Real Estate
Introduction
The Four Quadrants of Real Estate Finance
Private Public
Individuals Equity REITs
Equity Firms Real Estate
Pension Funds Corporations
Savings Associations Mortgage-Backed
Debt Banks Securities
Insurance Companies Mortgage REITs
Pension Funds
Real Estate
Equity Markets
Sources of Commercial Real Estate Equity Capital (1995)
Private Markets Public Markets
Direct Equity Pooled Equity
Sole proprietor Private REITs Public REITs
Pension funds Commingled funds Real estate operating companies
Life insurance Partnerships Public placement partnerships
Joint ventures S Corporations
Savings associations Opportunity funds
Commercial banks
REIT = Real Estate Investment Trust
Mortgage Markets
Introduction
Types of Markets
1) Primary: loans originated
2) Secondary: loans traded
Property Types
1) Single Family
2) Multifamily and Commercial
Mortgage Markets
Total Mortgages Outstanding
1994
Property Type Outstanding Percent
(billions) of Total
1- to 4- SF $ 3,217.0 75.2%
Multifamily 291.6 6.8
Commercial 688.2 16.1
Farm 82.2 1.9
TOTAL $ 4,279.0 100.0%
Mortgage Markets
The Primary Single Family Mortgage Market
Types of Mortgage Loans
1) Conventional
A) Conforming vs Nonconforming
B) Insured vs Uninsured
2) FHA (insured) Loans
3) VA (guaranteed) Mortgages
4) Rating System
Mortgage Markets
The Primary Single Family Mortgage Market
Sources of Mortgage Loans
1) Depository Institutions
a) Savings Institutions
i) Savings and Loan Associations
ii) Savings Banks
iii) Credit Unions
b) Commercial Banks
2) Nondepository Lenders
a) Mortgage Bankers
b) Mortgage Brokers
c) Private Firms (GMAC, AT&T Capital)
Mortgage Markets
The Primary Single Family Mortgage Market
Sources of One- to Four- Family Originations
Year Total Savings Commercial Mortgage Other
(billions) Institutions Banks Banks
1985 $245.8 46% 21% 31% 2%
1990 376.7 35% 36% 27% 1%
1995 561.5 20% 26% 53% 1%
Mortgage Markets
The Secondary Market For Residential Mortgages
I) Institutions
1) Government/Government-Sponsored Enterprises (GSE)
A) Government National Mortgage Association (GNMA)
B) Federal National Mortgage Association (FNMA)
C) Federal Home Loan Mortgage Corporation (FHLMC)
2) Private Institutions
A) Investment Banks
B) Life Insurance Companies
C) Pension Funds
D) REITs
Mortgage Markets
The Secondary Market For Residential Mortgages
II) Securities
A) Conventional Passthrough Mortgage Securities
i) GNMA MBSs
ii) Freddie Mac PCs
B) Sequential Pay Securities
i) Collateralized Mortgage Obligations (CMOs)
ii) Real Estate Mortgage Investment Conduits
(REMICs)
Mortgage Markets
The Secondary Market For Residential Mortgages
Federal National Mortgage Association
“Fannie Mae”
Established in 1935 to initiate a secondary mortgage market
Rechartered in 1954 with three objectives
1) enhance secondary market for FHA/VA loans
2) manage direct loans/defaulted properties
3) manage special assistance programs
(e.g. subsidized mortgage loan programs)
Made private by the Housing and Urban Development Act of
1968 (traded on NYSE)
Mortgage Markets
The Secondary Market For Residential Mortgages
