Our Roundtable Members Portfolios and Focus

Stephanie Petosa: Welcome everyone. Let’s start out by learning
about your individual companies and areas of focus. Please
provide us with a basic understanding of your firm’s investment
philosophy and your respective commercial and multifamily real
estate portfolios.

Michael Lascher: Blackstone Real Estate has $93 billion of investor
capital under management. That is comprised of our Global
Opportunity Funds, European Opportunity Funds, Asia Opportunity
Fund, a new Core Plus strategy that we started about a year ago,
and our real estate debt strategies business. We’re on our eighth
global fund, which is a $15.8 billion Global Opportunity Fund. We
just launched fundraising for our fifth European Opportunity Fund.
The Asia opportunity I mentioned is our first Asia-dedicated Real
Estate Opportunity Fund. As I said, we started our Core Plus
strategy about a year ago and the BREDS business started in
2007 when Mike Nash joined Blackstone.

Mark Weiss: RFR was started by two principals, Aby Rosen and
Michael Fuchs, in 1991. Next year is our 25th anniversary. We have
about $10 billion of real estate, 50% to 60% leverage, primarily in
New York City but we are also in Las Vegas, Miami, and Stamford;
plus we have a couple billion dollar Euro portfolio in Germany. Our
focus is primarily on office, hotel, residential and retail. Probably
the only area we don’t do is industrial. Our focus today is on valueadd
properties in particular; buying and redeveloping properties
using the expertise we have particularly in New York City on the
redevelopment side.

Victor Coleman: I started Hudson Pacific in 2008. We’re a Real
Estate Investment Trust; went public in 2010, with about $7-plus
billion dollars, all office, all West Coast from three major markets —
Seattle, San Francisco and the Peninsula and here in Los Angeles
where I’m sitting today.

Farzana Mitchell: CBL is a Real Estate Investment Trust invested
in retail properties. We’ve been public since 1993, 22-plus years,
and prior to that privately owned. So collectively, we are over 35 years
old. We own approximately 133 properties. Our core properties
include 77 malls and 5 outlet centers; our other retail centers
generally are big box and grocery anchored located around the
periphery of the malls. CBL’s geographic footprint is primarily in
the Southeast and Midwest. We have been secured borrowers
for 30-plus years until the last three years, when we sought
and received investment-grade ratings from Fitch, Moody’s, and
recently S&P. We have transitioned to an unsecured borrowing platform. Today we are borrowing on a secured and unsecured basis, including drawing on our long-standing relationship with a consortium of banks participating in over $1.9 billion in credit lines and term loans; also on unsecured basis.

Are We Approaching a Cycle Peak?

Lisa Pendergast: What is your opinion on the current state of the
commercial and multifamily real estate markets given today’s
historically low cap rates and low interest rates. How close we
are to a cycle peak and how concerned about that are you?

Victor Coleman: I am asked this all the time. I look at it a little
differently. When everyone is predicting the same thing, it is
probably not going to happen.

Now I do believe that there will be a differentiator between ‘haves’
and ‘have-nots’ in terms of assets. So good market, quality real
estate, limited risk. Not necessarily good markets, not quality real
estate, risk.

Stephanie Petosa: What role has ample debt and equity capital
played in the current cycle for your business and portfolio?

Michael Lascher: For us, the debt markets have been very healthy. We
find there is deep access to capital through a variety of sources: CMBS,
bank balance sheets, insurance companies, debt funds. There is a flight to quality in the lender community. They want to know that they have good borrowers who know how to execute business plans and who are going to
work well with them if things don’t work out as planned. We’ve been very fortunate; the lending community has been good to us. And, we’ve been able to find a place to finance our deals, whether they are in the single-family rental space, multifamily, retail, hotel, office, or industrial. It’s really just a question of not overwhelming any one capital source. For example, the CMBS market is very healthy but there aren’t as many large-loan borrower deals as we saw in prior cycles. So we are careful about not using the CMBS market as the sole source of capital for every big deal that we invest in. We try to mix it up and ensure that we’re looking to multiple types of capital to finance our business.

