Download Debt Financing in a Challenging Regulatory and Market Environment

Debt Financing in a Challenging
Regulatory and Market Environment
Panelists and Deals
Mindy Berman
JLL
Managing Director
Boston, MA
Moderator
Erik Tellefson
CapitalOne Healthcare
Managing Director, Medical Facilities
Chicago, IL
Mokena MOB
Acquisition Financing
Chicagoland, IL
$11,900,000
Winston Abbott
Siemens Financial Services, Healthcare
VP / National Sales Manager
Dallas, TX
Dignity Neighborhood Hospital
Construction/Permanent Loan
Las Vegas, NV
$16,100,000
Brion Haist
JLL
Executive Vice President, Capital Markets
New York, NY
Aurora MOB
Credit Tenant Lease
Waukesha, WI
$17,500,000
Agenda
•
•
•
•
Debt Market Conditions
Case Studies
Panel Discussion
Q&A
Debt Market Conditions
Benchmark Treasury Yields
Interest rates and government debt yields continue to decline and remain near historic lows
The 10-Year Treasury yield is currently 43 basis points lower than the five-year historical average
6.0%
As of 4/14/2016, the 5- and 7-Year Treasury yields are 1.23%
and 1.54%, respectively.
Meanwhile, the 10-Year Treasury yield is at 1.77%.
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
10-Yr Tr
Apr-11
7-Yr Tr
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
5-Yr Tr
Source: JLL Research, Federal Reserve
April | 2016
5
Historical 10-Year Treasury Rates
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
Averages
6.0%
40 Year : 6.56%
50 Year : 6.56%
30 Year : 5.23%
4.0%
20 Year : 4.07%
2.0%
0.0%
Apr-66
10 Year : 3.00%
5 Year : 2.20%
4/14/16 : 1.77%
Apr-76
Apr-86
Apr-96
Apr-06
Apr-16
Source: JLL Research, Federal Reserve
April | 2016
6
Overall Real Estate Debt Summary
Commercial and multifamily real estate debt outstanding: $2.76 trillion as of 3Q2015
Bank and Thrift
37.5%
CMBS, CDO and other ABS issues
18.8%
Agency and GSE portfolios and MBS
16.0%
Life insurance companies
13.8%
State and local government
3.7%
Federal government
3.0%
REITs
Finance companies
$23.5
0.9%
Household sector
$20.6
0.7%
$19.8
0.7%
Nonfinancial corporate business
$12.2
0.4%
Other insurance companies
$11.6
0.4%
State and local government retirement funds
$519.9
$442.7
$380.2
$102.7
$82.7
$69.4
2.5%
$35.0
1.3%
Nonfarm noncorporate business
Private pension funds
$1,036.9
$4.7
0.2%
(in billions / % of total)
Source: Mortgage Bankers Association; data available thru 3Q2015
April | 2016
7
Real Estate Debt Conditions
Life Companies
Banks
CMBS
• Focused on high quality
transactions and
institutional real estate
• Regulatory environment
continues to impact pricing
with slightly widening
spreads
• Spreads have recently
widened nearly 100 basis
points over past 5 months
with rates ~5%
• Willing to go longer term
(7+ years) for select, small
to medium size deals
• Choppy market with nearly
every new securization
pricing wider than previous
securitization
• Pricing has increased 20 30 bps over the past 90
days due to spread
widening in bond market
(offset by a reduction in
Treasury rates)
Market
Snapshot
• Trying to originate more
cash flowing loans
• Construction loan terms
are getting more
conservative
Agency
Alternative
• Primary source of medium
and higher leverage
multifamily financing
• Bridge loan pricing has
increased 25 - 50 bps over
past 60 days.
• Freddie & Fannie portfolio
limitations pushing to focus
on more Class B / C
properties
• Increased appetite in
mezz loans from investors
(equity investors seeking
safety versus debt investors
seeking yield, which we
saw 12 months ago)
• Currently lending full term
I/O on modest leverage
deals and not shying away
from equity "cash-outs"
• Abundance of capital in
mezz debt space
• Primary source of liquidity
for assets in secondary
markets plus hotels
• New regulations taking
effect at YE 2016 creating
uncertainty over pricing and
year-end origination
Leverage
Outlook
50 - 65%
50 - 65%
65 - 75%
Up to 80%
Up to 95%
Steady to slightly increased
volume going in to 2016,
though several lenders may
reduce goals due to
concerns about "relative
value" compared to
corporate bonds.
Will continue to focus on
current key client
relationships
Volume in 2015 was $101
billion. Significant
maturities from 2006
maturities should sustain
market, despite choppy
pricing.
Other sources of financing
have and will continue to
pick up the slack from the
reduction of agency
originations
Steady volume going in to
2016 as development
pipeline remains strong
April | 2016
8
Historical U.S. CMBS Issuance
In 2015, U.S. CMBS issuance hit a post-recession high with full year issuance of $101 billion, compared to $94 billion in
2014. Issuance in 2016 is off to a slow start relative to 2015, with $19.4 billion originated as of April 6, compared to $32.6
billion at this time last year.
