November 11, 2019
By Dennis Kaiser
Connect Media hosted its inaugural commercial real estate conference in Seattle last week. More than 150 attendees gathered for an afternoon of networking and two panel discussions, one titled, “Deal Flow Across the Capital Stack,” and the other, “Industry Leaders: A View from the Top.”
Today, we’ll recap the Capital Stack panel, which was moderated by CBRE’s John Lo. Panelists included: Parkview Financial’s Andrew Benton, Annaly Capital Management’s David Sotolov, and Ready Capital’s Jordan Goforth.
The conversation focused on what lenders say are their “bread and butter” deals today. Benton said they often look at non-recourse deals that may have sponsorship issues, provided they are good assets. For Sotolov, bridge lending value-add deals that fit into their wheelhouse might be a senior living facility. He noted that for last 18 to 24 months they’ve seen a “wave of new construction refinance opportunities.” Sotolov says the bridge lending they are doing now is an efficient way for sponsors to manage their capital since it gives them time to stabilize an asset and figure out their strategy, while bringing down their cost of capital.
Benton noted that since they operate in the high yield lending segment already, the interest rate environment and the Fed’s actions haven’t had much impact on their business. He noted the concern is finding assets that still make sense. They have seen prices drop 100 basis points in their portfolio, but he’s not seeing an impact on way the way they underwrite credit. He noted they are seeing old, repeat deals being shopped by those hoping to find a lender willing to bite, which he says are “easy no’s.”
Goforth says they saw spreads come down for a bit as LIBOR went up, but then they moved in the same direction for a while and overall borrowing costs came down a bit. When they examined their portfolio from 2018 to 2019, they found the differential was only about 50 basis points, though. He says, the CLO market has helped to reduce the cost of capital as has the increased competition.
Sotolov surmised, perhaps the compression was less about the Fed’s actions and more about the amount of capital flowing into the real estate debt market. “Real estate just looked more attractive,” he says, causing yield requirements to ease. He cautioned due to imbedded risks in the business bridge lenders could get “hurt and hung,” at some point. That’s because deals are leveraged though either a warehouse repro line or CLO market, not match funded. That will eventually create exposure that the lender must address and find protection via floor rates or spreads.
Lo noted that the market is “so efficient these days both on a micro and macro basis.” He says when you look at the global macro basis that is driving a lot of the effects being felt in the U.S., which is the “best house on the block,” though that also comes with offsets. He also noted on the fixed rate side of the business, it may be a “race to the bottom.” The panel consensus was that the standard practice for LTV’s today are 70/80% of cost.
In terms of deals and markets the lenders now favor, Goforth says they like West Coast deals. Though he advised to stay away from tertiary markets given the late stage of the cycle, since that may present liquidity issues if the market turns over. Meanwhile, Sotolov advised not to confuse small markets with slow growth markets. He says, there are good opportunities in smaller markets, though you could still do a bad deal in a core market that isn’t experiencing growth.
For comments, questions or concerns, please contact Dennis Kaiser