Victor Coleman: We’re currently 30% leveraged as a company. We
are pretty much an unsecured borrower across the benchmarks. As for the availability and role of debt capital: if you’re a quality borrower, the opportunities are fairly aggressive out there — from core banks, to CMBS, to unsecured markets. And, we just did all three. In terms of my concerns and vision as to where we are in the cycle, I think it’s going to be continually more challenging for people to access the markets depending on their track record. As I said, if you perform exceptionally, it’s going to be easy. But, if you haven’t, I think you’re going to find that the road
is not going to be easy, no matter what happens. The last thing I would say concerns the equity side of the markets. You have to match equity with debt at any cycle timeframe, especially when there’s volatility or perceived volatility at various times in the cycle.

Mark Weiss: There are 30 something CMBS lenders and new
debt funds cropping up every week. Moreover, commercial banks,
regional and international banks are getting back in the business. I
think it’s the healthiest market I’ve seen since the crash. And, I was
on the wrong side of that market during the crash. As a borrower, it’s
fantastic; I couldn’t ask for anything more. We spend considerable
time thinking about debt maturities and the direction of interest
rates. Two weeks ago, the ten-year Treasury was at 2.0%, now it’s
at 2.3%. Pre-crash, deals were getting done at 5.5%.

I find the CMBS market in particular to provide easy access to high-quality, 10-year interest-only debt for a very stable asset that you plan to hold on to. We’re looking to doing that as much possible right now. At RFR, every one of our assets is owned individually, whether we have an equity partner in that deal or not, but nothing’s crossed. We can take a holistic view on every single asset and not have to think about a fund structure and look at debt maturities that way. I’m also finding the market to be unbelievably healthy from a floating-rate perspective, particularly
for non-stabilized assets. We did a deal two weeks ago, a $22 million purchase of a three-story building in SoHo that’s going to be empty in six months and we borrowed $18 million against that at sub-LIBOR500. That rate reflects our sound track record and expertise in New York, which makes it relatively easy to raise debt capital. I don’t think everybody would have gotten that loan.

Farzana Mitchell: With what we are faced with on the retail side, I concur with many of you regarding the benefits of being a well-known sponsor with experience in the industry. When borrowing on a secured basis in the CMBS market, a quality asset is desirable.  Same for the life companies; if they like an asset then the pricing is aggressive. A high-quality asset/sponsor garners tremendous competition and at times a price
war. Debt on assets that are lower on the quality spectrum is harder to
obtain. We have a strategy to sell some of our properties with lower sales per square foot but that are nonetheless stable performers. Some prospective buyers are finding it difficult to attract lenders to loan on these properties, primarily due to the lenders’ inexperience in underwriting loans for malls in middle markets. The presence of JCPenney and Sears in many major malls has been challenging due to the financial difficulties faced by these retailers. We believe there is tremendous opportunity to bring new retailers to our malls when either JCPenney or Sears or both vacate the mall. New retailers add diversity and a brand new
experience for consumers. CMBS lenders are seeking certainty of
cash flow and that is understandable. If the borrower is experienced
and the sponsor strong then the debt market is available and the
CMBS market is open. I do believe the CMBS market has changed
for retail in recent months.

Victor Coleman: I think this is one of those cycles that people don’t
really put a lot of weight on access to capital on the debt side; it’s
more about the equity side. More transactions are bought on cash
and then financed down the road. There’s greater discipline over
the last five years, with property investors seeking very low leverage
of 50% or less. From our standpoint, we don’t buy anything with
debt. We don’t need to close anything with debt. We close with
cash and we have access to credit facilities if we don’t have cash.
After that, we’ll figure out our debt structure, but overall we’re a
very low leverage company.

Lisa Pendergast: Given the size and scale of all of your businesses,
are you concerned about the health of the single-asset/borrower
(SA/SB) CMBS market once the new risk-retention rules under
Dodd-Frank take effect in December 2016? Expectations are
that such issuance will be plentiful through the third-quarter
2016 and potentially slowdown sharply or disappear altogether
thereafter. How will that affect the way in which you utilize the
CMBS market?