$260
$240
$229
$220
$198
CMBS issuance (billions of $US)
$200
$180
$167
$160
$140
$120
$93
$100
$74
$80
$20
$47
$52
$48
$37
$40
$101
$67
$57
$60
$86
$78
$94
$33
$26
$16
$12
$3
$12
$19
$0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD 2016
Source: JLL Research, Bloomberg, Commercial Mortgage Alert
Data through April 6, 2016
April | 2016
9
CRE Debt Maturities
Approximately $268 billion of CRE loans are scheduled to mature in 2016 and $295 billion in 2017
$350
$300
281
22
289
23
298
25
280
282
24
24
268
131
$200
$150
27
26
$250
Maturities (billions of $US)
295
205
213
211
159
187
213
214
27
26
203
25
132
187
25
154
24
145
$100
159
154
99
126
94
$50
99
54
53
62
110
137
64
69
41
29
24
36
36
2018
2019
2020
2021
2022
$0
2011
2012
2013
2014
2015
CMBS
2016
Banks
22
2017
13
2023
Life Companies
Source: JLL Research, Trepp LLC
April | 2016
10
Implications for Borrowers
Uncertainty and risk aversion is creeping into the real estate finance market—none of it is driven by concerns
about real estate fundamentals. It is driven by the junk bond market, risk aversion in emerging markets,
broader macro-economic concerns and regulatory changes.
•
Less competition from CMBS lenders and higher demand for bank and life company money. Life companies will likely get through
most of their allocations by late summer
•
New CMBS regulations for risk retention go into effect December 24,, 2016
 Expected pricing increase of 30-40 bps
 Lenders likely to limit new loans in November/December until pricing and execution is understood
 Secondary market liquidity for CMBS bonds is thinning due to regulations preventing Wall Street from “making markets” for their bonds
•
CMBS pricing approximately 5% for 10-year loans




•


•




Interest rate up 1% over past 6 months
Rate is still lower than the $100B+ of 2006 maturities where rates were 5.5 - 6.0%
Remain the primary source of liquidity for secondary markets and hotels
Loan economics are not final until the day of closing
Banks are continuing to figure out new regulatory framework
Different lenders view the same transaction with a different view on its impact on capital requirements and profitability
Clarity should start to develop over the next 12 – 18 months
Recommendations/Implications
Secure loan commitment by August as allocations may utilized by Q4 (consider forwards)
Liquidity in primary markets and Class A transactions will be less impacted than secondary markets and lower quality assets
Institutional borrowers will be less impacted than local/regional investors
Expect volatility and higher rates to impact asset pricing
April | 2016
11
Hospital Bond Issuance
Tax-Exempt Healthcare Issuance ($B)
9.0
$8
8.0
$7
7.0
$7
$6
6.0
5.0
$4
4.0
$3
3.0
2.0
$4
$3
$3
$2
1.0
0.0
Q1
Q2
2014
Q3
2015
Q4
2016 YTD
Source: Barclays
April | 2016
12
Tax-exempt Bond Rates Relative to U.S. Treasury Rates
30-Year MMD
4.50%
4.20%
4.00%
3.50%
3.00%
2.61%
2.50%
2.00%
Jan- 14
Jun- 14
Nov- 14
May- 15
Oc t- 15
Apr- 16
30Y M M D
2.61%
30-Year UST
4.50%
4.00%
3.98%
3.50%
3.00%
2.71%
2.50%
2.00%
Jan- 14
Jun- 14
Dec - 14
May- 15
30-Year UST
Nov- 15
Apr- 16
Source: Barclays
April | 2016
13
Current Lending Parameters
Bank
Life Company
3 Years
5 Years
10 Years
3 Years
5 Years
10 Years
Leverage
50 – 65%
50 – 65%
N/A
N/A
50 – 65%
50 – 65%
Debt Yield
9 – 12%
9 – 12%
N/A
N/A
8 – 12%
8 – 12%
LIBOR* + 170 – 270
LIBOR* + 170 – 270
N/A
N/A
T + 160 – 230
T + 160 – 230
2.58 – 3.58%
2.82 – 3.82%
N/A
N/A
2.84 – 3.54%
3.38 – 4.08%
Pricing
Current Rates
CMBS
Agency
3 Years
5 Years
10 Years
3 Years
5 Years
10 Years
Leverage
N/A
65 – 75%
70 – 75%
N/A
Up to 80%
Up to 80%
Debt Yield
N/A
8 – 12%
8 – 12%
N/A
1.25x - 1.55x DSCR
1.25x – 1.55x DSCR
Pricing
N/A
S/T + 320 – 360
S/T + 280 – 310
N/A
T + 225 – 290
T + 210 – 270
Current Rates
N/A
4.40 – 4.80%
4.44 – 4.74%
N/A
3.39 – 4.04%
3.82 – 4.42%
*Current Rates based on April 14, 2016 interest rates. Floating rate debt assumes swapped all-in rate.
