June Capital Markets Update
District Capital is very grateful to have stayed busy during the Covid-19 pandemic. A big THANK YOU to our patient clients and resilient lenders for the extremely productive quarter. District Capital was fortunate to have closed over $100,000,000 in the second quarter of 2020.
Life insurers continue to place selective debt at attractive rates in the 3.5-4% range, depending on the loan term. Leverage can be up to 70%, however, most lenders are flooded with lower leverage options, resulting in their selective behavior. Life Co’s remain the most consistent, drama-free lending option in the market.
Welcome back! Last week’s securitization of just over $800 million went off without a hitch with AAA pricing at 115 over swaps which were 30 basis points inside the last conduit securitization print. In fact, whispers were that every tranche of the offering was oversubscribed by 10 times!
It should be noted that all collateral in this pool was originated pre-Covid. The good news is these successful securitizations are freeing up capital to be reinvested in new CMBS origination. You can expect to get to full leverage (75%) for the right deal, however, expect it to come with plenty of structure (e.g. reserves, escrows, holdbacks, cash flow sweep trigger, etc.). CMBS lenders will continue to be picky with any collateral containing retail or hospitality.
Fannie, Freddie and HUD continue to flood the market with cheap financing. An upfront COVID reserve remains in place for principal and interest for a set timeframe depending on the leverage profile of the loan. Rates from Fannie and Freddie for 10-year money are in the 2.95-3.20% range, depending on leverage. Max leverage for cash-out loans with Fannie and Freddie is 70% - 75% LTV for acquisitions.
At 65% LTV both Fannie and Freddie get very competitive with rate and long interest-only periods. HUD loans are even cheaper starting in the low to mid 2.5% range (excluding MIP). HUD is still doing cash out at 80% LTV with a nine-month COVID reserve of PITI.
In the small loan space, District Capital continues to be the market leader for Freddie SBL lending. Our partnerships have provided us access to the cheapest execution and lowest closing costs in the market. Freddie Small Balance lending can be tricky as Freddie has instituted several conditions and requirements. However, rates remain very competitive. You can expect rates for 80% LTV to be around 3.75%. For lower leverage, expect to see rates around 3.5%. Full term interest-only is not out of the question for the lower leverage requests.
For higher quality collateral over $4M, Freddie SBL is getting very aggressive on full leverage and can potentially get below 3.5% for the right deal.
The banks continue to stay on the sidelines, carefully choosing entry points and saving their dry powder for current banking/borrower relationships. Their focus remains on loan modifications and PPP loan forgiveness applications. We have surveyed several banks that are beginning to lend again. Rates are in the L+200-275 range, again depending on product type and strength/deposits of the guarantor.
The bridge lending market is currently inefficient due to uncertainty around the future of the real estate market and overall macro-economy. Mortgage REITs and debt funds that rely on the CLO execution to leverage transactions are hesitant to price and are sidelined at this time. There seems to be an underlying sense of optimism from these lenders as local economies continue to re-open. The debt funds who have avoided leverage are lending and have stepped up to win deals where they typically are unable to compete. Expect to see spreads in the L+400-700 (with a LIBOR floor instituted).
Credit Tenant Lease (CTL):
Now is the time to test the CTL market. We are seeing this market function exceptionally well and it seems to be business as usual. Rates are at historic lows and with the Fed propping up the corporate bond market, spreads have come ripping in. CTL is an excellent execution for any long-term lease that shows even the slightest hint of credit. While this space has traditionally been dominated by investment grade credits, investors insatiable appetite for yield has opened the door to non-investment grade execution. These executions are case by case, credit by credit. Our recommendation is to float a name or financial statement by our team, and we can get very quick feedback.