JP Morgan Mapping 2 More ‘Horizontal’ Deals

MARCH 10, 2017

2 Bancorp Is Latest Conduit Dropout

2 Pricing Diverges on 2 Conduit Deals

4 Credit Agricole In Line for Calif. Loan

4 Thorofare Eyes Open-End Debt Fund

4 Helaba Inks Refi of Back Bay Offices

5 ING Funding Office Recap in Boston

5 Revere Drumming Up 3rd Debt Fund

5 Buyer Seeks Loan on LA-Area Offices

5 Floater Sought for San Diego Purchase

6 Brookfield Backs Boston Office Deal

8 CMBS Delinquencies Holding Steady

8 Square Mile Lends on Portfolio in Md.

9 Wells Funds Pennsylvania Complex

10 INITIAL PRICINGS

15 MARKET MONITOR

THE GRAPEVINE

Veteran trader Rob Cestari left Bancorp Bank this week after a three-year stint at the Wilmington, Del., bank. He's pursuing other opportunities. Cestari ran the group's floating-rate lending program out of the New York office. He previously was a commercial MBS trader at several broker-dealers since 2009, including Stifel Nicolaus, PrinceRidge and Cohen & Co. Before that, Cestari ran the high-yield debt platform at Winthrop Realty and put in stints at Apollo Real Estate Advisors and Nomura. Separately, Bancorp has halted its conduit operation (see article on Page 2).

Michael Bachenheimer has joined Bedrock Capital as executive director in

See GRAPEVINE on Back Page

Morgan Stanley to Refi Times Square Tower

Morgan Stanley has agreed to originate a $1.4 billion debt package on the office tower at Five Times Square in Manhattan.

The loan to a partnership between RXR Realty and David Werner would be backed by the leasehold interest in the 1.2 million-square-foot building, at Seventh Avenue and West 42nd Street. The floating-rate debt is expected to have a five-year term.

Senior debt would account for $780 million of the package, and the remainder would be divided into three mezzanine pieces. Morgan Stanley plans to hold on to some 15-30% of the senior mortgage and syndicate the rest. The roster of participating lenders hasn't been finalized, but the loan is expected to close within a few weeks. RXR and Werner circulated the assignment directly to lenders, without a broker.

The partnership will use most of the proceeds to pay off debt that matures this month. Wachovia originated a $1.2 billion debt package in 2007 when AVR Realty

See TOWER on Page 9

JP Morgan Mapping 2 More `Horizontal' Deals

J.P. Morgan, which this week priced the first conduit offering to use the "horizontal-strip" option of risk retention, is already planning to employ the same structure on two more deals.

The first, expected to surface next week, will be backed by loans supplied by J.P. Morgan and Deutsche Bank (JPMDB 2017-C5). The issuers will satisfy the riskretention rules by selling the bottom 5% of the capital stack to Barings, a Charlotte affiliate of MassMutual, which will hold the bonds for the life of the deal. That will mark Barings' first B-piece purchase.

A few weeks later, J.P. Morgan and two unidentified lenders will team up on another conduit offering (JPMCC 2017-JP6). Rialto Capital will buy the junior 5% portion.

Meanwhile, additional issuers are actively considering the horizontal-strip option.

The spate of interest indicates that the option is emerging as a viable alternative

See DEALS on Page 6

CMBS Pioneer Philipp Retiring From Moody's

Tad Philipp, who had an influential role in the development of the commercial MBS market during two stints at Moody's, is retiring next month.

Philipp, one of the sector's best-known figures, was head or co-head of the rating agency's CMBS group for 16 years, starting in 1992. During that time, he helped vet the structure of CMBS transactions and set credit-quality standards. More recently, he has overseen commercial real estate research at the agency. He has also been an active member of the CRE Finance Council and a frequent conference speaker.

"Tad has long been the dean of the rating agencies, speaking on the issues of the day with an authority and thoughtfulness that will cause a great many to miss him," said veteran investor Brian Furlong, a managing director of New York Life.

Joseph Franzetti -- himself a former head of the CMBS groups at S&P and Duff & Phelps and now a senior vice president of capital markets at Berkadia -- said: "Tad brought a unique intellectual discipline to the art of credit ratings. When it was

See PHILIPP on Page 9

March 10, 2017

Commercial Mortgage

2

ALERT

Bancorp Is Latest Conduit Dropout

Bancorp Bank has pushed the pause button on its conduitlending program.

The Wilmington, Del., bank stopped bidding on fixed-rate mortgages last month, citing weak borrower demand for conduit loans, but it continues to originate and securitize floatingrate loans.

"It's no secret that borrower demand has dropped off for conduit loans," said Ron Wechsler, commercial real estate lending chief at Bancorp. "So we're turning our focus to floatingrate loans, which is a stronger product right now."

