• 1-800-123-789
  • info@webriti.com

Category ArchiveCREFC 2018

Freddie Mac’s David Leopold on the Insatiable Demand for Multifamily

Freddie Mac has been a trailblazer when it comes to affordable multifamily housing, delivering record numbers and leading the nation as the top multifamily financier in each of the last three years. David Leopold is at the forefront of Freddie’s presence in the affordable housing space, which accounted for 83 percent of eligible units financed by the government-sponsored enterprise in 2017.

Commercial Observer caught up with Leopold last month at the MBA Commercial Real Estate Finance Convention and Expo to talk about Freddie’s footprint, it’s new products and what’s in store for 2018.

Commercial Observer: Can you explain your focus at Freddie Mac?

David Leopold: One thing Freddie Mac is focused on is touching all corners of multifamily. So, in that broad scope, affordable housing means a couple of different things. It means naturally occurring affordable, which is C, B-minus, product that just happens to be affordable, and then there’s targeted affordable, which is what my team focuses on. And when I say targeted affordable, I mean properties that have at least a portion of the units with rent restrictions to maintain affordability for a long period of time. That generally means our borrowers have traded some rights to raise rents for all of some of the units in exchange for public consideration. So, that’s what we mean by targeted affordable.

Can you speak to the increased demand for multifamily and how Freddie Mac is looking to fill it?

Demand is insatiable in much of the country right now. Those areas—you know, the high-barrier to entry markets—are experiencing dramatic affordability crises and the challenge is not finding people to full the units, it’s finding enough units to accommodate that demand.

What areas specifically are of interest or have seen increased demand?

It’s more common that not just about everywhere, but it’s focused on the high-barrier to entry markets, so markets that have seen a lot of growth or a lot of job opportunities. That generally coincides with more people wanting to live in those markets because there are more job opportunities.

I know Freddie has introduced new products recently. Can you talk about that?

We invested in the platform with a real focus on innovation. And, there’s two specific programs that are advancing the current platform and there’s wholesale, new businesses that we’re developing. In terms of advancing the existing platform, we’re continually tweaking our products. Specifically, in 2017, we spent a lot of time and effort to increase our volume in cash-preservation deals, so these are generally refinancings or acquisitions of deals that have existing restrictions on them, and the owners would like to keep them affordable. So, our job is to help provide the senior debt at a efficient, but aggressive, levels to help them maintain that affordability and also keep the units decent and up-to-date and so forth. Last year, we did over $2 billion of that and that goes K-deals. So, we’re using the strength of our conventional business to source low cost of capital to keep our rates low for affordable. Last year it was very successful.

Can you speak to what you’re doing in the tax-exempt space?

We’ve really driven innovation there. Historically, we were a bond shop, so the diversification of our product set was really going from bonds and into other things—cash preservation. But, at the same time, we really focused on that core competency and tried to wring out any fat there is in terms of tax-exempt finance. That was a multistage process: We went from publicly issued bonds to tax-exempt loans (TEL). That’s a huge step because that’s a direct placement product and there’s no public issue, so now you have fewer transaction costs. Since then, we’ve continued to augment. At first we were doing immediate tax-exempt loans, now forward (executions) have actually become a bigger growth engine that immediates. We also just added what we call Flex TEL (flexibile tax exempt loan), which is a float-to-fixed version and makes it more efficient for rehabs. To the extent that we can get closer to the deal and not need a construction lender for rehab, we want to do that because that drives costs down and helps us reach more borrowers and helps us preserve more units. So, TEL has been tremendously successful, not only because of the innovation on the front end, but also in the way we source capital on the backend.

What are some challenges facing the affordable housing market going forward?

The biggest is that deals are getting harder to do because costs are up—hard costs are up across the board. Interest rates are rising. And, these deals take subsidy. The ability to restrict rents comes at a cost and that cost demands some form of public subsidy, which is hard t come by. I mean, budgets are tight and rates are up, right? And specifically, tax reform has also reduced the value of low-income housing tax credits, which is the single biggest capital subsidy in the business. What we saw last year was that the likelihood of tax reform was bad enough. The market perceived uncertainty and investors pulled back, so there was less demand for credits and value went down. That happened again in November, when the market was trying to figure out where the corporate tax rate would ultimately land. So, there was a fairly material disruption in tax equity markets, making deals harder to do. Now that tax reform is done and we know what the corporate rate is, so the markets are back but they’re back at a lower value per credit. The specifics there are that tax credits are worth less per tax credit so you need more credits to equal the same amount of subsidy, and more credits per deal means fewer deals. So, that’s been a challenge.

