The strong run of CMBS in the European market in 2021 reached its high point during the middle of summer. The deal was Morgan Stanley's second CMBS of the year, from its European Loan conduit platform, and saw its spreads land way inside initial marketing levels and post the tightest Triple A CMBS print since the financial crisis.
HAUS (ELOC 39) is a €315.5m securitisation of a single senior loan advanced by the bank to finance Brookfield's acquisition (via eight affiliates) of a German multi-family residential portfolio managed by a newly formed management company called Belvona.
"The reason Morgan Stanley funded the loan, instead of the German local banks that usually fund multi-family, is the very bespoke nature of the portfolio. You typically see sub 5% vacancies in German multi-family assets, but because of its previous ownership this portfolio had a 30% vacancy," said Sree Mitra, a securitisation and real estate banker in Morgan Stanley’s global capital markets division.
The previous owner did not renovate unmodernised units, nor did it lease out those units on cheap, long-term leases, which led to the unusually high vacancy rate. Brookfield plans to renovate more than one-third of the portfolio over the next two years.
A bespoke portfolio – 6,281 residential units across 92 sites – required a bespoke CMBS, which was designed with what Morgan Stanley described as a defensive, RMBS-like structure. It has a five-year expected redemption date and none of the balloon refinancing seen in most European CMBS.
The loan structure was designed to accommodate Brookfield’s extensive refurbishment and lease-up business plan, and to protect CMBS investors by €62.8m of fully funded reserves to top up rental income and fund capex requirements throughout the process.
It had been eight years since the previous German multi-family securitisation and scarcity value, as well as the name of the underlying sponsor, ensured full investor engagement.
The €194.2m Class A1 (Aaa/AAA) priced at 65bp over three-month Euribor on an order book 1.9 times subscribed, after starting out at 75bp–85bp. Orders peaked at 2.1 times. Spreads were also tightened right across the capital structure: the €19.1m A2s (rated Aa2/AAA), priced at 85bp on a 2.2 times subscribed order book. Lower down the capital stack, the B, C and D notes hit 110bp, 140bp and 200bp. All tranches had five-year expected weighted-average lives, and the weighted-average coupon was three-month Euribor plus 98.5bp.
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