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CDO Use Continues to Grow

Commercial real estate financiers are getting a lot of mileage out of their newest toy--commercial real estate collateralized debt obligations. Everyone at the show calls them CRE CDOs. (It rolls off the tongue easier the more you practice saying it.) The final data for 2006 presented at CMSA's CMBS Investor Conference shows that CRE CDO issuance grew to $34.3 billion in 2006--a 62 percent gain from 2005 and more than four times the volume of issuances in 2004. (Robert Ricci, managing director for Wachovia Securities projects 2007 volume to reach $60 billion)

There are a lot of differences between CMBS and CDO--too many to try and encapsulate here. The key difference is that issuers have the option to actively manage the pool of assets inside CRE CDOs. They can cycle loans in and out, change property types, change geographic distribution (all within limits, of course). Issuers are also not limited to fixed-rate mortgages. It can include that, but more commonly includes floating rate debt of all stripes. Managed pools can also include REIT and REOC debt, mezzanine financing, preferred equity and other derivatives. Another difference is that unlike with CMBS issuances, sponsors can (and often do) retain ownership of some of the pool.

From a sponsor standpoint, it seems to be an attractive option and CRE CDOs promise to play a growing role in provding financing for the commercial real estate sector. And, because the pools are actively managed, sponsors can charge higher fees--as high as 45 basis points compared with 20 basis points for CMBS.

Despite the explosion in CRE CDO issuances, it does have a long way to go to catch up to the popularity of CMBS. CMBS issuances reached $299.2 billion in 2006--a $60 billion gain over 2005 and more than double 2004's volume of $128 billion.

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