Thoughts on the shape of the curve
Europe recently saw the re-emergence of Commercial Mortgage-Backed Security (CMBS) issuance, with Blackstone sponsored Last Mile Logistics 2023-1 deal. We think this logistics CMBS deal is of particular significance as it not only marks the first return since March 2022 from sponsor Blackstone after well-known Commercial Real Estate (CRE) headwinds, but the first European CMBS issuance of any kind since last April.
Amidst a deteriorating economic outlook and central banks' initiation of their rate hiking cycles, CRE became an obvious source of concern and CMBS issuance faced considerable challenges. With interest rates rapidly increasing, deal flow dried up, the resulting void in transactions created a well-known uncertainty over property valuations and shorter term loan maturities became a source of concern. Against this backdrop, the ability to issue CMBS becomes commercially challenging so it’s no wonder this is reflected in the numbers; the much larger US CMBS market has continued to function on a more limited scale with total issuance in 2021 and 2022 totalling $222bn and $147bn respectively, with YTD 2023 materially lower again at $37bn (source: Barclays 4th August 2023). Secondary markets in European CMBS have also suffered, with sporadic appetite for individual deals and varied liquidity having left spreads materially wider than all other ABS segments.
So what drew people to the new Last Mile Logistics 2023-1 deal? Familiarity certainly helps - Blackstone is the largest sponsor in the market and the 8th European logistics deal that they have placed. Logistics assets are also a ‘known quantity’ having held up relatively well throughout the period. However, in our view just as important in tempting investors was a reduction in leverage, reflected with a Loan to Value (LTV) of 54.5% compared with 63.7% on the previous deal, as well as concessions that allow the loan to pay down more quickly over its life, both of which add further protection to bondholders.
The deal was oversubscribed in every tranche (AAA to BBB), and at least 2x covered at the mezzanine level. Although it has felt the impacts of higher debt costs on yields, continued rental growth has somewhat subdued this, and cap rates have remained more resilient than many others would have expected. The £260m 5-year deal was arranged by Citi, and placed to a small group of investors at spreads over Euribor of 235/350/450/580 (AAA/AA/A/BBB respectively), providing a weighted average coupon on the pool of 3.33%. If you compare this to the last deal priced in April, Vita Scientia, which was sponsored by TPG, you can see how much spreads have adjusted over the period. Vita Scientia priced at 130/180/205/275 from AAA down to BBB, and had a weighted average coupon of 1.75%. This shows the cost of funding for the deal has almost doubled and we think sets a new spread for where lenders must target for new CRE lending for CMBS to be a viable funding channel.
Ultimately we see the Last Mile Logistics deal as a positive indicator for the market, demonstrating that CMBS issuance remains feasible even amid market uncertainty. Especially so if it establishes a set of much needed structural concessions and a pricing benchmark for both primary and secondary markets, and sets the stage for potential future issuance, albeit without an expectation of significant uptake from here.