COVID-19 SPECIAL EDITION

R E A L E S T A T E C A P I T A L A D V I S O R S

D E B T l E Q U I T Y l S T R U C T U R E D F I N A N C E

As of March 30th 2020

NAVIGATING THEAHEAD

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Views from the Top ThePandemic, short term chaos ornew economic reset

Where does Liquidity Still Lie? A lookat the lender universe and where capital iscurrently being deployed

Shifts in Underwriting a granular focus oncredit underwriting across the deal and assetspectrum

VIEWS FROMC L A R I T Y I N T H E W A K E O F U N C E R TA I N T Y

THE AGE OF

The novel coronavirus (COVID-19) has touched the far corners of theglobe and created a time of uncertainty in today’s commercial realestate market. As swaths of industries continue to become affected bychanges in travel restrictions, quarantine mandates, stimulus packagesand a myriad of other political measures, liquidity in the credit marketsremains on the sidelines awaiting direction.

Today, banks, funds, mortgage REITs, and agencies are adjusting theirviews and cautiously evaluating where to deploy capital. Banks look tobe reserving capital for existing clients and experienced sponsors, butcontinue to lend albeit with a much more cautious tone. Fannie andFreddie are ‘business as usual’ for the time being with some structuralchanges to new loans and added reserve requirements. The CMBSmarket, once a boon for the industry is currently frozen and will likelyremain so for the next 60-90 days. The large and fragmented privatedebt market is having its challenges but continues to evolve and serveas a lifeline to borrowers.

In 2019, a record $151 Billion was raised for global private real estatefunds with approximately $319 Billion in dry powder available. As ofJune 2019, there was $181 Billion of private real estate debt fundsunder management. Many of these funds and mortgage REITS havehistorically manufactured yield by leveraging their capital using cheapshort-term revolving lines of credit (“RLC”) from big banks to fundconstruction loans and other mortgages. This RCL market is what hasallowed funds to issue loans at more attractive costs of capital whilestill generating yield for their investors. The erosion in property cashflows and underlying asset values caused by COVID-19 has started totrigger RCL covenants, requiring some funds to post additionalcollateral, hence putting a strain on liquidity.

At present, there is conundrum between investment managersinherent need to deploy capital, while simultaneously assessing riskand ensuring appropriate capital preservation measures for itsstakeholders. In general, we see pockets of capital still lending but thefinancing process has required a much broader process to capitalizedeals that before.

Global Closed-End Private Real Estate Fund Raising

$151 Billion $319 Billion

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No. of Funds Closed Aggregate Capital Raised ($bn)Source: Preqin Pro

$181 Billion

NOT ALL ASSET CLASSES

Looking at the lending landscape, it is important to address the real and perceived impact ofCOVID-19 on specific asset classes as lenders have adapted their lending policies in favor ofsome while dramatically pulling back from others. As of the date of this report, March 26th, theSenate approved a fiscal stimulus package supporting several industries which might affect thelending policies going forward.

As of today, given the travel restrictions in place, event cancellations and store closuresimplemented by the both the state and federal government, lending for hotels and retail haveseen the greatest pull back in terms of available credit. Further trickling down to the consumer,the fear of rising unemployment has begun to creep into the multifamily market as contractworkers, consultants, hospitality staff and non-critical personnel continue to be laid off. Overthe next weeks, we will begin to see the impact of such lay-offs on rent collection anddelinquencies. Finally, office and industrial have been the most insulated up until this point.Further erosion to supply chains and downsizing of small to medium sized businesses overtimewill change this sentiment but lending remains active for now.

Not covered in this report but worth a brief mention is that lending for new condoconstruction and assisted living are at a standstill and will likely remain the status quo untilboth the COVID-19 Spread and health of the economy see improvements.

IlliquidPockets of Capital

Selectively LendingActivelyLending

MULTIFAMILYRETAILOFFICE

HOTELSINDUSTRIAL

CONDOMINIUMS

CautiouslyLending

IN SEARCH OF W H E R E D O E S L I Q U I D I T Y S T I L L L I E ?

THE C A P I TA L

DEBT FUNDS and commercial mortgage REITs are stillwell capitalized and currently adjusting their neworigination strategies on a week-by-week basis. Allocationtowards construction has pulled back a bit especially inkey states where COVID-19 is prevalent and the risk ofconstruction site shutdowns are higher. Bridge lendingremains active for office, industrial and multifamily albeitat slightly lower leverage with added holdbacks forinterest reserve.

COMMERCIAL BANKS are lending although taking amuch more conservative approach. Leverage onconstruction lending has dialed back to 60%-65% LTC andis reserved for experienced borrowers or existing clients.Refinancing requests with an equity cash out componentare being heavily scrutinized. The majority of any hotel andretail financing requests are currently being put on holduntil further notice.

CMBS is currently frozen. Investor demand for newsecuritizations has dried up causing lenders to pump thebrakes on writing new loans. We expect this to last for atleast the next 60-90 days.

AGENCIES (FANNIE/FREDDIE) are still issuing newloans at historically low rates. Structurally, Fannie Mae isnow requiring 12 months of P&I payments to be held backat closing while Freddie Mac is lowering leverage by 5%and increasing DSCR requirements by 5 bps.

LARGE DEVELOPERS are selectively deploying seniorand subordinate debt into this market. The focus is oninterim bridge financing for properties who have loomingmaturities coming due where traditional financing may notreadily be available. We are seeing 200+ bps spreadpremiums in the current climate.

