Basis closes B-piece acquisition as CMBS relative value plays emerge 

The firm compared the leverage and yields on the B-piece with similar metrics for preferred equity or mezzanine debt investments.

Basis Investment Group, which earlier this month acquired the B-piece of a new issue commercial mortgage-backed securities deal, sees a strong relative value play in this segment of the market.   

The New York-based investment manager acquired the non-investment grade bonds of BANK5 2023-5YR1, a $1.025 billion securitization of five-year CMBS loans originated by Wells Fargo, Citibank, Morgan Stanley and Bank of America. The deal is backed by first mortgages on 134 office, retail, multifamily, hotel and self-storage properties throughout the US. The firm made the acquisition via its BIG Real Estate BP II fund.

BANK5 2023-5YR1 is the second-ever CMBS conduit deal to come to market that consists of only five-year loans, a shift from the 10-year maturities typically seen in this kind of securitization. 

In its analysis, the firm compared the leverage and yields on the B-piece with similar metrics for preferred equity or mezzanine debt investments, said Tammy Jones, founder and chief executive. A key part of this analysis is the fact that this deal, like other CMBS conduits, is comprised entirely of first mortgages. 

“We are looking to find good risk-adjusted returns for our investors,” Jones said. “When you look at where B-pieces are trading relative to mezzanine debt and preferred equity and consider that mezzanine debt and preferred equity are higher leverage than the first mortgages [in the CMBS pool], it is a chance to get higher yields while still being a part of a first mortgage.” 

The weighted average LTV in the pool is in the range of about 55 percent, compared with about 75-80 percent for mezzanine debt or preferred equity investments. “It is very appealing in a risk-off environment, especially for a fund like ours which focuses on attractive risk-adjusted returns and preservation of capital,” Jones added. 

Jones noted, however, that this specific opportunity is somewhat transitory, given the historical movement in CMBS loan-to-value ratios. “There are times when CMBS is much more aggressive and leverage is pushing the high 60 to low 70 percent range in some deals and the timing is important,” she said. 

CMBS B-pieces are typically privately placed through an invitation-only process, with only a handful of firms selected to come to the table. This is the fifth B-piece Basis Investment Group has acquired but it remains significant that a woman- and African American-owned company is now part of this process. 

“For many years, these coveted, high barrier-to-entry B-piece opportunities were routinely only awarded to majority owned firms,” Jones said. “In the trillions that have been done in the past two decades, there has been limited access to women and people of color. I have made it my personal mission to create access to opportunity to all by showing that Basis, as a woman- and African American-owned firm, could execute seamlessly. My hope is that will open the door to other diverse-owned firms coming up behind Basis.” 

She continued: “These are private placements, relationship-based awards and what we are trying to do is ensure that we are breaking down barriers and promoting relationships. I want other firms to think about CMBS B-pieces as part of their investment strategy if they follow a diversified investment strategy.” 

Looking ahead, Jones sees opportunity despite current challenges and notes that ultimately, buyers, sellers and lenders will have to move ahead as the market faces an estimated $1.5 trillion of maturities over the next two years. 

“I formed my firm during the GFC, and I see opportunity where others may not. We are in a mini banking crisis, we are seeing recessionary trends and we have rates that are much higher than the last decade of almost free money,” Jones said. “Volumes are down because we are not yet at a level where buyers and sellers will begin to capitulate. That said, there are many opportunities in both debt and equity and Basis has the capital to transact.”