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I got an offer at a tier lower firm than you mentioned in the CMBS ratings analyst role, and know a few friends who took the spots. No one that I know has jumped ship yet, but I would imagine it is pretty useful knowledge in a debt fund/Originations. I know that the role I was about to fill the person left for a BB Origination role.
I don't think those jobs will be given to you by a headhunter so you might have to hustle/ Take a MSRE but you definitely have the skill set required for those roles.
TLDR; Solid roundabout way to get into Debt funds or originations, but if that is what you want to do maybe just try to get a job at a Debt fund or on an originations team.
Interesting.
How in depth do Analysts get in the property level modeling?
I interviewed at Morningstar in their CMBS group. The pros are definitely the deal flow that you be exposed to, the experience you will gain learning about different product types, the supply and demand drivers, different markets. I think particularly for people with 0-4 years of experience, just the sheer volume/deal flow will be incredibly helpful and it will give you tons of talking points during your next interview.
Others can correct me if I am wrong because I have never actually worked at a ratings agency, but from my interview experience and my research, I didnt really feel that the modeling that you will do will be very complex and in some cases its very vanilla/elementary. Maybe for CLO's where you have floating rate loans and more justifiable assumptions, modeling is a little more complex? I am not sure. But for the CMBS side, one interviewer even told me that sometimes, it's as simple as taking the T-12 that the originator gives you, arrive at a stabilized net cash flow (NOI- reserves), use a stressed cap rate to arrive at an adjusted value for the property. This is extremely simplified, but also I think his group was doing tons of freddie/fannie deals at that time where its stabilized multifamily, where there is not much more to it.
In order to prepare for the interview, I read S&Ps CMBS rating methodology http://pages.stern.nyu.edu/~igiddy/ABS/CMBS_Evaluation.pdf I also felt that it essentially is just applying stressed expenses/revenues to arrive at stabilized net flash flow, then using stressed cap rates to arrive at adjusted value. Not much else to it. Different rating agencies might have their own proprietary stress tests, where for example hotels might have the biggest volatilty with revenues and highest expense ratios, so they might get bigger adjustments compared to other product types. So, when you compare the originator's analysis and the rating agency analysis, the cap rate that the agency uses will be expanded by half or quarter percent, net cash flow will be a 2% or so less, value of the property will also be a little less, and LTV will consequently be a little higher.
I also learnt during my interview that rating agencies often have a diverse group of people- some come from a finance/PE background while others come from a more traditional real estate background even including property management as qualitative analysis is also extremely important. Exit ops in my opinion will be origination at a debt fund, bank, intermediary, underwriting at an agency shop. I think more than than your work experience at the rating agency, you will have to rely on your network if you want to transition to the equity side/acquisitions as there will be doubt over your experience with non stabilized properties or development. Lastly, there is new issuance group and surveillance, I was told new issuance is much more interesting, and exit ops are better.
Fix your link bro. It works when you take out the extra ",and"
Very solid. It's similar to what I heard from ppl working in rating agencies. But as for the new issuance group and surveillance, surveillance is more like a front desk.
Interested as well. Recently had a recruiter reach out to me for a CMBS Surveillance Analyst role at Kroll Bond Ratings. Seemed like they were trying to fill spots. I have ~1 year experience in underwriting at a small debt fund. I turned it down, as it seemed to be a lateral/backward move from my current position.
I work in a CMBS new issue group at one of the RAs mentioned. Feel free to PM me with any specific questions.
Generally, the benefit of a CRE group at an RA is the enormous deal flow. I've been in my spot less than a year and have easily been a part of over $25 billion in transactions. The underwriting process runs the gamut from a vanilla in-place underwriting of a stabilized MF asset in an agency deal to a detailed pro-forma underwriting a for new development getting financed on a standalone ("SASB") basis.
Also, surveillance is definitely second-rate compared to NI. You are basically just digging through servicer reports as a surveillance analyst.
We have REPE folks in our group, former BB underwriters, former asset managers, etc. Exit opps tend to be fairly good on the debt side of the business, and people make the jump back and forth from RAs to Real Estate groups at top banks all of the time. Slightly harder on the equity side because it's much more granular real estate analysis but not impossible.
Hi, thank you for your insight, it is very helpful, on a conceptual level, I get how a conduit pool gets segmented into various tranches. The higher quality loans will be more on the investment grade level and lower the quality they get pushed into the non investment grade tranches at the bottom, but I am a little unclear on how single asset loans gets segmented when its just essentially one loan and one property, so how does that get split into various tranches? Appreciate any info! thank you.
Securitizations get tranched out by rating agencies based on the credit metrics of the pool as a whole, so specific loans are not tied any one IG or non-IG certificate, except for a specialized structure called a rake bond.
If one shitty loan in a conduit defaults, the losses to the CMBS trust are allocated in reverse-sequential order (B- first, AAA last). The bottom certificates provide 'credit support' to the better rated certs. On a single asset loan, it is the same idea. Usually there is some amount of borrower equity, mezzanine/subordinate debt, and then the senior mortgage. Any losses would first eat through the borrower's equity, then the mezz/sub debt, then the lowest rated classes of the CMBS loan until they hit the AAAs.
If that's your best option take it. In my opinion (I'm sure there are exceptions) your only real exit opp is to a CMBS shop. RAs mainly take haircuts to lenders underwritings. You'll get a ton of deal flow but i feel like it's mostly process work and you probably won't learn the fundamentals of real estate, how to originate and structure a deal, working with clients. You'll be very siloed. However, if you learn the RAs underwriting methodology and know it cold, you could be of good value to a CMBS shop, specifically the securitization department, though you could make it into originations too. From securitization you could go to grad school, debt fund, broker, B Buyer (it's possible to go Fitch > DB > KKR), other places... the thing is you gotta get in, get out. Start looking after your first year, hopefully you'll find something by the end of your second.
