Using the baseball analogy I often tell my readers that it’s too early to leave the game in the bottom of the fourth inning. Of course, I’m referring to the commercial real estate cycle in the U.S. in which markets have finally thawed out and incremental leverage begin to accelerate.
While I spend most of my time researching equity REITs, I have become a fan of structured finance businesses – or commercial mortgage REITs – that provide financing for a variety of commercial real estate products/sectors.
Why leave the ball park?
In addition to modest supply and robust demand, commercial real estate is enjoying excellent access to liquidity supported by low interest rates and strong investor confidence.
Prior the financial crisis, many commercial mortgage REITs contributed their investments to collateralized debt obligations (or CDOs) and borrowed against the investments, increasing leverage. These REITs routinely cross-collateralized their CDO debt, creating even higher effective leverage.
No Signs of a Slowdown
The U.S. real estate market is in the middle innings of the cycle and that means investors should stay focused for opportunities to diversify and take advantage of the continued economic recovery.
A quick glance in history reminds us of the late 90’s when the Russian debt crisis triggered problems with U.S. real estate that later crippled Criimie Mae in 1998. Then in 2007 we saw the financial collapse, only paralleled by the Great Depression and saw the end of Lehman Bros and Bear Sterns with the near collapse of Citigroup and AIG.
As you recall, the financial markets were in utter turmoil and there was no certainty that any REIT would have access to the capital. As a result, most REITs were forced to cut or suspend dividends.
owever, since the end of the last recession, commercial mortgage REITs have become less risky – primarily due to lower leverage and lower loan-to-value (or LTV) ratios.