The group still has some $200 million of fixed-rate loans on its balance sheet that it could sell into conduit deals or wind up keeping itself.

Bancorp is the eighth conduit lender to drop out of that market over the past 15 months as the sector was buffeted by costly new regulations, bond-market volatility and erratic loan demand. The others are BNY Mellon, Freedom Commercial Real

Estate, KGS-Alpha Real Estate, Liberty island, MC-Five Mile,

Redwood Commercial Mortgage and Walker & Dunlop. Meanwhile, some originators that sold mortgages to conduit issuers, including Hunt Mortgage, also exited.

Wechsler launched the lending business for Bancorp in 2012, after commercial MBS issuance started to revive following the downturn. Bancorp used its own capital to fund its loans and was willing to retain exposure to its deals, as required under the new risk-retention rules. But the drop-off in borrower demand made the program uneconomical. Wechsler said the group could resume originating conduit loans down the road if market conditions improve.

Last year, Bancorp securitized $365.9 million of commercial mortgages -- $86 million of conduit loans and $279.9 million of floating-rate mortgages. It ranked 26th among 37 securitization programs that supplied loans to CMBS deals.

Pricing Diverges on 2 Conduit Deals

Of the two conduit offerings in the market this week, investors showed a clear preference for a $1.1 billion issue backed entirely by loans from Goldman Sachs.

In both cases, the benchmark bonds priced Tuesday in line with spread guidance circulated by dealers. But the issuance spread on those long-term super-seniors was 4 bp tighter in the Goldman deal, matching the previous year-to-date low of 88 bp over swaps (see Initial Pricings on Pages 10-14).

The equivalent notes in a $1.1 billion conduit offering by J.P. Morgan and Starwood Mortgage went out the door at 92 bp. That was 3 bp below this year's high of 95 bp, which investors demanded on the preceding conduit issue -- a $634.9 million transaction led by Wells Fargo that priced Feb. 28 (WFCM 2017-RC1).

Buy-side demand for Goldman's offering (GSMS 2017GS5) was particularly strong at the bottom of the investment-grade capital stack. The notes rated BBB-/BBB by Fitch and Morningstar flew off the shelves at 315 bp -- the lowest level seen on such paper in two years. Those bonds had been

shopped with price talk of 330-345 bp. The comparable spread in the J.P. Morgan-led transaction

(JPMCC 2017-JP5) wasn't disclosed because that tranche was sold as part of the B-piece to Starwood affiliate LNR Partners. LNR committed to satisfy the federal risk-retention mandate by holding onto a "horizontal" strip of bonds at the bottom of the transaction, equal to 5% of deal proceeds. The next-higher class of notes in the JPMCC deal, with BBB/BBB+ grades from Fitch and Kroll, was pre-placed with an unidentified institutional investor at 350 bp.

The GSMS transaction uses the "L-shape" option under the risk-retention rules, which took effect late last year. Goldman retained a "vertical" strip representing 2.7% of the face value of bonds up and down the capital stack, while Rialto Capital took down a horizontal position equaling 2.3% of total proceeds via its purchase of the B-piece. For conduit transactions, the riskretention pieces must effectively be held for the life of the deal.

It's unclear whether the different risk-retention strategies in the two deals had any effect on their pricing. Some investors attributed the tighter spreads in the Goldman deal to the collateral. For example, the underwritten loan-to-value ratio for the GSMS loan pool was relatively low at 56.4% on a weighted average basis. It was 59.1% in the JPMCC deal. The stressed loanto-value ratio, as measured by Moody's, also was lower for the GSMS deal, at 111.9% versus 113.4% in the JPMCC transaction.

"You can structure a deal however you like, but the collateral credit quality is what really matters," one CMBS buyer said. "And the Goldman pool was very well received by investors, from a credit perspective."

Next up in the conduit sector is a $1 billion offering by Deutsche Bank and J.P. Morgan (JPMDB 2017-C5). The issuers plan to comply with the risk-retention rules by selling a 5% horizontal strip to an unaffiliated B-piece buyer (see article on Page 1).

Elsewhere in the new-issue market this week, investors snapped up a $564.9 million commercial real estate CLO floated by Prime Finance, a New York fund shop that originates bridge loans and mezzanine debt. On Monday, bookrunners Wells and Citigroup sold bonds from all five classes of the floating-rate issue (PFP 2017-3) at spreads well below price guidance. The senior tranche of triple-A paper went for 105 bp over one-month Libor, down from talk of 115-bp area. The spread on the triple-B-minus notes tightened the most from guidance -- winding up at 350 bp, down from talk of 375-bp area.

Before Your Next CMBS Deal...

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March 10, 2017

Commercial Mortgage

4

ALERT

Credit Agricole In Line for Calif. Loan

Credit Agricole has the inside track to win a roughly $275 million mortgage on a Beverly Hills office portfolio.

