RBC Bankers Pitch Canada Strip Mall Bonds on Wall Street

Norm Camire, the head of Canadian commercial mortgage-backed securities at Royal Bank of Canada, is spending a lot more time with U.S. investors.

Demand is climbing for securities backed by bundled-up commercial mortgages from apartment buildings, malls and office towers as investors are attracted by higher relative yields to U.S. debt and lower risk of default. RBC became the first of Canada’s six major banks last year to regularly issue CMBS in seven years, since before the global financial crisis.

“It’s all about the yield,” said Camire, who expects to spend several weeks in the U.S. this year meeting with investors in cities including New York, Boston and Philadelphia, compared with only a few days last year. “When we open the book for pricing, Canadian deals tend to oversubscribe fairly quickly.”

Issuance of Canadian CMBS will exceed C$2 billion ($1.6 billion) this year, compared with C$1.1 billion in 2014, according to the mortgage-services firm CMLS Financial Ltd. Royal Bank, the nation’s biggest lender, forecasts that issuance will reach C$3 billion in 2016 as demand from U.S. pension funds and asset managers rises.

Delinquencies on U.S.-issued CMBS peaked at 12.6 percent in June 2011, data compiled by the Toronto-based credit-rating company DBRS Ltd. show. That compares with a high of 2.6 percent in November 2009 for Canadian debt. U.S. delinquencies rose to 6.6 percent last month, while Canadian debt levels remained below 1 percent, the data show.

Smaller Market

At the same time, the market in Canada remains small relative to the U.S., raising concern among investors about the ability to easily trade the securities. Four Canadian CMBS issues were sold last year, compared with about 300 in the U.S. over the same period totaling about $183 billion, according to data compiled by Bloomberg.

Canadian-dollar denominated CMBS are seen as even safer by investors and command a bigger yield premium over U.S. peers since the market is smaller, according to DBRS.

“Historically, Canadian CMBS is safer because the underwriting standards are more conservative,” Karen Gu, senior vice president of global CMBS at DBRS, said by phone Tuesday. “Across metrics, it’s all more favorable for Canadian CMBS.”

In the past few years, between 30 percent and 60 percent of investors in Canadian CMBS were U.S.-based, according to CMLS Financial.

Relative Value

Canadian CMBS offerings maturing in five to 10 years and rated AAA are usually priced slightly cheaper to their U.S. equivalents, according to Yves Locas, head of debt syndication at National Bank of Canada.

Royal Bank led the Real Estate Asset Liquidity Trust CMBS bond sale in October 2014. The second-largest portion with a maturity of 5.5 years priced with a coupon of 2.56 percent. That same month, Government National Mortgage Association priced the six-year tranche of a $391 million bond sale, GNR 2014-155, with a coupon of 2.3 percent.

“Investors are able to look at Canada’s pristine record and garner a slightly wider spread, so they’re going to pick up their pencil and do the work,” Locas said by phone Tuesday.

In Canada, the majority of CMBS bonds back retail areas, including Manning Crossing, a shopping center in Edmonton, Alberta, with a grocery store and Tim Hortons coffee shop. As the Canadian CMBS market expands, it’s also getting more creative. Mortgages for storage facilities, inns and industrial parks are becoming more common as part of CMBS deals.

Historic District

One of the largest properties backing a Canadian CMBS transaction is Toronto’s historic Distillery District area, a cobblestone-paved neighborhood lined with cafes, high-end clothing stores and art galleries that was a whiskey maker in the 1800s. The loan refinancing the mixed-use site is part of the most recent Canadian CMBS offering of C$325 million from IMSCI, scheduled to close this week, according to DBRS.

Investors including pension funds and money managers “buy into Canada and the stability and performance,” Glen Malcolm, CMLS Financial senior vice president, said by phone from Toronto. “And a lot of them say ‘hey, you know what? We get a little bit of a spread pick-up, too.’”

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