So, how do you face that challenge?

Product development is a huge part of my job and a huge value that are platform creates. Every time we develop or tweak a product in targeted affordable towards helping borrowers maximize whatever subsidy is in the deal. If our product can help generate more free money, that money can go farther, and we can do more deals. That’s how we think about it. In a market disruption, we can continue to innovate our product sets.

Can you speak to Freddie Mac’s growth over the last year, having hit record highs?

We had record growth in our targeted affordable business, and that’s $8.6 billion this year, from $5.6 billion last year (2017), so we feel good about that. Also, we’re targeting more units. We need to do well and be sustainable as we continue to invest, but also do well and make sure we’re meeting out mission. If you look at the number of very low income units produced by the platform, the amount of growth and the amount of borrowers we touched, are tax-exempt loan is now in 32 states across the country, so we’re feeling really good about that growth.

What’s in store for 2018?

In 2018, we’re going to re-enter the tax credit equity markets and we’re going to invest no more than $500 million, and starting in the next 60 days, we’re going to be launching our first fund and will enter the market as a proprietary investor with established syndicators and a goal of as close to $500 million as we can get.

Source: commercial

CREFC 2018: Faisal Ashraf Weighs in on Lotus Capital’s New Platform

Lotus Capital Partners has been off to the races since it launched in 2016. In addition to arranging $315 million in financing from Mack Real Estate Credit Strategies for the construction and recapitalization of Penn-Florida Companies Via Mizner—a 2-million-square-foot mixed use project in Boca Raton, Fla., last year, the firm just expanded its offerings in launching a loan sale and distribution platform.

The business will serve lenders and investors looking to de-risk and leverage their positions in whole loans, A-notes and mezzanine debt. Lotus has already closed $150 million in private placements, including three ten-year mezzanine tranches on pharmaceutical company Allergan’s new headquarters in Madison, N.J., structuring and separately placed $70 million with Hyundai Asset ManagementMorrison Street Capital and Blackrock. The initiative will be led by Tim Taylor, the former head of special situations at Ten-X.

Commercial Observer caught up with Faisal Ashraf, Lotus Capital’s founder and managing partner, at the CREFC conference in Miami to learn more about the launch.

How has the conference been for you?

I’ve never seen so many happy people in my life. I found bullish sentiments all around. The only bit of frustration I found, which is a little ironic, is that people can’t get their money out fast enough.

Lotus Capital just launched a loan sale and distribution business. Talk us through why it’s the right time to launch a platform such as this. 

There’s a myth that loan sale advisory is a only a countercyclical business that is needed in a downturn. We believe that there’s abundant opportunity to address the capital needs of investors generally in the whole loan format or within their current capital structures. Additionally, we characterize ourselves as the only outsourced capital markets desk in the business, which means that existing lenders can outsource, for example, the A-note distribution of their portfolios to us so that they can leverage yield. As you know, a big part of debt funds’ strategies is to sell off their A-notes.

So, this is a business that has little to do with a downturn but rather the existing need that investors have today and it just so happens that there’s nobody else providing it.  As an example of capital structure distribution and just to test the thesis, I sold $150 million in mezz on behalf of a CMBS dealer recently.  This is a very technical process, it involves negotiating inter-creditor agreements and we have to leave a certain amount of spread so that someone can still have a solid CMBS execution.

What’s the primary benefit in outsourcing the distribution?

While the biggest firms will likely continue to do things internally, not every firm has large or dedicated capital markets capability. I think that, generally speaking, a firm may use our services because they believe we carry different/deeper relationships in the capital markets, or because we have creative methods of structuring that will save them time and money.  For example, we may have 5 new ideas on how to get that paper sold in the Middle East or Far East. In that regard we become an outsourced capital markets private-placement desk.