Tishman Speyer is close to a deal with the bank for a loan backed by three properties totaling 590,000 square feet. The New York firm hit the market a couple of months ago looking for floating-rate debt. Eastdil Secured is advising Tishman on the financing, which will have a term of seven years, including extensions. It's expected to close in the coming month or so.

The properties are Maple Plaza, at 335-345 North Maple Drive (290,000 sf), a building at 407 North Maple Drive (168,000 sf) and Beverly Place, at 9242 Beverly Boulevard (132,000 sf). They are within two blocks of each other, just south of Santa Monica Boulevard in western Los Angeles County.

The portfolio is worth around $410 million. The buildings are 80% leased overall, but four large tenants are set to vacate in the next few years, which would bring the occupancy rate below 50%. Tishman proposed structuring the loan with some $45 million set aside to cover leasing costs and tenant improvements connected to the vacancies.

Tishman acquired the properties in separate transactions, all in 2005, for a total of $215.2 million. It purchased Beverly Place (formerly known as Beverly Mercedes Plaza) from Prudential unit TMW Property Funds; Maple Plaza from Realtech Development of Los Angeles; and 407 North Maple Drive from a partnership including music mogul David Geffen.

Tishman initially held the properties via funds it ran. In 2007, it sold them to an Australian affiliate, Tishman Speyer Office Fund. Five years later, Tishman created a joint venture with an unidentified pension fund to acquire the Australian entity's assets, which encompassed 16 U.S. office properties.

Thorofare Eyes Open-End Debt Fund

As it wraps up the capital campaign for its fourth closedend debt fund, Thorofare Capital has started talking to investors about plans for its first open-end vehicle.

The Los Angeles operator will initially look to raise $300 million to $500 million of equity for what's tentatively dubbed Thorofare Asset Based Lending Fund 5. The vehicle would target a 9-10% return by originating commercial mortgages across the country. It would use leverage to more than double its lending capacity.

Thorofare writes both fixed- and floating-rate mortgages of up to $40 million across all asset types. For fixed-rate loans, loan-tocost ratios go as high as 85%, with the inclusion of subordinate debt. Terms max out at three years, including extensions, and interest rates are typically 8-10%. Floating-rate loans have leverage of up to 80% and terms of up to five years. Coupons are currently running 425-650 bp over one-month Libor.

A formal marketing campaign will likely start this fall, when the operator is expected to hold a final close on Thorofare Asset Based Lending Fund 4. That vehicle is seeking $300 million of equity and has raised more than $220 million to date.

Investors have been told the shift to an open-end strategy

is intended to give them greater flexibility. Most of Thorofare's backers have participated in multiple funds, and it would be more convenient for them to write larger checks for one openend vehicle. The format would also provide more liquidity, allowing limited partners to redeem their commitments.

Thorofare was formed in 2005. It's headed by brothers Kevin Miller, who is chief executive, and Brendan Miller, the chief investment officer. The other principals are Felix Gutnikov, Ryan Herbert and Marc Rapaport. The firm expects to make additional hires as its book grows.

The shop's first three debt funds raised a combined $460 million of equity. All are fully invested.

Helaba Inks Refi of Back Bay Offices

Beacon Capital has tapped Helaba Bank for a mortgage of about $83 million on a recently renovated Boston office property.

The German bank originated the loan within the past couple of weeks to refinance Beacon's leasehold interest in the 207,000-square-foot building, at 177 Huntington Avenue in the Back Bay district. The floating-rate debt, with a term of five years, was arranged by HFF.

Most of the loan was funded up-front, while a portion that sources said was relatively small will be provided in the future for tenant-improvement costs.

Beacon acquired the iconic, 26-story tower in 2012, paying $59 million to First Church of Christ, Scientist, and signing a 99-year ground lease. The building, at Belvidere Street, is alongside Christian Science Plaza, where the church has its headquarters.

The Boston fund operator embarked on a large-scale renovation project that fit into a wider city plan to revitalize the area surrounding the church property, in the southern part of the Back Bay. The upgrades at 177 Huntington included improvements to the elevators and ventilation systems, the addition of conference facilities and a fitness center, and renovation of the lobby and facade. The cost of the project was pegged at some $18 million.

Last year, Beacon put the building on the block, via HFF, with expectations it could fetch around $139 million. But Beacon opted to retain the property.

First Church of Christ, Scientist, developed 177 Huntington Avenue in 1972 to house administrative offices. The building was designed by renowned architect I.M. Pei. The church began leasing most of the space to other tenants in 2008 as it consolidated staff at its adjacent headquarters.

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March 10, 2017

Commercial Mortgage

5

ALERT

ING Funding Office Recap in Boston

ING Real Estate Finance has agreed to lend about $130 million on a Boston office complex that's being recapitalized.

