charles Neirick:               That’s the billion, or actually now trillion dollar question. Stepping back, I think I would look at it as, what is it that’s going on at the headline? We have substantial government intervention globally. We have central banks flooding the system with liquidity and virtually every asset class, including junk bonds and other assets that historically have not been favored in the financial system through the regulatory chains. I think that going forward, while I don’t think that that’s necessarily the best thing, I do believe that there’s a lot of structural relief and regulatory relief that has been brought into the system, both at the retail level, meaning at the residential level, through Freddie and Fannie, at the governmental level, in states such as New York mandating a no eviction for a mandatory forbearance period for tenants. And there’s a spill over into the commercial sector as well that’s taking place, more or less nationally.

                                           In fact, the system is mandating that everybody lockups and work through this, but there’s a bunch of unknowns yet as to how, for example, a commercial lender will engage with its borrower to provide forbearance relief on paying its mortgage and how that trickles down from the landlord to the tenant and how long people will have to be able to make hold their committed obligations. People are not going to be able to work in some places perhaps until August. That means their businesses aren’t generating any revenue. They may have five months of a cruel left to service. The question of course, is, how do they ever catch up? Are their businesses so fundamentally impaired that they aren’t able to catch up? What will those circumstances be? The legal system, its ability to process everything that is going on here will also be severely challenged. So there’s a paradigm of unknowns here that could lead to very horrible consequences through the system.

Ryan Morfin:                    Yeah. No, I think it’s interesting. I think corporate credit, although you’re primarily a real estate lender, right, you look at commercial credit, pretty draconianly and you’re very diligent about it. But the corporate credit market has gapped out and there was perhaps an over lending in terms of commercial credit to MNFRP in the middle market. And I think you’re starting to see that a lot of the loans and a lot of these private debt funds are severely underwater across the portfolio. And those tend to be tenants, they have landlords and what I’m starting to worry about is the scale. We’ve seen a tremendous uptick in these non-bank loans. And so the companies, the underlying tenants have a lot of leverage. And so maybe the buildings, this cycle may be different. They’re not as levered, but the underlying revenue streams are maybe over-leveraged. And I don’t know what your thoughts are about that.

Charles Neirick:               The United States over the last five years has been on the leveraged finance boom. The entire collateralized loan obligation market has exploded. As Wall Street fueled a specialty finance investors to acquire increasingly covenant light paper for structured finance products that they were distributing. So it’s unknown how the CLO market is going to fully react to this. The CLO structures are pretty rigorous. There’s a sequential pay structure, meaning the AAA rated at the top get paid first and whatever’s left over, gets distributed and so on. But in the CLO market, there’s also gates that prohibit distributions below the AAA classes to subordinate bond holders, and they start accruing their interest. So you hyper amortize the top of the capital structure and then work your way down. But a lot of investors have been in those structures and the default rates that they assume are likely understated in this scenario that you’ve painted.

                                           However, Ryan, I think it’s important to underscore that this is a week by week type phenomenon. And depending on what happens in terms of stay at home mandates being lifted in different parts of the country will change that landscape, I believe. And there are also parts of the country where there isn’t necessarily the same degree of need to have stay at home edicts remain in place. Less populated states, for example, be it Kansas, be it Utah, et cetera. They may get back to work sooner. And so there’s the potential for the economic system to ignite quicker. And also there may be very tough choices for the governmental branch to have to make as to the wellbeing of the overall populous to the detriment of some. Those are tough, painful choices, and a lot of people are going to be suffering through this. No doubt.

Ryan Morfin:                    Yeah, there will be some cold mathematics solved for in the coming months ahead. No doubt. What’s interesting too, is where rates are and where they might go, I know in the CLO market, there’s some talk already chatter about potentially what could be a conundrum that if an interest rates and credit rates go negative, some of the below investment grade classes may actually have to actually pay money to the trust versus take distributions out. I don’t know if you’ve got any thoughts on that, but it seems to be completely unchartered territory for some of the structured finance folks.