The proof point in the Allergan deal [Lotus arranged a $115 million 10-year, fixed-rate CMBS financing from a CMBS dealer for Lincoln Equities Group for the new Allergan U.S. headquarters in Madison, N.J.] was that we sourced $70 million of mezzanine of which $50 million was from an investor who had never invested in the U.S. We have a series of relationships that are off-market and allow us to present some interesting solutions. We’re not the silver bullet by any means, but we can give you capital markets expertise, strong distribution and potentially attract the off-market bids from years spent running distribution desks on Wall Street. The upside to this is it allows lenders to focus on their day jobs instead of spending time doing what we do.

Where do you see Lotus Capital going from here?

My goal is for Lotus to be seen as a preeminent real estate investment banking firm—that doesn’t mean that we’ll be the biggest firm in the world, it means that people think about our firm as offering high-touch solutions with regarding to intermediating capital and over time we’ll add other dimensions to the business. For now I’m pleased we are the fasting growing firm of our kind in the country –zero to $1billion in our first full year.  The deals we’ve done and pace we have kept aren’t for the faint of heart.  

What do you expect to see in the industry in 2018?

I see more bullishness. Like every year I expect some hiccups, but the market did a good job of shaking those hiccups off in 2017. With regard to sector-specific expectations, I do believe this will be the year that the retail sector is dealt with a little more thoroughly. I think certain investors will say, “Ok, we understand now what the have and have-nots are, and we will scale down part of our retail portfolio.” And that’s a great opportunity for Lotus to help them address that need and distribute some of that paper. 

Source: commercial

CREFC 2018: Columbia Pacific’s Billy Meyer Talks Competition and Customer Service

Seattle, Wash.-based Columbia Pacific Advisors has had a busy start to the year. It recently closed a $55 million refi/acquisition/ bridge-to-sale financing package in South Boston and a $35 million loan on a stabilized office building in East Hollywood. So far the debt fund has deployed $500 million across 40 loans, and it’s hungry for more. Commercial Observer caught up with Billy Meyer, a managing director at the firm, at CREFC’s annual conference in Miami to learn more about his personal conference agenda.

Commercial Observer: What do you think the general sentiment is here at the CREFC conference?

Billy Meyer: I think the majority of folks in the lending space believe there’s still plenty of deals to be had and opportunities exist for each and every lender, whatever their space is. The volumes for each individual production might be down, simply due to new competition. There’s a lot of money out there and new competitors are trying to find yield in different capacities. So, people are varying their strategies and maybe opening up new funds in order to target different markets. From what I see and from what my peers are saying, there are opportunities and heads are up chasing them down.

What is your competitive edge as a bridge lender, would you say?

In our specific space, communication is a big part of it. You’re partnering with a borrower and that means communicating effectively up front and then throughout the documentation process. The moment we’re first introduced to a new opportunity through to closing on that transaction might take three weeks or five weeks depending on how effective our communication is. We’re a short term bridge lender and we’re able to move very fast, so we need to communicate effectively if we’re going to talk through everything effectively in a short period of time. What separates us is, too, is that our money remains on our balance sheet the entire term of the loan and its fully discretionary based on what we want to do internally—we don’t have to go outside our walls to get approvals from anyone else and we don’t have multiple levels of credit committees. Also, everyone on our team can talk through a deal’s intimate details with the broker or the direct borrower, understand the execution strategy of what a borrower is trying to do and understand what makes sense and what doesn’t.  We pride ourselves with a high level of customer service and we understand that quick responses are what brokers and borrowers are looking for.

What’s a typical deal for Columbia Pacific Advisors?

We’re a lender in every region in the country and on all property types. We are most effective with Borrowers who need money fast, need a high level of confidence in closing, need the money for a short period of time or have a situation that is not quite bankable yet.  We don’t do new construction loans and we don’t do suburban land loans. But we’re very good at senior housing, affordable housing, multifamily, retail, office and self storage. Any type of cash-flowing, commercial real estate is where we excel and can close really fast. Our average loan is about $16 million, but we’re working hard towards increasing it to be $20 to $25 million. We’re hungry to get out there but at the same time we are all investors in the fund so we really care about making good decisions and getting our money back.

So you have skin in the game.

Yes. I have a piece of my own net worth in the fund as well as some of my parents’ retirement money. So with every transaction I think about whether I’m comfortable investing in this deal—I don’t want to lose on a deal and have my parents move in with my wife and kids [laughs]. the fund is entirely made up of private investors. There’s no institutional capital in the fund and nobody dictating what we can or can’t do. We do what we feel is right from a business sense.