Federal Home Loan Mortgage Corporation
“Freddie Mac”
Created by Title III of the Emergency Home Finance Act of 1970
To provide a secondary market for conventional mortgages
A privately owned corporation (traded on NYSE)
Mortgage Markets
The Secondary Market For Residential Mortgages
Government National Mortgage Association
“Ginnie Mae”
Division of US Department of Housing and Urban
Development
Created in 1968 to
1) manage/liquidate FNMA mortgages
2) support Federal subsidized housing
3) guarantee FHA-VA mortgage pools
Major risk: issuer default
Mortgage Markets
The Primary Commercial Mortgage Market
Sources of Commercial Mortgages (1994)
Lender Outstanding Percent
(billions)
Commercial banks $ 388.0 6.5%
Savings institutions 123.4 11.6
Life Insurance Companies 208.2 19.6
Federal and related agencies 86.5 8.1
Mortgage pools and conduits 66.8 6.3
Others (e.g. Individuals, Pension 189.1 17.8
funds, REITs, Investment banks,
Mortgage companies)
TOTAL $ 1,062.0 100.0%
Mortgage Markets
The Primary Commercial Mortgage
Market
Types of Loans
1) Conventional Fixed Rate
2) Balloon (term < amortization period)
3) Floating Rate
4) Installment Sales
5) Participations
6) Convertible
Mortgage Markets
The Secondary Commercial Mortgage Market
1) Commercial Mortgage Backed Securities
A) Typically NOT insured
B) Backed by commercial lease agreements
C) Nonrecourse debt
2) Real Estate Investment Trusts (REITs)
A) Mortgage REITs
Introduction to CMBS
What is a CMBS?
A commercial mortgage-backed security (CMBS) is a financial asset
created when an issuer places a commercial mortgage (or collection of
mortgages) into a trust and the trust issues classes of bonds backed by the
underlying principal and interest payments.
Today we will examine:
The income property debt market
The anatomy of a CMBS
Introduction to CMBS
The Income Property Debt Market
Income Property Debt Outstanding
(Millions of Dollars, end of period)
Year Multifamily Commercial Total
1990 309,326 758,189 1,067,515
1991 306,392 758,739 1,065,131
1992 295,417 716,687 1,012,104
1993 291,985 706,780 998,765
1994 275,005 682,044 957,049
1995 287,483 705,719 993,202
1996 312,388 774,960 1,087,348
1997 332,200 835,372 1,167,572
1998:1 339,789 854,949 1,194,738
Source: Federal Reserve Bulletin
Introduction to CMBS
The Income Property Debt Market
Income Property Debt Holders
(Millions of Dollars, end of period)
Year Financial Federal/ Non-Agency Others
Institutions Agency CMBS
1990 816,737 78,318 5,897 166,562
1991 784,319 93,731 10,177 176,904
1992 730,915 82,294 21,499 177,395
1993 701,229 85,380 34,170 177,987
1994 686,898 76,027 51,699 142,424
1995 701,577 73,386 68,659 149,578
1996 724,886 74,361 97,153 190,947
1997 758,514 75,531 138,787 194,740
1998:1 766,326 76,193 157,127 195,091
Source: Federal Reserve Bulletin
Introduction to CMBS
The Income Property Debt Market
Income Property Debt Holders
(Percentages, end of period)
Year Financial Federal/ Non-Agency Others
Institutions Agency CMBS
1990 76.51% 7.34% 0.55% 15.60%
1991 73.64% 8.80% 0.96% 16.61%
1992 72.22% 8.13% 2.12% 17.53%