Charles Neirick:               No doubt. I don’t think anybody ever contemplated that they were actually going to be in a passive financial investor and have to pay back in. The enforceability of that is a coin toss. I don’t know.

Ryan Morfin:                    Well, yeah, I could assume people are just going to put the bonds back or liquidate them. It’s going to be interesting to see what happens. In CMBS world, and I know you do some work in buying different positions and different structures, what happened to the spread for CMBS and what are we seeing in terms of new issuance? Is it all on pause or were there any deals priced over the last few weeks?

Charles Neirick:               Simply stated, there’s no new origination issuance bid, especially in structured products, such as CMBS. For ultra high grade borrowers and ultra high grade assets with longterm predictable cash flow streams, there is new loan origination that’s taking place by balance sheet lenders, such as banks, such as life insurance companies. However, that is substantially work product that was originated January, February, and perhaps the very beginning of March. If a borrower were to come to market today looking for liquidity, I would suggest there’s no bid anywhere. You can’t price risk, no transparency into the operating fundamentals to be able to underwrite credit, and as a result of that, you can’t price risk. We’ve been asked to participate in loan capital structures that were conceived in January, February, that closed in early March and are now looking to fill the pockets of the capital structure up and that are unspoken for. And those conversations are going to be really painful because the way we think of things today there’s a lack of clarity as to whether or not an asset will be able to sustain its payment profile or engage in lease up in the future and what market rents may be. The whole demand driver phenomenon that you were talking about earlier, Ryan.

                                           So right now, the primary origination market is seized up by and large. However, in the liquid tradable rated form of mortgage backed securities, there’s been a lot of activity over the course of March as these redemptions forced the unnatural disgorgement of assets into the hands of investors such as us. We were active during the month of March, investing in assets we otherwise passed on at origination because they did not hit the risk return thresholds that we saw or were outbid by others who had a substantially lower threshold for risk than we did. We, for example, invested in a 50% loan to value ratio piece of credit with a 2.5 times debt service coverage ratio with an occupancy profile of investment grade tenants and an average life of approximately 10 years of the lease stream that remains in the building. It’s fully leased. It’s in a gateway city. It’s owned by, amongst others, a publicly traded real estate operating company and other institutional money.

                                           In my circumstance, there’s one of the largest pension plans in the United States, also has a mezzanine class that is junior to our investment. We bought that investment with a 36-month investment horizon return of 20% by example of what’s been going on in the capital markets. There’s a lot of [inaudible 00:17:12] assets in town.

Ryan Morfin:                    That’s interesting. Was that a financial institutional bank that wanted to that closed on something for relationship purposes and needed to recalibrate the syndication or?

Charles Neirick:               No, that happened to be a mortgage backed security that we bought. That was [crosstalk 00:17:29].

Ryan Morfin:                    Yeah, got it. Got it.

Charles Neirick:               And money manager was forced to sell its entire portfolio of mortgage backed securities, commercial mortgage backed securities that is, and we were offered the opportunity to acquire part of that class of investments.

Ryan Morfin:                    So you got to feel pretty great about where you are in that cap structure. There’s a lot of margin of safety. Yeah, that’s great.

Charles Neirick:               There’s a lot of margin of safety. So we feel very fortunate about that. On the other hand, we’ve been asked to participate in along those closed in March. And there’s a piece of the capital structure that has not been spoken for, where we think that the originator is unfortunately going to have to make some very tough choices. It’s part of a syndicated loan structure. So there’s no mortgage backed security structure here. There’s contemplated to be a senior mortgage syndication, and there are three classes of mezzanine that are part of this capital structure. The junior most class and the senior most class of the mezzanine debt are spoken for. The middle within capital structure is not. The mortgage loan itself is not yet syndicated. And we’ve been asked to fill the void in the belly of the capital structure, is the term is used in our industry, the middle piece.

Ryan Morfin:                    Were the price… I was going to say, so that first example you just gave us, there’s no way that that piece of paper would price at 20% three months ago. That would have priced maybe at like what 4% or 5% yield?