What are some of your recent deals?

We did a roughly a $55 million loan in South Boston. It was a debt consolidation of a couple of different loans plus additional funds to acquire an adjacent property. The neighborhood was up-zoned recently so the borrower got a golden ticket. His property per square foot is now worth considerably more. We gave him a refi loan, an acquisition loan and a bridge-to-sale loan at 60 percent loan to value. We also did a loan in East Hollywood that was roughly $35 million.  It was on two adjacent parcels and one stabilized office building that just experienced a major tenant leaving—so it was around 60 percent occupied. The borrower had two loans and one loan matured, so again it was a debt consolidation and bridge-through-stabilization. We refinanced two loans and included proceeds for tenant improvements and leasing commissions.

What was your main purpose in attending the conference?

We’re focused on lead generation. We look to meet with brokers and also other private lenders who do almost exactly what we do but not quite, so lenders who aren’t comfortable lending on affordable housing or senior housing whereas we’re fluent in that space. We’re in the customer service business ultimately and brokers call us and the deal is not a good fit for us, we’ll refer them to who we think could be a good fit. It’s a small world in our lending space and we’re willing to share opportunities within the lending community. I believe there are plenty of opportunities around and greed is pretty low right now, it’s actually a really friendly space.

Source: commercial

CREFC 2018: Say Hello to CLOs

Commercial real estate collateralized loan obligations (CRE CLOs). It’s a bit of a mouthful for sure, and for some, CLOs are a sobering reminder of the pre-crisis Wild West. But, they’re baaack. And, judging by the packed house with standing room only that the CREFC panelists—including issuers, lenders and an investor—spoke to, people are curious about the new and improved 2018 CRE CLO market.

And for good reason: The market is heating up, significantly. Case and point, in December, Blackstone Group issued the largest CRE CLO post-crisis, the BXMT 2017-FL1 transaction, weighing in at a whopping $1 billion. The transaction was collateralized by 31 senior participation interests in loans secured by 71 properties, according to a report by KBRA at the time of the deal’s issuance.

Last year saw almost $8 billion in deal volume, but panelists estimate that amount will easily rise to $12 billion to $14 billion in 2018, driven partly by investor demand for the bespoke financing market. It’s a significant increase, given that in 2016 there was only $2 billion in issuance. That said, the market may be growing but remains disciplined and well balanced, one panelist said.

Today, CRE CLOs are a benign, nonrecourse source of financing that serve a distinct market purpose, panelists noted. Specifically, they solve the capacity issue around balance sheet financing. As an added bonus, when the market is functioning well, a CRE CLO is an accretive form of financing that complements warehouse financing nicely. Further, the deals create new capital markets opportunities and relationships for their participants.

First up in the panel discussion was the question of how recent CRE CLOs differ from CLOs issued pre-crisis. One panelist said that today’s CRE CLOs are “plain vanilla” unlike the more exotic pre-crisis days. But simply put, they have improved collateral quality. Pre-2007, the majority of transactions were more leveraged and the loans pledged as collateral had higher leverage attachment points. Today’s CRE CLOs are also composed entirely of first lien mortgages in contrast to pre-crisis collateral, which consisted of various position in the capital stack.

Most of the loans securitized in today’s CRE CLOs are floating-rate, short-term bridge loans on transitional assets where the sponsor is in the process of implementing a business plan on the property.

The notion that the loans included in the structures must always be cash-flowing is overstated, one panelist said. While generally true, the spectrum of loans in deals varies greatly and rating agencies are very pragmatic on how these loans are viewed. However, ground-up construction loans won’t make the cut.

Lenders also have more flexibility with CRE CLOs than they typically would in a REMIC structure, panelists said, with less servicing restrictions when it comes to modifying the loans. A key factor, given the transitional nature of the underlying collateral and the varying timelines of a borrower’s business plan implementation for those assets.

Tempted to dabble in the space and issue a one-off CRE CLO deal?

Proceed with caution, said participants. Significant resources are required from both an expense and labor perspective in order to pull a transaction together. From pooling the assets in an investor-friendly structure to working with the rating agencies and legal counsel to contending with extended transaction timelines and market volatility. The gestation period can take up to 15 weeks, and in a volatile market, the cost of funds targeted by an issuer can move significantly.  And don’t forget, CRE CLO issuances, like CMBS, are subject to risk retention requirements.

