From the October 2012 Issue of Real Estate Forum
The Never-Ending Search for Yield
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When it is all said and done, 2012 will likely be recorded in industry annals as the year deals finally closed—unlike in 2010 and ’11, when buyers and sellers would find one reason or another to hit the brakes on transactions. “We are in a unique period right now when both parties are inspired to get deals done,” says Kevin White, director of business development for Virtus Real Estate Capital. And financing? That is a no-brainer, he says, and indeed the Austin, TX-based real estate private equity sponsor is moving forward with its own transactions with an eye to locking in as much debt as possible. “That way, if we hit the wrong end of the cycle, we have enough term left on the loan to ride it through,” he says.
Fortunately for White, the securitization markets are happy to oblige. Earlier this year the company acquired a 264-unit, 1,056-bed student housing community near East Carolina University in Greenville, NC. It secured 10-year debt from Freddie Mac with a two-year IO term at a 4.16% interest rate.
“The attractive part about this deal is that in the future it can be resized during that ten-year period,” White says. “One of the issues with locking in long-term debt is that a lot of the time prepayment penalties make it very rigid and there is no flexibility on the exit.” In that scenario, it becomes too expensive to defease the loan.
With Freddie Mac’s willingness to resize the transaction, however, the new buyer can assume the existing loan, placing more debt on it if necessary at whatever the current interest rate is. “The blended cost of debt would probably be much less for the borrower, depending on where interest rates are going,” White concludes.
Freddie Mac, for its part, is more than happy to shoulder the risk; it has any number of securitization vehicles, many recently introduced to the market, on which to slough it off. There are no worries about demand for these securities, at least if recent history is any indication—most of the GSEs multifamily securitization transactions have been, in fact, oversubscribed by investors on the prowl for yield…
…To read the rest of the story, please visit the October 2012 issue of Real Estate Forum.
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