April | 2016
14
Case Studies
Mokena MOB – Acquisition Financing
Lender:
CapitalOne Healthcare
Borrower:
MedProperties Holdings Affiliate, Dallas
Type of Loan:
Term Loan
Property Type:
Medical Office / Surgery Center / Post
Acute
Location:
Chicago, IL (Suburbs)
Loan Amount:
$11.9MM
Loan-to-Value:
70%
Size:
29,000 SF
Term/Amortization:
5 years - 30 Mos. I/O then 30 yr Amort
• Borrower – Dallas-based MedProperties Holdings,
(large legacy borrower with strong relationship) was
seeking a loan to finance its acquisition of a 29,000 SF
MOB / Surgery Center property in the Chicago Suburbs.
The asset is a mix of MOB space, surgery center and
post acute usage with doctors offices, a 4 OR ASC and
the post acute portion including a recovery center with 5
overnight beds. The borrower’s concern was finding a
lender that understood the asset and would provide an
appropriate loan.
• Property details
• 100% leased by a JV between the doctor group
and its operating partner.
• 15 year Lease Term
• NOI of $1.3MM
• Relatively high $/SF for an MOB / Surgery Center
of $590/SF value – related to the space usage.
• Solution – CapitalOne was able to utilize its healthcare
expertise and compare across the various components
of the asset to illustrate a blended basis that made
sense with respect to the $/SF. Aligning the debt to the
borrowers’ business plan, Capital One structured a loan
that met the borrower needs.
Dignity Neighborhood Hospital – Construction/Permanent
Lender:
Siemens Financial Services, Inc.
Borrower:
Rose Rock Capital
Type of Loan:
Construction and Permanent
Property Type:
Neighborhood Hospital
Location:
Las Vegas, Nevada
Loan Amount:
$16,100,000
Loan-to-Value:
75%
Size:
60,000 square feet
Term/Amortization:
24 months – interest only with escalators and
extension options
Borrower
• Rose Rock Capital (Bryan, Texas) solicited
construction and permanent financing for a 60K sq. ft
neighborhood hospital to be built in the metro Las
Vegas, Nevada area. The asset is part of Dignity
Health’s overall hub and spoke market strategy - to
serve the community and capture market share.
• Rose Rock Capital was seeking an experienced lender
with platform knowledge and the capacity to replicate
the financing.
Property Details
• 100% pre-leased to a JV tenant partially owned by
Dignity Health.
• 15 year triple net (NNN) lease with escalators and
renewal options.
• 1st year NOI of $1.7 MM.
• Eight (8) treatment and inpatient beds and auxiliary
hospital services on first floor.
• Physician offices and specialty services on second and
third floors.
Solution
• Siemens Financial Services, Inc. was able to
underwrite a start up tenant under a non-recourse loan
structure with market terms. In addition, provide any
TI, Capex or equipment financing needed by the tenant
as both JV partners are existing Siemens clients.
Aurora Health Care – Credit Tenant Lease
Lender:
U.S. Bank National Association
Borrower:
Mayfair Medical Properties, LLC
Type of Loan:
Credit Tenant Lease Financing
Property Type:
Medical Office
Location:
Wauwatosa, WI
Loan Amount:
$17.5 mm
LTV:
93%
Size:
60,800 SF
Term/Amortization:
25 years / 25 years
• Borrower: Mayfair Medical Properties LLC
desired a long-term, fixed rate, non-recourse
financing corresponding to the term of the
underlying lease that would refinance the
existing floating-rate construction loan.
• Property:
• 100% leased to Aurora Health Care, Inc.
(Investment grade, ‘A3’ rating)
• 25-year Absolute Net Lease
• $18,800,000 Development Cost
Solution: JLL placed the Credit Tenant Lease
bonds with a major foreign fixed income investor.
Over 10 investors competed to purchase the
bonds which resulted in competitive pricing and
successful closing on behalf of Mayfair.
Coincidentally, Aurora issued tax-exempt bonds
the same day as the CTL at exactly the same
coupon as the CTL bonds.
Private Placement Volume
Large, liquid market to tap for private debt for investment grade borrowers served by life companies and pension funds
Credit tenant lease is a subset of private placements
$70,000
$60,000
Deal Volume in Millions
$50,000
$40,000
US Domestic
$30,000
Foreign Issuance
$20,000
$10,000
$-
2009
2010
2011
2012
2013
Year
2014
2015
2016 YTD
2009
2010
2011
2012
2013
2014
2015
2016 YTD
$ 28,121
$ 41,822
$ 44,897
$ 54,257
$ 58,250
$ 58,843
$ 60,484
$ 9,743
CTL Issuance (in millions)
$125
$ 1,489
$ 1,262
$ 1,951
$ 2,584
$1,234
$ 1,128
$ 42
CTL Percent of Total PP
0.4%
3.6%
2.8%
3.6%
4.4%
2.1%
1.9%
0.4%
Total Private Placement Issuance
(in millions)
Panel Discussion
Thank you!
Mindy Berman
[email protected]
+1 617 316 6539
Erik Tellefson
[email protected]
+1 312 441 6828
Winston Abbott
[email protected]
+1 214 232 9242
G. Brion Haist
[email protected]
+1 212 812 6492