There is some truth to this. On the RA side, you will learn the credit side of the real estate business fairly well. You're obviously not going to learn how to originate a loan, but you will learn how to structure and size a transaction. Of course RAs take haircuts to the lender's underwriting, but it's not as formulaic as you suggest. I recently worked on one of the largest CRE loans of the year on an non-stabilized asset and our RA group basically did all of the underwriting for the bank on the deal. At the end of the day, RAs determine the profit margins on CMBS transactions.
I agree totally that RAs are a good 1-3 year play, at most. I can rattle off names of VPs and MDs at all of the major CRE banking groups who started off at an RA. The process usually is RA > Banking Group > PE/Equity Shop. I'll tell you that the pay at a mid-market PE/Equity shop probably isn't substantially greater, and you'll be slaving away as a new monkey.
If one works for the originations group at a bank, does one get to work on pricing and segmenting the loan into different tranches or is that mostly on the investment bank?
short answer is no... all shops are structured differently and even cities for that shop can be structured differently. If you work at a smaller shop (basically non BB) like Ladder Capital then you may work with securitization hand in hand, though you won't be actually tranching the loan, but you'll pick up stuff along the way. Other banks like Wells Fargo practice more of an assembly line. analysts size loans all day, VPs review the underwriting and suggest structure, then it goes to the pricing, then the relationship manager delivers the terms, then a closing team handles it. It's all very separated. only way you can know for sure is to speak with someone working at that particular office.
Thank you so much for the insight! Just one more q, I am a newbie so still learning. On your Wells Fargo's example and pricing, what do you exactly mean by pricing?- pricing for that one individual CMBS loan that is being originated or pricing for the entire pool? It is my understanding that an investment bank that is involved in the securitization process is responsible for structuring/pricing the pool and selling certificates to investors. Are you saying the originator is also involved in the process. I guess my confusion lies with the fact if XYZ bank is originating a 5M CMBS loan, what role will XYZ play when it comes to tranching the pool of 60 loans where the 5M loan is just one amongst 60. When I was referring to structuring/pricing, I was referring to pricing and tranching the entire pool of loans, does the originator play a role at all here? Thank you once again!
To answer your first question, both. The orginator, the person who manages the relationship with the client (i.e. broker and/or borrower), will run point on the deal. The originators job is to bring in clients that requests loans, then oversee the loan request as it goes through the various processes of the bank. They are the point person for all internal people that have questions about the loan and need him to run point on the deal, and all external people that have questions about where the loan stands and what the bank is able to do. Securitization is one department or process of CMBS. As you know, CMBS loans are sold in the form of bonds.
Let's say a bank (although usually it's a group of banks working together) made 70 loans in 1 month totaling $600 million. All 70 of these loans will be put into a Special Purpose Entity. That Entity now has $600 million of assets in the form of notes receivable, and has money coming in every single month (because the borrower now owes money to the new note holder, the special purpose entity). Nobody actually owns the spe, it's actually a trust, overseen by a servicer. That servicer makes sure that all the loan terms are being fulfilled by the borrower. They get paid for this service. Because this SPE or trust has predictable monthly income, it's possible to issue bonds. The bookrunner, or the bank that issues the bonds, creates pretty books and goes on roadshows to pitch the deal to potential bond buying investors. There are insurance companies that want AAA bonds that pay only a few percentage points per year, but are very safe, and there are hedge funds, that want to buy highly speculative bonds that pay 15%+ per year. These bonds are backed by the same exact collateral, but offer different coupons. That's because they are tranched into different risk profiles. The AAA is the safest and have first priority over all cashflows, Next is AA and so on. The securitization department works with rating agencies, usaully 2 or 3, who rate the bonds from the trust. They look at the pool of loans and come up with their own opinions of value and potential cashflow and all the corresponding metrics, and issue their own opinion of how much of the $600 million can be called AAA, AA and so on. If a rating agency calls a bond AAA, they better be damn sure that the only way it defaults is through some cataclysmic event. That's why very few bonds are rated AAA and the main reason they can be called AAA is because they are the last ones to be affected by defaults/losses/casualties/etc...
The securitization department's job supposed to have a rough idea of how the entire pool will be tranched by the rating agencies. The Trading Desk's job is to know how much these bonds sell for. As you know a AAA bond that has a $100 face value can sell for more or less than $100 depending on the coupon. This is where we get into bond math which we'll skip. Suffice it to say the AAA bonds get sold at a premium, imagine you give $100 to a AAA borrower that pays you 5%, if you go to Charles Schwab and ask to buy a AAA bond, that bond will only pay you 2.5%. Well, if you have to pay $100 to get $2.50 each year, how much should you have to pay to get $5.00 each year? that's what your AAA bond is worth. That's a bond premium, switch the yields and you get a discount. The trading desk knows how much bonds trade for, and the securitization desk tells them roughly how much of the loan gets put into each tranche. Then the desk applies the pricing to each tranche to get a weighted average. NOW! it's important to remember, the loans are part of ONE POOL! the loans ARE NOT individually tranched out... That's just a way to obtain pricing. The Trading Desk also hedges the banks positions by buying positions in CMBX, a synthetic instrument designed to track CMBS bonds and helps execute trades on closing day to fund loans.
The originator oversees the process. They answer questions for the different departments internally, they give their team instructions to get work done in a timely way then check that work, they answer the clients questions and try to broker the deal between what the bank wants and what the client wants, trying not to piss either off so the deal can close and they can get their % of the profit.
Lastly, $5m typically aren't tranched. They're too small to spend the time on, they just take a standard % haircut on the net cash flow of the real estate and apply rating agency methodology and price out accordingly.
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