In this blog we have shown a certain fondness for banking, commercial real estate, and debt. Well this is a trifecta, Wells Fargo (WFC) is rebuilding what used to be Wachovia’s (WB) commercial mortgage backed securities (CMBS) business. It is a fantastic story. With all the talk of a bond bubble and the lack of safe instruments, CMBS are rallying and there is simply no supply. These are the same instruments that were considered toxic waste one year ago and I can still remember the comments on how structured finance was not coming back.
We believe there is going to be a resurgence of CMBS, and we are investing in anticipation of it,” said Blakey, head of commercial-mortgage lending and servicing. “Our pipeline is growing and we intend to be a leader of this market." Wells Fargo is pushing ahead in a market Wachovia controlled before it reported more than $2.1 billion of losses tied to CMBS in 2007 and 2008. Wachovia was the No. 1 underwriter from 2005 to 2007, with $81 billion of commercial mortgage-backed bonds, data compiled by Bloomberg show. Wachovia, based in Charlotte, North Carolina, structured the largest CMBS deal in history, a $7.9 billion bond that included financing for the 2006 purchase of Stuyvesant Town- Peter Cooper Village, Manhattan’s largest apartment complex. The buyers ceded control of the property earlier this year after failing to make debt payments.
Certainly there are advantages in issuing loans after a bubble collapse with a decimated competition. Lending conditions and underwriting standards are much better.
Commercial property values have declined 39 percent from the 2007 peak, according to Moody’s Investors Service. The decline has made underwriting loans less risky, and banks can dictate more conservative terms and choose the most creditworthy borrowers, said Shrewsberry, head of the company’s securities and investment group. “It’s a nice time to be originating loans, because you’re at a lower price point on the collateral, you can impose the right structure and there isn’t the frenzied competition of a few years ago", Shrewsberry said.
I have no position in Wells Fargo, though I am certainly surprised that this great franchise is priced at 1x book value and at its 52w lows. What really attracts me to this story is that the comeback of the securitization market could have a positive impact in commercial real estate valuations, trickling down to refinancings and banks' capital ratios.
Starwood Property Trust Inc. (SPT) Chief Executive Officer, Barry Sternlicht, said during an Aug. 10 conference call that “CMBS markets are wide open” and suffer from too little supply rather than lack of demand from buyers. “There’s been good demand for the CMBS issues that have come out so far in 2010,” said Matthew Anderson, managing director at Foresight Analytics, an Oakland, California-based bank and real estate research firm. Banks will aim to take advantage of loans maturing over the next five years, Anderson said. Almost $1.5 trillion in commercial mortgages on the books of banks or bundled into securities come due between 2010 and 2014, he estimated. “The market possibilities have re-emerged in a way that’s conducive to doing some business,” Shrewsberry said. “This is a rejuvenation.”
Disclosure: Author holds no position in WFC