Charles Neirick:               Yeah.

Ryan Morfin:                    So you’re looking at about a four to five times shift in credit pricing to get people to to transact. And it will probably converge down. Yeah.

Charles Neirick:               Just count and comparatively speaking to the spread of issuance, risk premia have gapped out four to five times. That’s correct.

Ryan Morfin:                    Interesting.

Charles Neirick:               However, Ryan-

Ryan Morfin:                    You’re-

Charles Neirick:               I was going to say that compared to the precedent of the global financial crisis, the risk premium gap that you’ve just identified is less than it was at the needle of the global financial crisis by quite a substantial amount. During the financial crisis, AAA rated multi-buyer or CMBS the needle or the bottom of the market was a discount margin of 1400 over or thereabouts. I personally don’t know anyone that actually was able to secure assets at that deep of a discount. These were assets that at issuance were 20 to 25 basis points for the class risk premium to the risk free rate. So AAAs, this go around on multi-buyer or conduit gapped out to approximately 400 area, depending on name, maybe it was 450, maybe it was 375. That compares to add issuance from the window of call it 2017 to present in the magnitude of 90 to 100 over. Lower down in the debt capital structure, BBB rated securities on multi borrower conduits, those have gone from same period of time at issuance, 2017 to present in the low to mid 300 area to today being talked in the 1200 to 1400 over area.

                                           So the relationship that you highlighted is sustained. Call it up four to five times widening and risk premium. However, during the financial crisis, BBBs were talked to magnitude four to 5,000 over relative to a hundred over. So far the central bank’s work of stimulus packages is helping to stabilize the credit markets much quicker and much more broadly. So the lessons that they learned the last go around are being applied.

Ryan Morfin:                    Well, I think we’re blessed to have a treasury secretary who really lived through that and profited handsomely I’m sure from the last credit crisis. And so he knew, I think, what he needed to do to step into to bridge the chasm on risk premium. Would you agree with that?

Charles Neirick:               Question about how the commercial real estate debt markets are trading, there’s still a lot of awakening yet to come. A lot of the leveraged specialty finance originators have yet to do anything but give relief to their borrowers. But as the timeline extends and their business plans aren’t able to be effectuated, they may have to accept a higher degree of pain to realize the liquidity they may be needed by their senior lenders. So there’s a very intricate relationship here between the money center banks and life insurance companies and the non-bank lending community and the institutional bond buyer marketplace. It’s symbiotic, everybody’s locked arms to one degree or another as the marketplace has customized various classes of risk for different consumers.

Ryan Morfin:                    Yeah. I think the impact though to transactions and clearing out some of these real estate deals that aren’t going to work. And I think we’re in the early innings of seeing what’s going on, how this demand destruction really starts to ripple through the economy. But the lack of financing, I think, to new buyers or people who are traders of property is going to, I think, slow down and maybe further compound the loss curves. Would you agree with that?

Charles Neirick:               Transaction volume will grind to a halt, which means that there’s going to be a spillover effect in the industry as to its wherewithal to process. JP Morgan, for example, has been overwhelmed with home loan refinance requests. They are only providing loans to existing customers. The care on PPP programs, which government has announced are not being able to be processed due to the overwhelming volume of applicants. So if you’re a small company and you’re trying to get in queue to process these loans in order to have your business survive, there isn’t the infrastructure to service it. If the system shrinks or contracts, there won’t be the infrastructure to process the loans going forward. Right now, the relationship remains the same across the entire commercial real estate industry. People can’t price risk. They can’t affect their transactions, whether they be leasing transactions, sales transactions, and related finance transactions. Real estate, of course, naturally being a fairly levered business has an operating model.

Ryan Morfin:                    So going to some of these different property types ,hotels seem to be the most dangerous. And you’ve said in the past hotels and operating company with some real estate. What are your thoughts about how severe this is going to get for the hotel industry and what people who are holding hotel loans or hold hotel investments should be thinking about?