1993 70.21% 8.55% 3.42% 17.82%
1994 71.77% 7.94% 5.40% 14.88%
1995 70.64% 7.39% 6.91% 15.06%
1996 66.67% 6.84% 8.93% 17.56%
1997 64.97% 6.47% 11.89% 16.68%
1998:1 64.14% 6.38% 13.15% 16.33%
Source: Federal Reserve Bulletin
Introduction to CMBS
The Income Property Debt Market
CMBS Holders
(Millions $, end of period)
Year Federal/ Non-Agency Total
Agency CMBS
1990 28,761 5,897 34,658
1991 26,121 10,177 36,298
1992 23,847 21,499 45,346
1993 22,471 34,170 56,641
1994 22,451 51,699 74,150
1995 26,898 68,659 95,557
1996 32,499 97,153 129,652
1997 37,794 138,787 176,581
1998:1 38,995 157,127 196,122
Source: Federal Reserve Bulletin
Introduction to CMBS
The Income Property Debt Market
Non-Agency CMBS Outstanding
(Millions of Dollars, end of period)
Year Multifamily Commercial Total % of All Debt
1990 731 5,166 5,897 0.55%
1991 3,698 6,479 10,177 0.96%
1992 6,305 15,194 21,499 2.12%
1993 8,701 25,469 34,170 3.42%
1994 14,925 36,774 51,699 5.40%
1995 21,279 47,380 68,659 6.91%
1996 33,689 63,464 97,153 8.93%
1997 48,261 90,526 138,787 11.89%
1998:1 54,680 102,447 157,127 13.15%
Source: Federal Reserve Bulletin
Introduction to CMBS
The Income Property Debt Market
The Commercial Mortgage Conduit Business
Year Total CMBS Issuance Conduits
(Billions $) % (Billions $) % of Total
1994 $ 20.3 $ 2.6 12.8%
1995 19.0 - 6.4% 4.4 23.2%
1996 29.9 57.4% 10.2 34.1%
1997 44.3 48.2% 21.9 49.4%
1998:1 19.6 12.7 64.8%
1998:E 66.5 50.0% 43.2 65.0%
Source: Commercial Mortgage Alert
Real Estate Investment Trusts
(REITs)
A corporation that:
1. invests most (at least 75%) of its capital in real estate
(either equity or debt);
2. derives at least 75% of income from real property rents, interest
on obligations secured by mortgages, gains from real estate sales,
dividends or gains from other REITs;
3. derives no more than 30% of gross income from the sale of
real property held less than 4 years; and
4. distributes AT LEAST 95% of taxable income to shareholders.
REIT distributed income not subject to corporate income tax!
Real Estate Investment Trusts
(REITs)
Types of REITs
1. EQUITY: hold at least 75% of invested assets in the ownership
of real estate.
2. MORTGAGE: hold at least 75% of invested assets in mortgages
secured by real estate.
3. HYBRID: neither mortgage nor equity REIT.
Real Estate Investment Trusts
(REITs)
REIT Annual Market Capitalization
($ Millions)
Equity
without
Year All Equity Mortgage Hybrid Health Care
----------------------------------------------------------
1972 1,880.9 377.3 774.7 728.9 377.3
1977 1,528.1 538.1 398.3 591.6 538.1
1982 3,298.6 1,071.4 1,133.4 1,093.8 1,071.4
1987 9,702.4 4,758.5 3,161.4 1,782.4 3,939.7
1992 15,680.2 11,008.9 1,948.8 2,722.5 8,764.7
1993 32,158.7 26,081.9 3,398.5 2,678.2 23,096.8
1994 44,306.0 38,812.0 2,503.0 2,991.0 35,588.3
1995 57,541.0 49,913.0 3,395.0 4,233.0 45,885.0
1996 88,776.3 78,302.0 4,778.0 5,696.0 73,593.0
1997 140,534.0 127,825.0 7,370.0 5,338.0 121,779.0
Market Capitalization is the aggregate of each company's
price on the last business day of the year times the
number of shares outstanding.