Michael Lascher: We definitely access the single-borrower market.
Most of the loans that we finance via the CMBS market are single-borrower deals. I am concerned about the risk-retention rules and I’m surprised that there hasn’t been a decision made to exempt single-borrower deals from the risk-retention rules where a bond buyer is able to underwrite a single credit. I was under the impression that the risk-retention rules would be helpful to buyers in the conduit market, where there are just so many different credits that no bond buyer could actually underwrite them all. So, you wanted the guy who was responsible for issuing the bonds to put his money where his mouth is and actually hold on to the bottom piece of the risk. My guess is that — in terms of the piece the issuer has to hold or has to be sold to a B-piece buyer who holds on to it for the life of the loan — a market will be created and you will find that
there’ll be capital raised to hold on to those pieces of the deal. So, I’m not really worried that, on December 31, 2016, the last single-borrower
issuance will come to be.

Victor Coleman: I think that’s an excellent point. I also think
that we haven’t heard the end of the story on Dodd-Frank. There
are enough people becoming fairly vocal about it. At almost any
conference you go to somebody stands up and says something
to the effect that:

It’s quickly shifting from a humorous point to a serious one as
the realization sinks in. So I don’t think the end result has been

Lisa Pendergast: What’s most interesting about risk retention as
it applies to these single-asset deals is that regulators have set
the bar so high for them being considered ‘qualified mortgages.’
And yet, most CMBS investors deem SA/SB CMBS as safe havens from both an asset quality, underwriting, and ability to perform due diligence perspective.

Mark Weiss: What’s a better definition of a qualified mortgage
than a single loan?

Farzana Mitchell: I also want to comment on Dodd-Frank as it is
not only wreaking havoc on the CMBS side, but also proving to be
a major constraint on the banking industry. We recently experienced
this phenomenon while extending and modifying our lines of credit.
Many of the smaller banks and the regional banks couldn’t participate
in the current environment because their risk models have changed
quite a bit because of the reserve requirements imposed by Dodd-Frank and the opportunity costs related to posting such reserves. The larger banks are able to lend and provide capital for an investment-grade company like CBL, but the spreads are fairly tight for the smaller and regional banks to earn a reasonable profit.

Lisa Pendergast: You know, Farzana, I think you hit the nail on
the head. There are a variety of reasons why CMBS bond spreads
have widened as much as they have, but one of the key reasons
has to do with liquidity. A key unintended consequence of many
of the regulations issued post the financial crisis is substantially
reduced liquidity for securitized issuers and investors and higher
costs for borrowers.

Straight Talk on the Current State of Core Asset Classes

Lisa Pendergast: Let’s talk multifamily first. Michael, I have to
ask about your recent partnership with Ivanhoe Cambridge to
purchase Peter Cooper Village/Stuyvesant Town. I think it says
a good deal about your views on the prospects for multifamily
longer term. Can you comment please?

Michael Lascher: The Stuyvesant Town investment was made
through our Core Plus fund and that is a longer-term hold vehicle.
The investment is definitely a reflection of our perspective on the multifamily business in general and even more specifically multifamily in New York City where vacancy rates are incredibly low and there has been virtually no new supply. In addition, there’s a renewed urbanization trend that has occurred and more and more people want to live in city centers
than outside of the city. There may be some [multifamily] markets around the country where we wouldn’t necessarily choose to invest, where there has been higher levels of new supply or other economic factors at play. But generally speaking, we have invested very heavily in the multifamily
business over the course of the last two years or so and I think we
own about 50,000 units not including Stuyvesant Town.

Mark Weiss: We have less multifamily. We do have condos, but
its growing increasingly difficult to buy in New York right now.
Prices have gotten a bit ahead of themselves and I think a lot of
that is due to the availability of international capital. The phrase
“New York real estate is the world’s safety deposit box” is not an
uncommon one these days. Whether it’s the sale of the Waldorf
Astoria or condo sales in New York City, there is Chinese, Middle
Eastern, and Latin American money at play. So, we’re seeing an
enormous amount of equity come in, which is keeping prices very,
very, aggressive. A pop in rates may put a slight damper on pricing.
Already, high-end New York City condos in the plus-$10 million per
unit area are sort of languishing.

You’re seeing an enormous amount of new hotel supply in New York and I think that’s really having a damper on what’s going on. You also have currency devaluation; the ruble is down 50%, the Latin American currencies are down 50%, and the Euro is down 20% going to 25%. The European traveler is having a big impact on the Times Square hotel market. It will be interesting to see how this plays out given the combination of all the new and renovated product coming into the market and currency devaluation. I don’t think interest rates are going to affect hotels as much, but I think the currencies will continue to have a real impact. The Euro is under 107 today and it feels like if the Fed raises rates in December, it could go to parity or below pretty quickly.