SHIFTS INS E C T O R B Y S E C T O R

MULTIFAMILYFINANCINGMultifamily is still looked at as the ‘darling’ asset class and will be perceived as a flight tosafety for major institutions needing to deploy capital. Debt financing remains availablefor the wide range of borrowers requiring construction debt, permanent financing, bridgeloans or subordinate debt. We are seeing leverage dialed back between 5%-10% and theimplementation of structural protections including sweeps and interest reserves.

Construction loans are still being issued by commercial banks, life insurers and debtfunds depending upon borrowers preferences for recourse and leverage.

TAKEAWAYS &OBSERVATIONS

Rate Floors Given the decline across all underlying index benchmarks (Swaps, Treasuries, LIBOR

etc.), lenders are readily setting rate or index floors to ensure a minimum yield.

Stricter Covenants In an effort to mitigate downside risk, lenders are implementing lower

DSCR covenants which triggering springing cash sweeps or lock box provisions

❑ Q

Leverage – Construction Debt

Commercial BanksDebt Funds (Stretch Senior)HUDLife Insurance

65% - 70% LTCUp to 75% LTCUp to 85% LTCUp to 60% LTC

Cost of Capital

Commercial BanksDebt Funds (Stretch Senior)HUDLife Insurance

L + 250-325 L + 500 - 650T + 285 - 325L + 225 - 300

Leverage – Interim / Permanent Debt

Commercial BanksDebt FundsFannie MaeLife Insurance

70% / 65%Up to 75%Up to 80%Up to 65%

Cost of Capital – Interim Financing

Commercial BanksDebt FundsFannie Mae (Perm)Life Insurance

L + 225-300 L + 275 - 350

T + 275 – 350L + 220

❑ Q

HOTELFINANCINGThe hotel industry has been one of the hardest hit by the COVID-19 Pandemic. Mosthotels are operating at sub 30% occupancy while others are fully shuttered. Financing forhotels is extremely challenging in the current environment given the uncertain road torecovery even after the spread of the virus has subsided.

Construction loans are still selectively being issued by commercial banks and debt fundsgiven the lengthier timelines before coming online. Expect funds to opportunisticallyincrease spreads by 100-200 bps on new construction loan. Borrowers facing loomingloan maturities will have the most difficult time securing financing in the current climateas bridge loans are seldom and being issued at low LTV/LTCs.

TAKEAWAYS &OBSERVATIONS

Best-in-Class deals on the construction side will be the focus for remaining lenders. Less than

stellar projects will be nearly impossible to finance.

Appraised Values will be in question as appraisers look to figure out assignable cap rates.

These adjustments will greatly affect loan proceeds for newly underwritten deals

❑ Q

Leverage – Construction Debt

Commercial BanksDebt Funds (Stretch Senior)

Up to 65% LTCUp to 70% LTC

Cost of Capital

Commercial BanksDebt Funds (Stretch Senior)

L + 275-350 L + 500 - 775

Leverage – Interim / Permanent Debt

Commercial BanksDebt Funds*CMBSLife Insurance

55% LTVUp to 65% LTV

Not LendingNot Lending

Cost of Capital – Interim Financing

Commercial BanksDebt Funds

L + 300 - 400 L + 400 - 800

❑ Q

OFFICE & INDUSTRIAL FINANCINGThe office and industrial sectors remain intact in the short term. Economic impacts tooperating businesses will be buffered by short term reductions in staff, furloughedarrangements and reductions in operating expenses to weather the storm before westart seeing issues with solvency.

Construction loans are still being issued by commercial banks, life insurers and debtfunds, although ‘spec’ projects with little to no pre-leasing has become more of achallenge. Permanent and interim financing remains available, although any equityrecaps are being dialed back.

TAKEAWAYS &OBSERVATIONS

Extremely Cautious Underwriting for Value-add deals looking for financing which assume

mark-to-market rents and lease ramp-up over the next 12 months

Increased Holdbacks for tenant rollover and lower cash trap triggers

❑ Q

Leverage – Construction Debt

Commercial BanksDebt Funds (Stretch Senior)Life Insurance

65% - 70% LTCUp to 70% LTC

65% LTC

Cost of Capital

Commercial BanksDebt Funds (Stretch Senior)Life Insurance

L + 300 - 350 L + 450 - 700L + 225 - 300

Leverage – Interim / Permanent Debt

Commercial BanksDebt FundsLife Insurance

75% / 65%Up to 75%Up to 65%

Cost of Capital – Interim Financing

Commercial BanksDebt FundsLife Insurance

L + 275 - 325 L + 300 - 500L + 250 - 300

❑ Q

RETAIL FINANCINGRetail properties across the board are facing tough times in todays market. Differing thanhotels which generally recover from downcycles more quickly, the survival of retailtenants following the wake of COVID-19 is unknown, and hence a great cause for concernamongst the lending community.

Liquidity for construction, bridge loans and permanent financing in the retail sector isfairly non-existent at the moment. Debt funds are selectively quoting some highlystructured bridge debt for looming maturities.

TAKEAWAYS &OBSERVATIONS

Lender Freeze across the credit markets will create investment opportunities to pick up

distressed notes at a discount to face value from funds and banks looking to raise liquidity.❑ Q

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