Real Estate Investment Trusts
(REITs)
Historical Offerings of Securities by REITs
INITIAL SECONDARY UNSECURED MORTGAGE
ALL EQUITY EQUITY DEBT BACKED
Number Total # Total # Total # Total # Total
1982 9 435.1 3 315.0 5 115.1 1 5.0 0 0.0
1983 23 747.0 4 159.0 15 438.0 4 150.0 0 0.0
1984 18 1,438.4 6 140.4 8 173.0 4 1,125.0 0 0.0
1985 59 4,270.6 29 2,791.9 17 412.7 12 939.0 1 127.0
1986 63 4,668.9 20 1,204.4 17 623.7 5 315.9 21 2,524.9
1987 50 2,929.2 12 634.4 15 733.0 4 248.0 19 1,313.8
1988 37 3,068.7 13 1,374.2 13 785.0 6 335.3 5 574.3
1989 34 2,440.8 11 1,074.5 15 722.1 3 150.0 5 494.2
1990 24 1,765.2 10 882.0 8 389.2 4 294.0 2 200.0
1991 35 2,288.6 8 808.4 20 786.2 3 169.0 4 525.0
1992 57 6,515.1 8 919.2 24 1,054.5 9 819.6 16 3,721.8
1993 141 18,326.6 50 9,335.4 50 3,856.3 18 1,352.6 23 3,782.3
1994 145 14,721.0 45 7,175.8 52 3,944.5 26 2,093.8 22 1,506.9
1995 195 12,493.4 8 939.3 93 7,321.4 73 3,444.0 21 788.7
1996 225 17,455.8 6 1,107.8 139 11,200.9 76 4,753.9 4 327.5
1997 463 45,270.9 26 6,296.5 292 26,377.6 134 10,568.2 11 2,028.6
Real Estate Investment Trusts
(REITs)
REIT Returns: 1987-1997
Equity
Without
Year All Equity Mortgage Hybrid Health Care
--------------------------------------------------------
1987 -10.67% -3.64% -15.67% -17.58% -4.48%
1988 11.36% 13.49% 7.30% 6.60% 15.75%
1989 -1.81% 8.84% -15.90% -12.14% 4.64%
1990 -17.35% -15.35% -18.37% -28.21% -23.62%
1991 35.68% 35.70% 31.83% 39.16% 29.42%
1992 12.18% 14.59% 1.92% 16.59% 20.66%
1993 18.55% 19.65% 14.55% 21.18% 18.70%
1994 0.81% 3.17% -24.30% 4.00% 2.99%
1995 18.31% 15.27% 63.42% 22.99% 14.21%
1996 35.75% 35.27% 50.86% 29.35% 36.40%
1997 18.86% 20.26% 3.82% 10.75% 20.52%
Annual total returns represent price appreciation, plus
actual dividends paid, plus dividends reinvested on a
monthly basis, during the year for companies which have
been included in the index for the entire period.
Year Equity REITs Russell2000 SP500 CPI
1979 1.3586 1.4309 Nominal 1.1329
1.1844 Returns: 1979-2004
1980 1.6896 1.9830 1.5684 1.2747
35.0000
1981 1.7910 2.0232 1.4914 1.3885
1982 2.1779 2.5280 1.8107 1.4417
1983 2.8452 3.2644 2.2183 1.4963
1984
30.0000 3.4406 3.0260 2.3573 1.5554
1985 4.0976 3.9656 3.1154 1.6145
1986 4.8826 4.1910 3.6908 1.6322
1987 4.7049 3.8235 Equity REITs 1.7046
3.8839
25.0000
1988 5.3394 4.7753 4.5368 1.7799
Russell2000 1.8626
Cumulative Return
1989 5.8115 5.5507 5.9654
1990 4.9193 4.4679 5.7762 1.9764
20.0000
1991 6.6753 6.5254 7.5407
SP500 2.0369
1992 7.6492 7.7268 8.1191 2.0960
1993 9.1526 9.1877 8.9302 2.1536
CPI
1994
15.0000 9.4428 9.0203 9.0470 2.2112
1995 10.8845 11.5858 12.4332 2.2674
1996 14.7231 13.4967 15.3021 2.3427
1997 17.7060 16.5147 20.4072 2.3826
10.0000
1998 14.6070 16.0941 26.2399 2.4210
1999 13.9322 19.5153 31.7620 2.4860
2000 17.6055 18.9258 28.8700 2.5702
5.0000
2001 20.0584 21.9728 27.2994 2.6100
2002 20.8248 17.2314 20.9206 2.6721
2003 28.5578 25.0498 26.4396 2.7223
2004
0.0000 30.3542 25.9727 25.8261 2.9557
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