Stephanie Petosa: Where else is hotel supply an issue of concern
here in the U.S.?

Mark Weiss: We own the W Hotel in South Beach and it’s considered
probably one of the top two or three hotels in that market. New supply is definitely having an impact. And, the same dynamics related to the European and the Latin American traveler prevail here as well. We’re taking the proactive approach of going to Latin America and spending time with travel agents there. We’ve actually seen our Latin American business pick up but only because we’ve made the effort to go down there.
Miami and New York suffer from a little bit of the same issue.

Stephanie Petosa: Okay Farzana, let’s talk retail. Is your outlook
for retail optimistic or pessimistic? What is your general view on
all things retail?

Farzana Mitchell: My favorite subject. I believe the retail environment
is best described as stable. It’s so dependent on consumer sentiment
and confidence and GDP and employment growth. We are confident
this year’s sales will be positive for the retail industry. We’re still seeing a lot of good retail demand in our space. As you know, CBL is in the middle markets and we are the only game in town in most cases. If a retailer wants to move to a middle market, they are oftentimes in a CBL property.
We came out of the recession reasonably well, but not at the same
pace as some of our peers that have grown a little bit faster than
we have. Remember, we are in the middle markets where growth
tends to be more stable and our peaks and valleys shallower.
That’s the good news; we believe that we have preserved our
stability and our cash flow.

Stephanie Petosa: There seems to be a changing of the guard
in terms of retailers. What are the major retailer themes as it
relates to your portfolio?

Farzana Mitchell: The retail environment is dynamic. Looking
at our portfolio over time, the top-20 retailers have changed dramatically and this I believe is no different for our peers in the mall industry. Sears and JCPenney stores are in most major malls and they are sorting themselves out. JCPenney seems to be on a good track. We do see a transformation taking place in the retail industry with replacement tenants for Sears and JCPenney bringing new life to the malls. A significant development is the movement of big box retailers such as Dick’s Sporting Goods, Ulta Cosmetics, Ross, Hobby Lobby, TJ Maxx and value-oriented retailers into vacated JCPenney and Sear’s stores.

Lisa Pendergast: The omni-channel strategies most retailers have come to employ to reach consumers are now readily apparent. What’s less apparent is what’s happening at the property-owner level to facilitate blending e-commerce and brick-and-mortar sales. What is it that landlords can do, have done on that front?

Farzana Mitchell: The technological revolution is making retailers re-think how to best serve customers. Retail sales will thrive on a  combination of brick and mortar and mobile technology and e-commerce; all blend to form a better synergy. Consumers enjoy the shopping experience and still require the stimulation of the touch and feel and ‘trying out’ before purchasing. We believe brick and mortar is here to stay, but we must continue to offer the experiences to our customers and we are doing so by adding restaurants, theaters and family entertainment. As a landlord, we provide the infrastructure for retailers to have better technology, faster access to Wi-Fi, and the latest digital platform on which to operate. Then it is up to the retailers to use the technology we
offer to capture their customer in an exciting manner.

Stephanie Petosa: On the retail front, CMBS investors often ask
about tenant sales and co-tenancy agreements; and yet sales
are often difficult to come by. What sort of leverage do you have
over tenants to gain access to sales data?

Farzana Mitchell: We generally require our tenants to report sales,
and we publish those sales numbers on a trailing 12-month basis in our quarterly investor reports. So it’s a requirement for our tenants. Not only do we need sales data for reporting purposes, but just as importantly, sales are a part of our calculation for percentage rents. Of course, this doesn’t apply to certain anchor tenants that are not required to provide sales data. While certain anchors don’t report sales to us, we typically know how they are performing. When a lender is performing their due diligence, we can secure a lot of that data and provide it to them for underwriting purposes. We have more scrutiny today because of underperforming anchors such as JCPenney and Sears. The trend of evaluating performance of the malls by sales per square foot is changing to gross sales for all tenants. E-commerce is having a different impact as well. We are unable to obtain e-commerce sales information that’s
generated from the stores. The lines are blurring for in-store sales
and e-commerce sales within the context of bricks and mortar and
this will require sorting out over time.

