01/25/2013 | By Carisa Chappell
Dan Fasulo, managing director with Real Capital Analytics, said there’s still a “massive” opportunity for mortgage REITs to help solve the equity gap problem that will result from the imminent wave of loan maturities for commercial real estate borrowers.
“To refinance a property today, in order for the owners to keep that property, they are going to have to come up with a check. Not all of them have the ability or want to write another check,” he said. “So you’re going to have to bring in a mezzanine lender to fill that gap, and I think you’ll see more and more of those types of deals.”
In addition to mezzanine deals, Fasulo said to expect more lending in general in 2013, as well as more competition among mortgage REITs.
“I think the deal flow will increase as primary first mortgage lenders loosen up their restrictions about having someone behind them,” he said. “Some first mortgage lenders over the past couple of years have had the power to say, ‘No, this this is the only loan you get on this property unless we approve it.’ I think that’s going to loosen up.”
Fasulo said mortgage REITs have also had to focus on areas of specialization to compete in the current environment.
“The real story is it’s 2006 all over again,” he said. “There’s plenty of capital out there. Where mortgage REITs really have a competitive advantage is that they move quickly and participate in different parts of the capital stack, where there might not be as much competition from traditional lenders.”
Susan Persin, managing director with commercial real estate consulting firm Trepp LLC, said she expects mortgage REITs to continue to deliver “outsized returns” in 2013.
Total returns for mortgage REITs in 2012 were 19.9 percent, according to the FTSE NAREIT U.S. Real Estate Index. By comparison, total returns for the S&P 500 were 16 percent.
Three of the eight initial public offerings of REITs held in 2012 were for mortgage REITs. However, although the sector has performed well, Fasulo said he doesn’t’ expect to see more mortgage REITs entering the market in the near term, thanks to the growth in the availability of public financing.
In terms of challenges, Fasulo said all lenders are struggling with low yields. He speculated that, like most lenders this year, mortgage REITs are going to have to “go out in that risk spectrum” to capture the same yields that they have been generating in recent years.
Persin agrees with the idea that mortgage REITs will face declining yield. However, she said she doesn’t think the trend will weigh heavily on the sector.