Commercial Mortgage Commentary - CMLS Financial · 2019. 8. 21. · The Insurance-in-Force...
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cmls.ca | 1 Copyright © 2018 CMLS Financial Ltd. All rights reserved. Any reproduction of any of this commentary without the express written consent of CMLS Financial Ltd. is strictly prohibited. The material in this commentary is provided for information purposes only on an “as is” basis without warranties or conditions of any kind either express or implied. FSCO LICENSE NO. 11749 AUGUST 2018 Commercial Mortgage Commentary Customer Forward Thinking. ™ Making News Overnight Rate After holding steady in April, the Bank of Canada (“BOC”) elected in the July meeting to increase the overnight target rate by 25 bps to 1.50%. Prime lending rates across the major Canadian banks followed suit with a 25 bps increase to 3.70%. After the news broke, swap markets were pricing a 66% probability of a third hike before the new year. GOC Yields Government of Canada (“GOC”) bond yields continued to flatten through Q2/18 as shorter-term spreads climbed relative to longer-term. The premium between the 3-year and 10-year tightened by 4 bps and the premium between the 5-year and 10-year tightened by 5 bps. Investments Three REIT equity offerings occurred in Q2/2018 totaling $700 million. In June, Dream Global REIT (TSX: DRG.UN) and Allied Properties REIT (TSX:AP.UN) raised $201 million and $299 million, respectively. In July, Minto Apartment REIT (TSX: MI.UN) completed a CAD$ 200 million IPO. The IPO funded the indirect acquisition of 22 multi-unit residential properties from a related Minto group company, which was comprised of 4,279 suites located in Toronto, Ottawa, Calgary, and Edmonton. Historical GOC Yields Source: Bloomberg, CMLS 3-Year 5-Year 10-Year 150 200 225 250 175 50 75 100 125 150 200 225 250 175 50 75 100 125 Basis Points Jan ‘17 Apr ‘17 Jul ‘17 Oct ‘17 Jan ‘18 Apr ‘18 Jul ‘18 BOC Overnight Target Rate Source: Bloomberg, CMLS 150 200 225 250 175 50 75 100 125 25 0 150 200 225 250 175 50 75 100 125 25 0 Basis Points Jan ‘17 Mar ‘17 May ‘17 Jul ‘17 Sep ‘17 Nov ‘17 Jan ‘18 Mar ‘18 May ‘18 Jul ‘18
Transcript of Commercial Mortgage Commentary - CMLS Financial · 2019. 8. 21. · The Insurance-in-Force...
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cmls.ca | 1Copyright © 2018 CMLS Financial Ltd. All rights reserved. Any reproduction of any of this commentary without the express written consent of CMLS Financial Ltd. is strictly prohibited. The material in this commentary is provided for information purposes only on an “as is” basis without warranties or conditions of any kind either express or implied. FSCO LICENSE NO. 11749
AUGUST 2018
Commercial Mortgage Commentary
Customer Forward Thinking.™
Making NewsOvernight Rate
After holding steady in April, the Bank of Canada (“BOC”) elected in the
July meeting to increase the overnight target rate by 25 bps to 1.50%.
Prime lending rates across the major Canadian banks followed suit with
a 25 bps increase to 3.70%. After the news broke, swap markets were
pricing a 66% probability of a third hike before the new year.
GOC Yields
Government of Canada (“GOC”) bond yields continued to flatten through
Q2/18 as shorter-term spreads climbed relative to longer-term. The
premium between the 3-year and 10-year tightened by 4 bps and the
premium between the 5-year and 10-year tightened by 5 bps.
Investments
Three REIT equity offerings occurred in Q2/2018 totaling $700 million.
In June, Dream Global REIT (TSX: DRG.UN) and Allied Properties REIT
(TSX:AP.UN) raised $201 million and $299 million, respectively. In July,
Minto Apartment REIT (TSX: MI.UN) completed a CAD$ 200 million
IPO. The IPO funded the indirect acquisition of 22 multi-unit residential
properties from a related Minto group company, which was comprised
of 4,279 suites located in Toronto, Ottawa, Calgary, and Edmonton.
