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Asset Securitization Report

Cantor Targets the Middle Market and More

June 2011

In April, Cantor Fitzgerald & Co. came to market with its debut new-issue CMBS transaction that was backed by loans originated by Cantor Commercial Real Estate (CCRE), a real estate financing business formed by Cantor Fitzgerald and CIM Group in August 2010.

This $634.5 million deal is noteworthy as well for the sector since it is the first time in close to 10 years that a newcomer into the business has originated, securitized and lead-managed its own deal.

"It was well received judging by the number of investors that participated and looking at the secondary market for it as well," said Shawn Matthews, chief executive officer of Cantor Fitzgerald & Co. "We're excited about the reception and about the next deal to come."

"The depth and breadth of the book was very deep," said Anthony Orso, chief executive officer of CCRE. "We're very excited about it and we are certainly going to be in the market on a regular basis."

Despite having to compete with bigger shops, both Matthews and Orso feel confident that they have found their niche - the middle market.

"From a holistic standpoint we are trying to look at the middle market where we have the opportunity and take advantage of it aggressively," Matthews said. "Certainly as an investment bank we're targeting the middle market as our focal point. But that's not to say we are not doing other facets of the business, although we have built expertise there. We have a niche that we can capitalize on and we are going to aggressively go after."

He mentioned that many of the regional and local banks that served as middle-market commercial banks are either out of the business or don't exist anymore. Additionally, there are a number of investment banks, including Merrill Lynch, Bear Stearns and Lehman Brothers, that were involved in the middle-market segment that have also disappeared from the sector. "For us, it's a market segment that we're very focused on," Matthews noted. "We've built a platform that will help us compete very aggressively in those areas."

The presence of CCRE, which has offices in New York, DC, Chicago, Atlanta, Dallas and Los Angeles, in various parts of the country allows the firm to serve this middle-market niche. "We built a national CMBS business and we've been able to focus on the middle-market commercial lending segment since we have people on the ground and we're seeing many opportunities," Orso said.

This has also helped in terms of the recent CMBS transaction where "we were very focused on having a well-balanced pool so by seeing a lot of transactions we were able to pick and choose the sponsors that we wanted," he added.

A First

Cantor Fitzgerald & Co.'s first offering called CFCRE Commercial Mortgage Trust 2011-C1 was rated by Moody's Investors Service, Fitch Ratings and Realpoint.

"We used three agencies on this transaction because as a new issuer we wanted to make sure that the investor community felt very comfortable with our first transaction," Orso said. "The ratings speak for themselves; I think we achieved a very good subordination level due to the high-quality loans that were in our pool."

However, one concern that investors had was regarding the level of leverage in the collateral backing the deal. As ASR earlier reported, the 2011-C1 offering was more highly leveraged than recent CMBS transactions since it had an issuer-reported LTV of 67.6% compared with a weighted average of 62% for more recent deals.

Orso said that there are two reasons why CCRE's first CMBS had slightly more leverage versus other CMBS 2.0 transactions. First, the deal did not have any investment-grade-only loans. Second it focused on the multifamily sector, which Orso said "is probably the best credit component in the marketplace so we feel better making slightly higher-LTV loans in multifamily product."

The Cantor deal was also backed by U.S. General Services Administration (GSA) loans, which are long-term credit leases to key federal agencies. The loans were on newly built construction, and the history of those leases is that the government generally renews them approximately 98% of the time and the pool had no early-termination loans, Orso said. "All of the underwriting for the deals we've done and the transactions we intend to do are based on existing, in-place income," he stated.

In its presale report about the 2011-C1 transaction, Fitch cited the deal's favorable property type mix, mentioning that the pool had no hotel properties and had less exposure to retail properties, which comprised 27% of the pool, compared with recent conduit CMBS. Multifamily properties made up 22% of the pool.

Orso said that Cantor's CMBS loans are representative of the other loans that have gotten done under CMBS 2.0. "I think they are well-structured, wellunderwritten transactions focused on in-place cash flow only," he stated. "The investor community has spoken very clearly and loudly over the last few years about the quality of transactions that they expect and I think the underwriters like us are adhering to that. The important distinction is that people are underwriting existing cash-flow and we did the same thing."

Clearly, the focus is on the quality of loans. "The market in 2.0 has proven that people are taking today's underwriting standards very seriously," Orso noted.

Another hesitation that investors raised about the transaction is that, given its size, the offering will not be as liquid as other larger recent transactions, raising doubts about the firm's willingness to support its bonds.

Matthews allayed these fears. "We are 100% going to support any and all of our deals. Being a first-time issuer that's the only thing they can go after us for and we have done it," he said. "We've supported the deal in the secondary market. There's plenty of liquidity in the name and we will continue to support any primary deal that we have."

After initially partnering with Wells Fargo for its debut deal, Cantor instead issued its first transaction with Barclays Capital as co-lead and CastleOak Securities as co-manager on the offering.

The company, as mentioned earlier, plans to participate in the CMBS market on a regular basis.

Whether it will play all the same roles in its future offerings as it did for its debut deal has yet to be seen. "We've proven we have the capability to do it," Matthews said. "That's certainly what we'll determine on a case-by-case basis. But clearly in the marketplace we have defined ourselves as an entity that could do all facets of the securitizations, all through the distribution and supporting the deal in the secondary market."

Matthews is taking his cue from the firm's experience with its first offering in terms of its place in the CMBS segment. "We think we're actually penetrating it very quickly and we got our deal to market probably quicker than any of us ever thought when we started it," he said. "Now it's about how do we take the next step. With the maturation of our investment bank and as we continue to grow the franchise, we will look for other opportunities as well."

The reemergence of the CMBS market seems to be laying the groundwork for Cantor's future plans. "We believe that the CMBS market is back," Orso said."There's $1.5 trillion dollars of loans coming due in the next four years with many local and regional banks out of the commercial real estate business. We have a place in the market for middle-market commercial lending. We believe that we can help fill that void." - KS

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