A LaSalle Investment partnership is buying a majority interest in the 452,000-square-foot property, at 10 Post Office Square, from GreenOak Real Estate of New York. The transaction, which is expected to close in about two weeks, values the complex at about $190 million, or $420/sf. Synergy Investments of Boston will retain a minority interest.

ING's floating-rate loan will have a five-year term. The bulk of the balance will be funded at the closing. The LaSalle partnership and Synergy can draw down the rest over time to cover leasing commissions and property improvements. Eastdil Secured is brokering the loan, and Newmark Grubb is arranging the recapitalization.

The Class-A office complex, at Congress and Water Streets in the Financial District, consists of two 13-story buildings that date to the 1920s. GreenOak and Synergy acquired them in 2014 from Soundport Capital of New York for $143 million. Mesa West Capital of Los Angeles financed that purchase with $116 million of floating-rate debt.

Revere Drumming Up 3rd Debt Fund

Revere Capital is seeking $350 million of equity for its third high-yield debt fund.

The vehicle, Revere Credit Opportunities Fund 3, would originate or acquire mostly fixed-rate commercial mortgages ranging from $3 million to $30 million, with terms of 2-5 years. The Dallas manager lends against all asset classes except land.

Investors have been told that Revere sees continued demand from borrowers unable to access capital amid the pullback by banks and commercial MBS lenders. Its origination focus includes bridge loans and financing for borrowers' discounted payoffs. For acquisitions, it looks at individual commercial mortgages and portfolios. It will also consider commercial and industrial loans, charge-offs and deficiency claims.

Revere operates two other vehicles. Its debut fund, Revere High Yield Debt Fund, raised $50 million of equity at its final close in 2013 and is now fully invested. The other is an openend vehicle, Revere High Yield Fund, which has raised $250 million of equity since its launch in 2013 and continues to invest, mostly in bridge and mezzanine loans.

The firm was founded in 2006 by principal Clark Briner, who previously worked at Deutsche Bank and Macfarlan Capital, a Dallas fund operator.

Buyer Seeks Loan on LA-Area Offices

Emmes Development is looking for about $161 million of debt to finance the acquisition and improvement of a Southern California office complex.

The New York investment manager has agreed to buy the

656,000-square-foot Main Plaza, in Irvine, from Shorenstein Properties for about $200 million. Emmes is in the market for a five-year mortgage, and has tapped Eastdil Secured to pitch the proposal to lenders.

A portion of the proceeds would be reserved for future costs of renovations and leasing, as Emmes works to boost the property's occupancy rate and rents.

The property encompasses twin 12-story buildings, developed in 1987 and 1998, within the 48-acre Irvine Concourse master-planned office park, adjacent to John Wayne Airport. They are designated LEED gold. The complex has two restaurants and a six-story garage.

San Francisco-based Shorenstein bought Main Plaza in 2011 from Maguire Properties of Los Angeles, paying $211.2 million. As part of that transaction, Shorenstein assumed a $161 million mortgage that Maguire had obtained from Column Financial in 2007. Column securitized the 10-year loan in a $2.7 billion pooled commercial MBS offering (CSMC 2007-C3). The interest-only mortgage, with a 5.5% coupon, matures in May.

Emmes' purchase is billed as a value-added play. The property's occupancy rate is around 77%, well below the 88% average for the surrounding Airport Area submarket, and current rents are about 25% below the market's average asking rate. Some leases are set to roll over in the near term.

The tenant roster includes Greenlight Loans (50,000 sf through April 2019), healthcare REIT HCP (47,000 sf until 2024), Sullivan Curtis Monroe Insurance (30,000 sf until 2024), Wunderman Worldwide (25,000 sf through October) and Propel Media (19,600 sf through September 2018).

Floater Sought for San Diego Purchase

Miller Global wants to line up a mortgage of about $72 million on a San Diego office complex it has agreed to purchase.

The debt would finance the Denver fund operator's pending acquisition of Gateway at Torrey Hills. Miller is set to pay PGIM Real Estate about $103 million for the 198,000-squarefoot property, in a deal being brokered by Cushman & Wake-

field.

Cushman is also advising Miller on the debt. The preference is for a floating-rate mortgage with a term of five years.

The complex consists of two four-story buildings that were developed in 2008 on a 16-acre parcel in Delmar Heights, an upscale neighborhood 16 miles from downtown San Diego. The property's name is a nod to the rare Torrey pine tree, which grows exclusively in the area. The buildings offer views of the nearby Torrey Pines golf course.

The property is about 80% occupied, which gives Miller the chance to boost leasing and revenue. Tenants include engineering firm Atkins North America, law firm Mintz Levin and Mutual

of Omaha.

The buildings are at 3570 & 3580 Carmel Mountain Road. Amenities at the complex include a fitness center, a cafe and outdoor meeting areas.

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