Prudential Mortgage Capital has re-entered the conduit space, striking a joint venture with Perella Weinberg Partners to originate CMBS loans.
The company joins a rapidly expanding list of CMBS providers to roll out programs this year—including RCG Longview and Berkadia—as the sector continues to heat up. While conduits have struggled to compete with the government-sponsored enterprises (GSEs) and life companies in the multifamily space this year, they have begun to make some inroads—and many expect the sector to grow more competitive in the second half.
“The GSEs and life companies right now have a pricing advantage over the CMBS market because the cost of capital is lower. But that won’t always be the case,” says David Twardock, president of Newark, N.J.-based Prudential Mortgage Capital. “Different capital sources will be more competitive at different points of time.”
Prudential discontinued its decade-old conduit operation in 2008. The company did ink a CMBS arrangement with Wells Fargo earlier this year, whereby Prudential would send loans Wells Fargo’ way. But this new joint venture puts Prudential and Perella in the driver’s seat for the entire process, giving them a proprietary product to originate, close, and sell.
The new program offers five-, seven-, and 10-year fixed-rate nonrecourse loans, goes up to 75 percent loan-to-value, and allows some interest-only periods.
Prudential, which already offers agency executions as well as portfolio loans, sees the CMBS program as an important compliment to those existing initiatives. For instance, CMBS will sometimes offer better terms than Fannie Mae would in one of its pre-review markets. And the conduit sector isn’t afraid to go into tertiary markets, as opposed to a life company book, which often focuses on the major metros.
“It’s the breadth of the market that the conduit will serve that differentiates it, and then the speed with which the deal can get executed,” Twardock says. “We’ll absolutely go to secondary markets. And a really well-run multifamily property in a tertiary market without a lot of supply issues would be a terrific asset for the conduit.”
At the height of the market, Prudential’s conduit operations closed between $2 billion and $3 billion annually. Prudential hopes to put out about $1 billion in CMBS loans in 2012, while it focuses on setting up the operations and getting some deal flow going for the remainder of this year.
One reason Prudential favored a joint venture arrangement is that it wouldn’t have to create a new internal CMBS warehouse—the place on the balance sheet where loans reside pre-securitization. Instead, the joint venture has created its own warehouse. And that warehouse was designed to be flexible, given the moving target of regulatory reform. Some of the potential changes to the CMBS industry include a 5 percent risk-retention requirement that will be fulfilled either through the venture making the loans, or with a third-party B-piece buyer. Another requirement of the proposed reforms is that the originator/issuer is required to take its profit over time, rather than earning it up front.
“This venture will have the flexibility to hold positions in accordance with risk retention requirements,” Twardock says. “And it’s set up so that if it needs to, it can earn its profits over time.”