Australian investment banking and management firm, Macquarie, and Des Moines, Iowa-based Principal Real Estate Investors have joined forces to launch Principal Commercial Capital to co-manage commercial mortgage backed securities.
Macquarie has staffed up its New York office with CMBS experts from banks over the last three to six months and later decided to link up with Principal and its already well-tenured mortgage lending group, the two firms announced last week.
Timothy Gallagher, who recently joined Macquarie from Morgan Stanley, told PDI that Principal’s expertise in the space was an attractive asset to Macquarie, which up until now hasn’t dealt in mortgage securitization.
“Principal has experience in origination, underwriting, servicing and closing these deals and all the skills you need to execute this business,” he said, adding that a lot of the people at Principal have worked together for many years on CMBS transactions.
Macquarie, for its part, recently brought on five new staffers from banks to originate US mortgages. Gallagher himself joined in June as a managing director and head of commercial real estate markets. He has previously worked as a managing director at Morgan Stanley and at Goldman Sachs.
Phil Miller and Charles Citro also came on board as managing directors. Miller was previously head CMBS desk strategist at Morgan Stanley and an originator at Merrill Lynch before that. Citro was a managing director at Goldman Sachs. Stephen Schwartz also joined as a senior v.p. at Macquarie from RBC Capital Markets, where he was head of CMBS Trading. He has also previously held trading and CMBS securitization roles at Deutsche Bank and Prudential. Conor D’Alton was hired as an associate in CMBS trading. He was in securitized product sales at Barclays and held origination and underwriting and asset management positions at Anglo Irish Bank in New York in the past.
“The fixed income groups at the banks have been shrinking and it’s a difficult position to be in right now,” Gallagher said. He added that bankers have been leaving of their own accord as these groups get squeezed at the banks. “It’s a personal choice that people are making, but the banks are still a tough place to be, as their revenues shrink in those departments.”
Executives at both firms will work on originating and structuring the deals. “We’ll both have skin in the game and be bringing our strengths to the table,” said Margie Custis, managing director at Principal. The group will focus on office, retail, multifamily, industrial and hospitality properties.
Gallagher told PDI he thinks the commentary about the mortgage market overheating again is largely overblown. “We’ve done an analysis of the market and how it looks relative to 2007 and there is still something like $75 billion in capacity that’s gone,” Gallagher said, explaining that many of the large banks that used to play in the space have disappeared (like Bear Stearns or Lehman Brothers) or no longer deal in these activities.
“There are many smaller new lenders out there, but the number of big lenders is fewer,” he said. “We’re not looking to be the largest lender out there, nor are we looking to be the 30th,” he added. Gallagher said he hopes the group will be in the top 10 among CMBS originators going forward and would look to do $1-$2 billion in deals per year, with about a deal per quarter.
Custis added that Principal’s experience in managing CMBS strategies should help it avoid shoddy mortgage deals. The new platform will focus on all major property types nationwide, with loan terms typically in the five- to 10-year range and loans between $5m and $100m. The firm has a track record as a CMBS loan originator and seller dating back to 1999. The firm has contributed almost 2,000 loans across 50 securitizations.
“We’re not new to the market, we’ve been active lender for decades, we have established relationships around the country and our average staff member has 15 years of experience,” she said. Principal’s track record in managing CMBS has some of the lowest default rates and losses in the market, Custis said, and she is confident that the firm will continue to originate deals that deliver top quartile performance to investors.
Principal Real Estate Investors manages or subadvises $52.6 billion in commercial real estate assets, which include public and private equity and debt investment alternatives. Principal Real Estate Investors is the dedicated real estate group of Principal Global Investors, which handles $311 billion across a variety of public and private, traditional and alternative assets and strategies.