/ / CRE Structured Products Advisory Practice
Aberdeen Realty Holdings Ltd, (“ARH”), through its CRE Structured Products Advisory Services Group, provides structured finance advisory services focusing on collateralized mortgage backed securities, collateralized debt obligations and equity interests in real estate private equity funds for which an investor is seeking to generate liquidity through a secondary market sale.
CMBS & CDO Services
Many hedge funds and institutional investors use trading strategies that try to maximize the total return potential of undervalued structured debt securities such as commercial mortgage backed securities and collateralized debt obligations as described below. Certain investors on the other hand that may want to employ a hold to maturity strategy instead of moving in and out of positions on a daily or hourly basis driven by automated trading programs must undertake a more substantive investment analysis. For an investor, rather than a trader, in structured debt securities to achieve above market returns, there are many risk factors endemic to holding positions in these instruments - including structure risk due to the lack of transparency inherent in the complex instruments themselves and underlying collateral risk at the individual asset level of the income producing commercial real estate backing these securities.
ARH’s team of specialists understands the complex structure and valuation issues of these products and the use of quantitative models to estimate a range of fair values, likelihood of loss and projected IRR. Working closely with third party CMBS data and analytics providers, ARH provides reliable, timely, and precise advisory services for its clients, for the following types of securities:
Collateralized Debt Obligations (CDOs)
A CDO is an investment-grade security backed by a pool of bonds, loans, and other assets with varying credit risks. CDOs are often referred to as “tranches” or “slices” with each CDO having a different maturity and risk associated with it. There are form variations of CDOs including Synthetic CDOs, and CDOs Squared and CDOs Cubed.
CDO² and CDO³ are backed by actual CDO tranches as opposed to bonds, loans or other asset collateralizations. These complex structures were devised to provide additional risk management tools to the commercial paper market; however, they lack transparency and are subject to significant liquidity and credit risks.
Commercial Mortgage Backed Securities (CMBS)
A commercial mortgage-backed security (CMBS) is a type of asset-backed security that is secured by an undivided beneficial ownership interest in a group or pool of mortgages. The mortgage loan is made by a financial institution or other lender to a borrower to finance or refinance the purchase of a commercial property, and vary in their terms. Because mortgage loans may take years to pay off, lenders must find ways to replenish their funds in order to fund new mortgage loans. To do this, loan originators sell groups of mortgages with similar characteristics into the secondary mortgage market through the process of securitization. Additionally, CMBS is used to redirect the interest and principal payments from the pool of mortgages to the bond or certificate holders that have purchased an interest in the securitization. These interest payments can be further broken down and applied to different classes of securities along with different levels of loss in the event of non-performing underlying mortgages, depending on the risk profile associated with varying priorities or “tranches” as they are classified under the CMBS offering.
Real Estate Private Equity Secondaries
Institutional real estate investors such as public pensions, private retirement benefits funds, endowment funds, sovereign wealth funds, family offices and closely held investment vehicles and high net worth individuals have committed significant amounts of capital to commercial real estate private equity funds (“CRE PE”) over just the last several years to deploy into commercial real estate investment ventures. CRE PE executes on its individual investment strategy be it core stabilized property acquisitions or opportunistic development and redevelopment plans, even the acquisition of CMBS, CDOs, whole loans, note participations and mezzanine debt. The investment strategies often require several years to fully commit the equity raised from investors into projects and additional years to begin harvesting returns through the disposition of the assets acquired.
With increasing frequency, the investors who committed capital to CRE PE are requiring solutions to unlock their capital in advance of the scheduled distribution from such funds to meet their other funding requirements. This provides an opportunity for real estate investors to acquire the CRE PE investment interest at an attractive valuation. ARH’s team provides a sophisticated and comprehensive level of transaction support for investors seeking to acquire CRE PE secondary interests including analysis of the fund, partnership, trust, JV or other investment vehicle structure to identify the investor’s priority of return, rights and obligations and validation of current performance and distributions. Of more critical importance however, is ARH’s ability to “drill down” to the existing portfolio assets or CRE PE fund’s future commitments to projects and undertake a thorough analysis of each asset’s strategy, underwriting, performance, valuation and terminal IRR. Only with a full understanding of the characteristics of each asset in the CRE PE fund can an appropriate price be determined for the secondary interest.