Charles Neirick:               We thought about that a lot. Hotels are essentially shut down, but their fixed cost overhead hasn’t gone away. Setting aside utilities, there’s fundamental infrastructure costs and goods and services that have an overhead to them. Inventory of food, for example, for the food and beverage departments has to be paid for, the products that were in refrigeration maybe lost, staff in many instances are union labor, and as such are protected to receive some form of payment. But if a hotel is closed for operations, there’s no revenue to sustain it. As we come out of this, we don’t know yet how the psychological patterns of behavior may change as a result of CV 19. We don’t know if people will immediately start to travel, immediately start to congregate, and so on. I do think in a year or two, people behaviors will revert back to norm and commercial travel will be back if not to the levels that it has been proceeding this last month, maybe to 80% of it, and then by extension, the same can apply to the hotel sector.

                                           People will be going and taking vacations again, there is life after COVID. No doubt. However, do you think that you’ll go back to average occupancies of 80% in hotels and having enjoyed seven or eight years of five, 6% compound annual growth rate in average daily rate, do you think you can sustain that and sustain occupancy? We think not. We think that there’s going to be a cutback in the amount of commercial and leisure travel that occurs. So that affects the occupancy side of it. And in order to insent them, there will have to be rate erosion as well to some degree. The cost structure of hotels doesn’t have as much downside in it. So that means that the operating margins of these hotels will be substantially compressed, which in turn affects their ability to service their debt. And so on.

                                           There’s an organic process that we’ll have to unfold, but it’s going to take time. A lot of the capital structures in the leisure sector are floating rate structures with extension options. And leading up to the period of January and February, the conditions relating to extensions were substantially relieved. Meaning there weren’t tests to speak of. If you were a large institutional borrower, by way of example, you could get a floating rate instrument of a primary term of 24 months and have 3, 12-month extension periods thereafter without having to satisfy any operating tests. So that could mean that there’s a little bit of leeway for the industry to ramp back up at the same time as lenders will work to modify their loan structures to give their borrowers relief. But the headline is, it could be very difficult for values to be upheld in that environment.

Ryan Morfin:                    Yeah. I can see people playing that card, amended and extended and amend and pretend so they could keep status quo in place. But if this continues to August or we have the second season coming up in the fall and we haven’t made progress in terms of testing or therapies or vaccines, I don’t think most of these cap structures can withstand that much of a compiling and occurring expense structure before. At some point, the destruction of value is going to force the lenders to have to take enforcement actions.

Charles Neirick:               I’m not willing to buy off on the dystopian demise of the financial system quite yet. It’s possible. We saw it during the financial crisis. We’ve seen it back in the early 2000s and the lodging sector was substantially dislocated. No doubt every week that goes by, Ryan, the conceptual commercial malays the financial system grows. but I do think the administration is trying to figure out how people can be brought back to work safely and in the process of doing so give hope to the economy not falling into a great recession, 2.0 or worse.

Ryan Morfin:                    Yeah, no. And I think the hotel industry, is one of those industries that is going to be hypersensitive to the situation. And I’m just trying to figure out at what point does a bank say, “You know what, we’ve got to protect our position. We believe you’ve burned through all of your equity value. We need to step in and protect our capital.” And I’m wondering at what point that from a lender standpoint, if you had a portfolio hotel loans right now, at what point would you allow them to amend and extend? I guess it would depend on the balance sheet, but when you say, “I’ve got to take this portfolio back and try to transact at some point to get some type of residual value here.”

Charles Neirick:               As part of the stimulus package, banks have been granted relief on their regulatory capital frameworks. Don’t know how long that lasts. But for the time being, it appears that the banking industry at large and the central banking system are aware of the relationship here and trying not to cause a meltdown. If you’re a lender on a hotel loan today, the first thing you’re doing is giving relief. There’s obvious overlay here that forces beyond anyone’s control that are causing the downdraft in your business model and your inability to pay debts. Without getting too technical on commercial mortgage backed structures, the special servicers’ job in a lot of structured finance transactions is to make the trust whole. That’s the quid pro quo for the investment that they’ve made. They fortify the capital structure as you may remember. However, these are specialty finance, limited partnerships, and they have limited resources to do so potentially if this extends.