Stephanie Petosa: Loans on office assets usually comprise a large percentage of CMBS collateral and make up the lion’s share of insurance company balance sheets. So it is an important sector of the market. Is there still upside in the office sector?

Mark Weiss: We’re primarily in New York and have mainly Class-A and some Class-B-plus properties. The leasing market is incredibly strong. That’s having an impact on the financing market. CMBS investors in particular love having New York City office exposure. A number of bond buyers live in New York and so can go see the properties backing their bonds. Many of our office properties are newly renovated; many of the larger NYC office assets have seen renovations. These projects sell very well and often have multiple offers when made available for sale.

Lisa Pendergast: What are your thoughts on suburban office
markets? I’ve worked in Stamford for a number of years, and it’s
been decimated by vacancies, with RBS and UBS moving out
in large part. Seems to me there simply aren’t enough hedge
funds in Connecticut to backfill that type of vacancy. And, that’s
just one example. Suburban New Jersey and New York appear to
have their share of vacancy issues as well. Will these suburban
markets come back in this cycle?

Mark Weiss: We bought a 1.8 million sf office portfolio in Stamford from our friends at Blackstone on the EOP flip in 2007. I really think it comes down to how the properties are managed. The average vacancy rate in Class-A Stamford office is around 20%. If you look at our 1.8 million sf, our occupancy rate is at 92%. So we’re significantly outperforming the market, but we put a lot of money into these properties too. We really are a part of the community. If you’re just an outsider who comes in as part of XYZ and owns one building in a suburban market that needs love and care, occupancy simply won’t come back as fast. In terms of cap rates, I think it’s much differentiated. Stamford cap rates have not quite returned to the levels seen in other suburban markets. I think a lot of that is fear of the overhang you highlighted; every day you pick up another article that RBS is leaving, UBS is leaving. Some of the stuff like the UBS space really isn’t competitive with what we have, right? Our average tenant is 5,000 sf to 6,000 sf. We’re not worried about competing against the 50,000 sf trading floor that UBS might have. In the end, it is a market-by-market analysis. Some suburban markets have come roaring back as property investors
say they can’t get enough yield in New York City, so let me go to XYZ suburban market. I don’t think it’s come back quite to 2007 and it certainly is differentiated by market.

Michael Lascher: We haven’t bought many suburban office assets
in the last couple of years. Yet, there are suburban markets that
are doing better than others. We’ve invested most recently in New York City and Chicago to capitalize on this fundamental shift.

Lisa Pendergast: Victor, you noted that most of your assets were
on the West Coast. I was startled recently by the new development
of creative space both in the Bay Area and in Los Angeles.
Are tenants in northern California migrating to Los Angeles due
to the more attractive rents in LA?

Victor Coleman: No, what we’re seeing is, interestingly enough, not a migration coming out of the Bay area to L.A. on any material aspect, it’s really an expansion. And it’s primarily an expansion around media and tech-related companies with more media exposure. To give you an example, there’s no reason why YouTube or Netflix need to have production space in (L.A.) when they already have the presence up in San Francisco. Yet, Netflix took 200,000 sf, YouTube took 300,000 sf, and why…the answer is that we’re talking about content. They need to be in southern California where they are creating content. So that’s Hulu and that’s HBO and Showtime who had already been doing that; that’s Amazon who is now doing that. So you’re seeing that shift to southern California, which is an expansion around media.

CMBS Versus Balance-Sheet Lenders — Is There a Preference?

Lisa Pendergast: For any given deal, do you know in advance
what’s better suited for the CMBS market or for a portfolio
lender such as a life company?

Mark Weiss: Outside of CMBS, we also utilize the community banks and the regional banks for debt capital. They all want to participate. Whom we use depends on size. If we’re doing a $1 billion deal, we’re limited as to who can lend into that. Most of our deals are between $75 million and $200 million, which leaves a lot of access to the debt markets. From a lending perspective, I think it’s incredibly strong. We tend to focus a lot on the structural elements of a financing because there’s always tenant improvements and leasing commissions in an office building. It’s a very capital-intensive business. We focus on trying to do the best we can do in terms of holdbacks and other things. I think the CMBS market has gotten relatively loose from that perspective.

