Fitch: Commercial mREITs Eye Growth as Banks Keep CRE in Check

LoanCore Realty Trust, Inc.'s (Pending: LCRT) forthcoming commencement of an initial public offering is the latest signal of the increasing role of commercial mortgage REITs (commercial mREITs) in the overall market for commercial real estate (CRE) lending, says Fitch Ratings. With between $350 billion and $400 billion of CRE loans maturing annually in 2016 and 2017, Fitch expects commercial mREITs to become more significant competitors to banks in CRE lending.

As pure-play CRE debt investors that are less regulated relative to banks, commercial mREITs predominantly originate commercial mortgage loans to hold on their balance sheets, originate conduit loans for securitization sales and invest in CMBS. The commercial mREIT sector is currently comprised of 13 companies, including Blackstone Mortgage Trust, Inc. (NYSE: BXMT), Ladder Capital Corp. (NYSE: LADR, subsidiaries with an Issuer Default Rating of BB, Outlook Stable), Starwood Property Trust, Inc. (NYSE: STWD) and specialty investors such as iStar Financial Inc. Collectively, these firms had $32.2 billion in total assets as of March 31, 2015, up 52% from year-end 2010, or about 9% on a compounded annual growth basis. Many mREITs have floating-rate loans holdings, including higher risk CRE loans on transitional properties, thereby potentially profiting from a rising interest rate environment.

LoanCore Realty Trust, Inc., with approximately $3.2 billion in assets under management and having filed its S-11 with the SEC on May 14, 2015, is another player in the mix. The company's management affiliate, LoanCore Capital, LLC, is a joint venture between an affiliate of the investment bank Jefferies Group, LLC (IDR BBB-, Outlook Stable) and an affiliate of GIC Real Estate Private Limited, the real estate investment arm of the government of Singapore's sovereign wealth fund.

There is the possibility that mREITs will fill a void left by large U.S. banks, which have pulled back from the more volatile segments of CRE lending, such as construction, acquisition and land development while growing overall CRE lending volumes. Many banks remain mindful of the poor performance of volatile CRE loan segments during the financial crisis, which is now reflected in the Fed's annual stress testing and the Comprehensive Capital Analysis and Review (CCAR) process. Projected CRE losses have been among the larger contributors to overall losses under the Fed's severely adverse scenarios. In the 2015 test, cumulative CRE loan losses reached 8.6% of total CRE loans, versus a cumulative loss average of 6.1% on across all loan sectors.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings
Sean Pattap
Senior Director
Financial Institutions
+1 212-908-0642
New York, NY
or
Matthew Noll, CFA
Senior Director
Financial Institutions - Fitch Wire
+1 212-908-0652
New York, NY
or
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