                                           So there could be a knock-on effect or domino effect that comes to bear here, Ryan, where the whole system goes into seizure. Lodging being a more volatile operating asset class could be the leading indicator of that. And there could be substantial destruction in value.

Ryan Morfin:                    Yeah. No doubt. I think the government’s played a very active role here in really addressing and trying to build this addressable bridge for the financial system. And I’m hoping, we’re all hoping they’re successful, but I think it’s going to be one of those conundrums that we find is how fast can they move and how fast is consumer confidence erode? It’s a race, I guess, that we’re up against. And it’s also going to depend on who moves first for the kill shot, right? If there’s certain lenders that step in to protect capital that’ll have maybe a cascade effect or avalanche effect [crosstalk 00:34:17].

Charles Neirick:               Very possible. A lot of foreign capital has come to bear into the U.S. commercial real estate debt system. It’s not all very deep pocketed institutional capital. And they may face redemption pressures on their end as they’ve syndicated risk onto constituents in their local domiciles and-

Ryan Morfin:                    That’s interesting.

Charles Neirick:               … articulated that they’ve raised capital as a surrogate to a high yield real estate backed fixed income instrument that is safe and you can sleep at night and you have these great pictures and look at these great owners. Nobody anticipated that we were going to be so quickly going through another financial calamity as the one that’s setting up now. But thinking back to when the financial calamity started and the actions that took place, there was a more prolonged period of time before a realization series unfolded. I’m thinking back to the preamble to Lehman Brothers’ demise. There were a series of other anchor financial services companies that endured substantial pain preceding that.

                                           And after Lehman Brothers’ demise, it was still a period of time before the markets found a floor again. And the workout process is one that isn’t turned on overnight, right? It’s a heavily negotiated process, it’s time consuming, and it’s also structurally consuming. And that involves multiple parties. You have call it the administrative branch or the legal branch of the office of the clerk, right? And then you have the lawyers on both sides. And then you have the sponsors that are having to make these decisions. Getting everybody in sync to react takes time. Just negotiating a reservation of rights letter amongst a borrower and a lender can take a week to 10 days. And then it could be another week to 10 days before the borrower and the lender are positioned to be able to engage with each other. What questions does the lender want to ask? What answers can the borrower give?

                                           Because there’s a framework of rationalization that has to take place amongst the parties. Why are you asking for relief for six months versus a year, versus three months, what’s happening in your cashflow stream? How much cash do you have in hand in your business? Et cetera, et cetera. That relationship carries through from the lender to the borrower, to the landlord and the tenant. So it takes time for all this stuff to work itself out. It’s very complicated and the road ahead is riddled with unknowns.

Ryan Morfin:                    So what are a few things that make you optimistic about where we are right now and some of the things that you’re potentially worried about?

Charles Neirick:               I’m optimistic by the fact that in the end, the planet has been able to cause billions of people to change their normal life patterns in the context of it in pretty short order. We can nitpick, but if you think about how quickly New York went from a vibrant metropolis to a bowling alley, it’s quite remarkable. And now export that around the world. That gives one hope that people have an innate wherewithal to self preserve. It gives me hope that there’s millions of passionate, empathetic professionals that are putting their life on the line to help the system work its way through this. That there are people that are giving freely of their time and their resources to help those that are less advantaged in this time of need.

                                           I worry about things such as food supply and what happens to the distribution chain. I worry about retransmission from needing to turn the economy on, retransmission of COVID-19 to needing to turn the economy back on and I was having a stage two event, as you talked about this fall, or maybe into next year, and what happens. It takes time to develop tests. It takes time to develop vaccines and treatments and procedures for all of this. That’s worrisome. But I think we have to maintain a vigilantly positive attitude that there is light at the end of the tunnel here, and that the system will reignite, however, that there will be many that will suffer in the meanwhile for that to happen.