Mark Lascher: I feel the same way. It’s very helpful if we are able to figure
out how to structure a financing so that we’re not loading it up from day one with every dollar of tenant improvement or CapEx that’s required. I think there is still a decent amount of structure required in the CMBS world and lending generally. The one thing, hands down, that we’ve not seen lenders move away from are cash traps that trigger if your debt yield declines significantly. This is very different from the last cycle when some property owners were stripping cash from assets for four years and then handing back the keys at the end of the term. Having your cash locked up with the lender allows you to focus on operating the asset or at least having the discussion earlier.

Victor Coleman: For us, it’s really is a relationship play with lenders.
Our decision falls into two categories. The first is the documentation and our comfort level with the documentation. The second is the ease of use of continually doing deals with guys you’ve already done deals with; again it’s really a relationship with lenders regardless of the lender type. I think the demands by lenders are a lot more specific today; there is a lot more vetting of the loan’s merits — whether it’s a CMBS loan or conventional loan. I believe that the process was a lot smoother in the past. That said, because of the size of our company, our strong balance sheet (we’re a $7-+ billion company), and good standing as a borrower, we can push back
a little bit on certain loan structures, cash-management features and TIs/LCs, etc. Since we’re operators and hands-on operators, I think the most challenging is lease approvals, or the time it takes to get major lease approvals done. We act quickly so we want to get our leases signed and transact with the tenant as quickly as possible. It is often that lease approval language that tends to be the biggest sticking point when dealing with CMBS lenders.

Mark Weiss: One of the things we’re very focused on when talking about structure are the mechanics associated with dealing with master and special servicers who are forced to work within a certain playbook. I’ll fight tooth and nail over issues such as what’s the definition of a major lease and when are lease approvals needed because those are the type of things that directly affect our operation of the property. I want to have as much flexibility as possible when it comes to dealing with servicers. They have a job to do, but I try to limit that job through the loan documents. If I have a 500,000 sf building, and a 100,000 sf lease pending; I understand
I’m going to need servicer approval. But if it’s a 30,000 sf lease in a 800,000 sf building, that’s where – on the margin – you can fight and win those battles, particularly if you’re a good sponsor.

Michael Lascher: The obvious bucket of assets that work really well for CMBS lenders are large, cash-flowing assets or portfolios. We finance projects in the single-family rental space through the CMBS market as well. In contrast, we have financed many hotels, particularly select-service hotel portfolios, with balance-sheet lenders more recently. But, there was a time when select-service hotel loans were solely going to the CMBS market. And yes, when we’re buying something or looking to refinance it, I usually have a good idea of what I think would be the best source of capital. I’m right a lot of the time, but not always. There are always surprises and sometimes lenders come out of left field and do something unexpected or out of the ordinary.

Farzana Mitchell: There is a difference between life companies
and CMBS in terms of whom we prefer. The cash-trap and cash management agreements CMBS lenders put in place versus the life companies make it compelling to avoid CMBS if possible. And, I agree on the structure, negotiating to have minimal rights by lenders to approve leases and other operational items is a huge challenge. We like to stay nimble with a desire to run our business with minimal constraints and costs. We see a difference between life company and CMBS lenders on approvals, process, and cost. Life companies are more flexible and allow us to operate because we are great at it while CMBS tends to be more intrusive. CMBS is also punitive in terms of the waterfall of operating cash flow. We’ve closed on both CMBS and life company loans recently. Both were fine from an execution standpoint. Yet, we believe we have more
certainty with life company lenders because we can lock in the rate early and get it closed. All else equal, I would rather borrow from a life company than a CMBS lender because the latter is time consuming and it can be difficult to work with CMBS lenders in servicing the loans, particularly when loans mature. I believe the CMBS market is choppy right now. Great assets tend to get great execution regardless of who the lender is.

Mark Weiss: On the loan maturity point, we had a situation with a loan coming due on February 6, 2016. Our first open period was November 6, 2015. In CMBS, if you don’t pay off the loan on the payment date, you have to pay the balance of the month’s interest. We missed it due to a variety of good reasons and now have to wait to pay off the loan on the next payment date on December 6, so we don’t pay double interest. That’s
incredibly frustrating; if it was a life-company loan, I would just call them up and say, “Hey, can we deal with this?” And it’s much more flexible. But it’s a quid pro quo; CMBS lenders provide more aggressive loans than what I’m able to secure in the life company market. CMBS provides me with
10-year interest-only money at relatively high leverage points on New York City office; I’m not necessarily going to get that in the life company market.