Historical GOC Yields
Source: Bloomberg, CMLS
3-Year5-Year10-Year
150
200
225
250
175
50
75
100
125
150
200
225
250
175
50
75
100
125
Bas
is P
oin
ts
Jan
‘17
Apr ‘
17
Jul ‘
17
Oct ‘
17
Jan
‘18
Apr ‘
18
Jul ‘
18
BOC Overnight Target Rate
Source: Bloomberg, CMLS
150
200
225
250
175
50
75
100
125
250
150
200
225
250
175
50
75
100
125
250
Bas
is P
oin
ts
Jan
‘17
Mar
‘17
May
‘17
Jul ‘
17
Sep
‘17
Nov
‘17
Jan
‘18
Mar
‘18
May
‘18
Jul ‘
18
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Capital Thinking.™cmls.ca | 2
Customer Forward Thinking.™
Copyright © 2018 CMLS Financial Ltd. All rights reserved. Any reproduction of any of this commentary without the express written consent of CMLS Financial Ltd. is strictly prohibited. The material in this commentary is provided for information purposes only on an “as is” basis without warranties or conditions of any kind either express or implied. FSCO LICENSE NO. 11749
CMLS FINANCIAL COMMERCIAL MORTGAGE COMMENTARY AUGUST 2018
Since our May Commentary, lender appetite for high quality commercial
mortgages remained balanced with borrower demand, causing spreads to
remain flat. 5-year deals are pricing at 145 bps to 160 bps for top quality
assets, while 10-year spreads maintain a 10 bps premium for similar
risk. With stagnant commercial mortgage spreads, the upward trend on
BBB-rated corporate bonds reduced the commercial mortgages liquidity
premium by 21 bps since the beginning of 2018. With the spread premium
now below the long-term average, commercial mortgage spreads would
need to climb, or BBB-rated corporate spreads would need to fall to move
the premium in-line with the long-term average.
Commercial Mortgages
The second CMBS issuance of 2018 occurred early in Q3/18. RBC
marketed REAL-T 2018-1, a $352 million CMBS comprised of 63 loans,
secured by 72 properties. Most of the properties in the latest REAL-T
are in Quebec followed by Ontario. The geographical concentration is
similar to that of the March 2018 CMBS issuance of CCMOT 2018-4.
REAL-T 2018-1 features a 4.28% weighted average interest
rate, an 88-month weighted average remaining term, and AAA
subordination of 13.125%. The issuance brings the total outstanding
balance of CMBS loans to $5.62 billion with $493 million scheduled
to mature in 2018.
CMBSCMBS balance outstanding and issuance
Source: DBRS, Bloomberg
IssuanceOutstanding Balance
4
6
8
10
2
0
4
6
8
10
2
0
Bill
ions
($)
2013
2014
2015
2016
2017
‘18
YTD
5-year commercial mortgage spreads
Source: Bloomberg, CMLS
200
300
350
400
250
0
50
100
150
200
300
350
400
250
0
50
100
150
Bas
is P
oin
ts
2013
2014
2015
2016
2017
2018
GOC
Spread
Coupon
5-year commercial mortgage spread premium
over BBB-rated corporate bonds
Source: Bloomberg, CMLS
Mortgage Spread - BBB Corporate SpreadLong Term Average
120
40
60
80
100
20
0
120
40
60
80
100
20
0
Bas
is P
oin
ts
2013
2014
2015
2016
2017
2018
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Capital Thinking.™cmls.ca | 3
Customer Forward Thinking.™
Copyright © 2018 CMLS Financial Ltd. All rights reserved. Any reproduction of any of this commentary without the express written consent of CMLS Financial Ltd. is strictly prohibited. The material in this commentary is provided for information purposes only on an “as is” basis without warranties or conditions of any kind either express or implied. FSCO LICENSE NO. 11749
Senior unsecured debt issued in Q2/18 slowed to $1.65 billion, down from
$2.9 billion in Q1/18. However, cumulative 2018 issuance is up 32% on
a YTD basis over 2017 and makes up 80% of the total issuance in 2017.
Two of the five issuances in Q2, totaling $800 million, were from OMERS
Realty Corporation. This included a $550 million 12-year and a $250
million 7-year note with spreads of 116 bps and 94 bps, respectively.
Early in Q3/18, a single $300 million 5-year note was issued by Brookfield
Property Finance ULC. Spreads on BBB-rated unsecured REIT debt
remained stable through Q2/18 at 150 bps.