Ryan Morfin:                    And even if it’s a partial reignite, I think it’ll start to-

Charles Neirick:               [crosstalk 00:39:49]-

Ryan Morfin:                    Yeah. Yeah. I do think there’ll be different pockets where for whatever reason, population density or genetic predispositions start to show a resilience against this virus. And those would be the areas that I think people get to get back to work fastest. But it’s a heavy lift though to reignite the engine. It’s been running pretty consistently, even though if it’s been depressed. I don’t know if it’s ever really been shut off like this in the history of the American economy,

Charles Neirick:               Maybe immediately following 1929. That’s the great calamity that some people have wanted to bring up in the context of what we’re living through and what the downside could be. I don’t know that I believe we’re going to go into that calamitous post-mortem. It appears that the global financial system has evidenced a willingness to play through and stimulate liquidity with unintended consequences, cycles will be sharper to the downside and the upside and will potentially become shorter. Ultimately, this all boils down to confidence in the system. And so far, the global financial community has expressed confidence in the United States leadership here and wherewithal to leverage its balance sheet, to maintain liquidity. And if that continues, then hopefully it flows through to the middle class and enables us to survive this.

Ryan Morfin:                    So when do you think the next CMBS deal is going to print? How many months are we away from that or weeks?

Charles Neirick:               I wouldn’t say another… There’s two different segments of CMBS that could print. You could have… They’re actually three. You can have investment grade or high quality operating companies of assets do some type of a corporate brand securitized transaction. You could have individual assets such as the case that I gave that we’ve invested in come to market because it has a refinancing need. That could happen perhaps in the third or fourth quarter of this year. A multi borrower conduit transaction, I don’t think you’ll see one for the remainder of 2020. Not until the second half of the first quarter of ’21, is my guess.

Ryan Morfin:                    It seems like the CMBS industry has digested all of those refinances that were coming, that wave of refinancings that were coming ’13 to ’15 to ’17. Is there an equal wave coming due… I’ll just call it the 2010 to 2014 vintage. Those ones are going to start coming due and I’m more worried about the 2010 vintage. There wasn’t a lot, I guess, done there. Do you think there’s a refinance risk issue for some of these larger transactions that were done in that period?

Charles Neirick:               2023 is when you start seeing an escalation in that volume.

Ryan Morfin:                    Got it.

Charles Neirick:               I would think that there are, without doubt, are billions of dollars of orphaned assets out there as a result of the 2010 and ’11 type assets. But the system, from a volume standpoint, didn’t really ignite until late 2011, 2012 and write itself.

Ryan Morfin:                    Mm-hmm (affirmative) . So we’ve got some time before that becomes an issue, probably a year and a half. Yeah.

Charles Neirick:               There’s some time. Doesn’t mean it’s going to be pretty. It doesn’t mean the risk premia won’t be gapped out for awhile, but let’s remember also that risk-free rates are substantially relative here. You’re looking at 75 to 80 basis points on the tenure right now with downside in rates. That gives you a lot of breathing room.

Ryan Morfin:                    Yeah. No doubt, the low rate environment’s helping bridge some of these credit issues, but the credit spreads, I think, is what’s going to gap up further and then that’s going to be, I think where the pain is going to be felt.

Charles Neirick:               We have.

Ryan Morfin:                    Yeah.

Charles Neirick:               We have, but-

Ryan Morfin:                    [crosstalk 00:44:46] actually further from where they are. Yeah. Yeah. Well, Charles, we appreciate you joining us for this conversation and would love to revisit it in the weeks and months ahead. And we always look for optimism at the end of every call, but I think your points about we’ll get through this, there’s a light at the end of the tunnel is well taken and there will be pain felt along the way, but it’s to be expected, I guess.

Charles Neirick:               Thank you, Ryan. We appreciate the opportunity to speak with you today.

Ryan Morfin:                    Thanks a lot, Charles. Take care.

Charles Neirick:               You too. Best wishes.

                                           (music).

 

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