Stephanie Petosa: How much control do you have over loan
documents and the leverage points that you were talking about
earlier? Is it easier post crisis to be a CMBS borrower?

Mark Weiss: CMBS documents have become quite standardized.
Yet, things like transfer provisions, preferred equity and what’s
allowed, as well as leasing approvals and cash traps are some items
where you can push around the margins. Ninety percent of the
document is what it is and it’s the remaining 10% that you push on.

Michael Lascher: Our documents are pretty well standardized. For
CMBS loans, we tend to start with a document we used in a prior
deal. It is the same for most balance-sheet lenders. Mezzanine debt
is traditionally prohibited unless the loan documents specifically
allow for mezz following an improvement in property-level cash
flows or a declining LTV as stipulated in the loan docs. I don’t think
preferred equity is prohibited. It probably speaks to the transfer
provisions. So you can have somebody invest as preferred equity.
It’s also helpful to the preferred equity investor if you go to the servicer beforehand and request to get the preferred holder approved so that if there’s a change of control they are automatically approved by the senior lender to become a controlling party of the entity. This is something I think most preferred holders would like to see. In certain cases, you’re not able to do that today. Generally speaking, I haven’t seen it be specifically prohibited; it’s not debt even though in a lot of cases it has some debt-like features in that there’s a current return and mandatory redemption date.

Farzana Mitchell: We’ve seen more standardization in CMBS loan agreements. We don’t see meaningful accommodation for mezzanine loans. Generally speaking, mezzanine debt has been prohibited for a number of years now. In terms of maybe pledging an equity interest, perhaps you can be a little creative and maybe there’s an upper-tier pledge of interest allowed.

Stephanie Petosa: Pro-forma underwriting is most often cited as
one of the key negative developments during the latter stages
of the previous real estate cycle. Is any of that going on that you
see and to what extent? Where do you see today’s lenders being
most aggressive?

Mark Weiss: I’m not really seeing much on pro forma. If you have
rent steps in the next 24 months with good tenants, yes, can you
get that counted? Sure.

Michael Lascher: In the hotel space, the rating agencies seem
to be underwriting to 2013. This is happening even though the
performance of some of the hotels we’ve financed in the CMBS
space has improved tremendously since that time. So not only are
you not seeing pro-forma underwriting, if anything, the agencies
have drawn a line in the sand and said we’re not comfortable hotel
cash flows are sustainable at this point in history.

Lisa Pendergast: What do you think hotel performance will look
like 10 years from now when the loans originated today come due?

Michael Lascher: We think there’s still some more room for growth
in performance, but I see the point of the rating agencies. In 2015,
hotel cash flows are far from where they were in 2009 or 2010.
The one point we haven’t touched on is overall leverage, which I
think is important to bring up. I’m not seeing ridiculous amounts of
leverage re-enter the system. We get great receptivity for 75% or 80% financing on a deal. Beyond that, there really is not a deep market for financing. Borrowers were typically able to finance deals at 90% LTV back in 2007.

Mark Weiss: I think leverage is almost forced to be lower. If CMBS
lenders didn’t push leverage lower, they would be looking at debt
yields of 7%, for example, in New York City office. However, New
York City office is trading at a 4.5% cap rate, but the lowest debt
yield CMBS lenders will go to is closer to 7%. So there is imposed
leverage. The CMBS leverage points are a lot more reasonable
and that’s because it’s more cash-flow driven now than it was back
in 2007.

Lisa Pendergast: Let’s talk about life company lenders. Life insurer lending picked up strongly early in the recovery. These portfolio lenders were much more active in 2008 to 2010 than CMBS lenders. How are life companies competing today? Are they becoming more comfortable with added leverage or less structure, or is it just that they’re willing to take less in terms of pricing?

Michael Lascher: They definitely have picked up in terms of
their market share. The CMBS market is incapable of absorbing
what it once did and so there is a real need for portfolio lenders.
I think the life companies have really stuck close to their knitting
and I don’t see them providing outsized leverage or giving
on structure.