Spreads on unsecured REIT debt remain cheaper than those on
conventional commercial mortgages. As investor demand for senior
unsecured debt remains available to the market, REITs continue to enjoy
cheaper unsecured financing.
CMLS FINANCIAL COMMERCIAL MORTGAGE COMMENTARY AUGUST 2018
Spreads on BBB-rated unsecured
REIT debt vs. commercial mortgages
Source: Bloomberg, CMLS
Commercial MortgagesBBB-Rated Unsecured REIT Debt
250
150
175
200
225
125
100
250
150
175
200
225
125
100
Bas
is P
oin
ts
2013
2014
2015
2016
2017
2018
Senior Unsecured Debt
2018 Issuer NameIssue Size ($Millions)
Issuance Rating Term (yrs) Spread (bps)
Q1
Choice Properties 350 BBB 7 143.4
Choice Properties 300 BBB 4 103.5
Riocan 250 BBBH 5 139.2
H&R REIT 300 BBBH 5.5 106.9
CT REIT 200 BBBH 10 159.1
Artis REIT 200 BBBL 2 CDOR+107
Choice Properties 750 BBB 10 196.8
Choice Properties 550 BBB 6.5 146.5
Total/Average Q1 2,900 6.25
Q2
Ivanhoe Cambridge II Inc. 500 AAL 5 89.4
OMERS Realty Group 550 AAL 12 115.9
OMERS Realty Group 250 AAL 7 93.6
Morguard Corp 200 BBBL 3 202
Chartwell Retirement Residences 150 BBBL 7 189.5
Total/Average Q2 1,650 6.69
Q3 Brookfield Property Finance ULC 300 BBB 5 230.5
Total/Average Q3 300 5.00
Total/Average YTD 2018 4,850 6.32
Senior unsecured debt issuances
Source: Bloomberg
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CMLS FINANCIAL COMMERCIAL MORTGAGE COMMENTARY AUGUST 2018
cmls.ca | 4
Customer Forward Thinking.™
Copyright © 2018 CMLS Financial Ltd. All rights reserved. Any reproduction of any of this commentary without the express written consent of CMLS Financial Ltd. is strictly prohibited. The material in this commentary is provided for information purposes only on an “as is” basis without warranties or conditions of any kind either express or implied. FSCO LICENSE NO. 11749
ABOUT CMLS FINANCIAL LTD.
CMLS Financial Ltd. is a diversified provider of lending products and services to the commercial and residential real estate finance industry. We take great
pride in continuing our over forty year tradition of exceptional service to borrowers, lenders, mortgage bankers and brokers. CMLS Financial is one of the
only independent, dedicated providers of mortgage services for the commercial real estate finance industry in Canada.
ERIC CLARK, CFA Managing Director, MAG 604.488.3897 [email protected]
SUKHMAN GREWAL, CFA Associate Director, MAG 604.235.5110 [email protected]
JASON GORDON, CPA, CMA Risk Manager, MAG 604.639.6438 [email protected]
STEVEN RAI, CFA Business Analyst
EMA FORTUNOVA Senior Credit Analyst
AUSTEN PERRY Junior Credit Analyst
ZHANNA KRIVOLUTSKAYA Senior Credit Analyst
ELIZA VALENZUELA Credit Analyst
VINOTHA SANMUGAM Credit Analyst
TRI NGUYEN Credit Analyst
PRITHVI KHANNA Junior Credit Analyst
The Canada Mortgage and Housing Corporation (“CMHC”) continues to
reduce its exposure to homeowner insurance as a result of the tighter
federal mortgage rules, which was partially offset by an increase in
multi-unit apartment building insurance. The Insurance-in-Force (“IIF”)
for homeowner insurance has decreased $44 billion to $244 billion from
2013 to Q2/18, while the multi-unit IIF increased $22 billion to $72 billion
for the same period. Amidst higher real estate and rental prices across the
country, CMHC will continue to place a focus on rental housing programs.
CMHC-insured spreads remained flat between 80 bps and 105 bps over
GOC on 5-year terms and between 85 bps and 110 bps over GOC on
10-year terms. All-in coupons increased roughly 10 bps from increases
in the GOC.
Insurance-in-Force size
Source: CMHC
Transactional Homeowner
288
284
275
264
249
244
50 53 58 63 69 72
Multi-Unit Residential
2013 2014 2015 2016 2017 2018 YTD
CMHC