Something else to bear in mind if considering a single deal is that investors are typically more receptive to those who are in the market more frequently, panelists said.

Investors in the asset class areas alwaysresponsible for doing their homework. While one panelist had some concern that this isn’t necessarily always the case, evident in oversubscribed AAA tranches, another panelist argued that investors today are buying CRE CLO bonds based on diligence and underwriting as opposed to ratings—another key differentiation from the pre-crisis era.

One thing is pretty clear, with issuance expected to almost double this year, the use of CRE CLOs for transitional lending will continue for the foreseeable future.


Source: commercial

CREFC 2018: How’s CMBS Doing? KBRA’s Eric Thompson Fills Us In

CREFC’s annual conference at the Loews Hotel in Miami kicked off with an overview of how the CMBS market has been faring, courtesy of Eric ThompsonKroll Bond Rating Agency’s senior managing director. All eyes have been on CMBS with the financing source proving its competitiveness in 2017 and going up against bank and life company loans. Proof is in the pudding, and last year’s issuance volume neared $90 million, surpassing most analysts’ expectations.

Single-borrower issuance in particular increased by a whopping 88.7 percent in 2017 year over year to $36.5 billion, while conduit issuance remained flat at $48.5 billion.

KBRA expects single-borrower issuance to remain strong in 2018. “There’s a number of factors that might contribute to that,” Thompson told Commercial Observer between panels. “Some borrowers may be seeking to lock in a better rate than they currently have, do so ahead of rising interest rates and take some value accretion out of a property. It is also anticipated that M&A activity may spur acquisitions that result in capital market financings.”

There is also a couple of dynamics going on in the single-borrower space that make it appealing to market constituents, Thompson said: “One is that while it can be a very competitive market for pricing and execution for issuers that can lead to compressed profit margins, they can pre-place a lot of the debt with investors and have a good idea of where that execution might be. Two, I think there’s a deeper pool of subordinate buyers who are willing to buy further down in the capital stack because they’re comfortable with the credit on a single asset and comfortable in looking at their basis from the perspective of owning it. Unlike in a conduit deal, if things do go bad, you have more transparency into what conditions can effectuate a change in control as there is only one asset.”

KBRA is aware of a dozen or more single-borrower transactions coming down the pipeline as the year begins and expects to see up to three CRE CLOs issued by mid-February.

At 57 percent, 2017 appraisal LTVs were at their lowest since KBRA began rating conduits in 2012, which is both good and bad. “The issue is that when you have that level of leverage CMBS is competing more with insurers and banks. Even if banks pull back because of regulatory concerns, you have more competition than you would even if you had marginally higher leverage.”  

Historically a financing source dedicated to assets in secondary and tertiary markets, one interesting trend uncovered in KBRA’s research last year was CMBS’ increasing exposure to primary markets. “We found that primary markets default less than secondary markets by two to three points. When they do default, they have losses that are five points less than any other market,” Thompson said. “In the most liquid MSAs, the default rate is actually half that of other market tiers. So this is a positive credit element and a bright spot in terms of trends from prior years.”

CMBS loans in the largest, most liquid markets MSAs—New York, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco—reached 33 percent in 2017, up from 28.1 percent in 2016. When combined with exposure to the next 11 largest MSAs, that percentage pierced the 50 percent level for the first time in KBRA’s rating history, reaching 54.3 percent (compared with 45.5 percent in 2016).

In his opening remarks, Thompson cautioned that, while primary market’s diverse economies can certainly withstand downturns, oversupply is always a concern to consider.

In terms of property types, 2017 was the year of the office with CMBS exposure to the asset class increasing to 39 percent. Perhaps unsurprisingly, retail exposure took a hit, dipping to 25.4 percent after averaging above 31 percent in previous years.

And while delinquency levels remain low, they are increasing. KBRA’s conduit portfolio delinquency rate reached 0.44 percent by year-end 2017, up from 0.15 percent at the end of 2016. The increase was somewhat expected given seasoning in transactions, Thompson said. Term defaults historically peaking between years four and six; the bulk of the delinquency (0.32 percent) is from the 2013 and 2014 vintages.

As one of the most buzzed-about topics at the CREFC conference, it looks like CMBS will continue to shine in 2018.

 


Source: commercial