Now that nobody wants to see our vax cards anymore, maybe it’s time to issue debt cards to everyone in the CRE community. We need to know if your regional bank got its booster shot.
During our annual State of the Industry panel discussion at the GlobeSt. Net Lease Spring conference in NYC this week, the conversation kept circling back to the dreaded D-word.
Everyone in the room wanted to know the best strategy for dealing with debt and—as one of our panelists put it—if the motivation to sell quickly under the stress of the rising cost of debt will be matched by the motivation to pursue deals with new price profiles.
Opinions on the best deal-making strategies in a market where uncertainty rules ran the gamut, and every question raised another question:
What type of debt do you want to use?
How long can you keep servicing that debt?
How does the cost of debt affect your debt?
Can you restructure debt without banks?
Can banks restructure debt for other banks?
Are we still indebted to Barney Frank for saving the financial system?
Does Barney get to keep his nameplate as a Signature director?
Can Janet Yellen cure the national debt by minting a platinum coin?
How many catalytic converters does it take to make a $32T coin?
Did you know there are no balloon payments at the end of a sale-leaseback?
Okay, maybe we spent too much time talking to that pure-play cannabis investment firm—or we didn’t hold our breath walking to the Marriott Marquis conference venue in Times Square, which had so much of his product wafting through the air even the Naked Cowboy was stumbling around.
Here’s our personal favorite: what kind of debt would you no longer touch with a 10-foot pole?
“We’ve pivoted away from CMBS clients and switched from regional banks on the debt side of the business,” said Coler Yoakam, senior managing director, corporate finance, at JLL Capital Markets.
“We pivoted away from regional, local banks because of the unpredictability. Frankly, their solvency and ability to perform is very much in question,” Yoakam said.
“Pricing started to change in December,” he said. “We’ll see if the motivation to sell under stress is matched by the motivation to pursue deals with [new] price profiles.”
“We use bank financing, insurance financing, CMBS financing,” Gordon Whiting, managing director, Angelo Gordon said. “I don’t think you can look at this in a vacuum. You need to look at all the capital that’s out there and how many of your tenants have debt coming due this year and in 2024.”
“The smart ones are paying down debt, those are the ones you want to deal with,” Whiting said. “I don’t think the debt markets are going to significantly change in the near future. I think we’re looking at significantly higher rates for the next year or two.”
“People are waiting for a recession to happen, and if everybody keeps waiting, it will. I think rates are going to be high for a long time,” he added.
“We use lines of credit, we use cash. At the end of the day, we finance our properties like every other buyer. You cannot be a buyer of real estate without a financing assumption and without financing the asset in some manner,” said Gino Sabatini, managing director, head of investments, W.P. Carey.
W.P. Carey has been very careful to maintain its triple A+ credit ratings while it issues debt into the bond market, he said, which sometimes put the company at a competitive disadvantage in recent months.
“The ratings agencies want us to keep our debt much tighter—they want us to stay within a 45% to 50% leverage range on deals. Lenders from last year until now would lend [on deals leveraged] up to 60% to 65%,” he said. “That puts us at a competitive disadvantage, because when we’re modeling 45%, our competitors were modeling 65%.”
“That advantage is now going away,” Sabatini said. “With our continuing ability to issue debt at the balance sheet level and get deals done, were in a relatively strong position.”
How strong? Strong enough to close the largest sale-leaseback deal in the NYC-based company’s 50-year history earlier this week: a $468M sale-leaseback of a Greater Toronto Area life science portfolio.
“That would have been a lot tougher to do when there were $200M to $300M CMBS deals that could close simultaneously,” Sabatini said. “So, we’re feeling great about our position.”
Gary Baumann, managing director, head of investments at NJ-based ARCTRUST Properties, didn’t shy away from embracing the R-word.
“We do a lot with regional banks. We have a lot of outstanding relationships with well capitalized banks whose names you would recognize,” Baumann said, without naming any of them.
[Full disclosure: JLL’s Yoakam did not pivot away from Baumann on the dais when he vouched for regional banks.]
Apparently, having an outstanding relationship with a well-capitalized bank means stuffing more capital into said unnamed financial institution.
“Our banking relationships are more than ever demanding deposits,” Baumann said. “You have to put money into the banks in order for them to issue the loan. That’s adding pressure to the system for us.”
“Where the credit climate is creating an advantage for all of us now is that it’s opening the window for the sale-leaseback market, larger than it’s been for a long time,” he said. “Because of what’s happening with the banks, we’re seeing opportunities to acquire net leases that weren’t there before.”
There’s no more “easy money” Baumann said.
“Yields on the deals have to move to market with what the capital costs are. There’s still a lot of money out there. The buying side will create pressure later in the year,” he said.
According to Sabatini, “For the right deal, equity [players] are going to write the check even if the debt isn’t the most attractive. Capital is still available for the right deals. Deals will still get done.”
Which leaves us with two questions:
If you deposit a platinum coin in your account at a well-capitalized bank, will they loan you a platinum coin?
Does Barney get to keep the 24-carat gold Signature calligraphy pen set they gave him when he became a member of the Board of Directors?
Source: “Let’s Talk About Debt: The Good, the Bad and the Ugly“