In Real Time
In Real Time
Interview with BSP's Mike Comparato on the real estate debt landscape
In Episode 9 of "In Real Time" we speak with Benefit Street Partner’s head of real estate, Mike Comparato, on the real estate debt landscape.
Key topics covered:
- Current events and macro views
- Effectively utilizing leverage for senior debt positions
- What are commercial real estate collateralized loan obligations (CRE CLO)
- Lessons learned from 2020
Disclaimer:
Views expressed are those of BSP, an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training and does not mean the SEC has approved of the services of the investment adviser. Past performance is not necessarily indicative of future results and returns are not guaranteed. All investments involve risks, including possible loss of principal. Allocations will change over time.
This communication is general in nature and provided for educational and informational purposes only. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
Hello everyone. My name is Jerry[inaudible] with beneficiary partners, real estate, pleased to announce that I'm being joined today by Mike Colorado, who is head of real estate. And today we are going to be talking for 10 or 15 minutes or so about some key topics facing a real estate debt investment landscape, Mike. Hello, and how are you today? Doing great. Thanks, Jerry. All right, let's jump right in. I want to start with, what is your view with current events and major news specifically in the last month? And if you'd like you can please comment on the state of affairs with investing today in private real estate debt.
Speaker 2:Uh, you know, I think the, the market is, is very healthy right now overall. Um, the, a lot of the questions that we've been asked for the past, you know, six, nine months through COVID have been, you know, comparing the great financial crisis to the COVID pandemic and, you know, we've held all along of that, the major differences and the depths of the financial crisis. We didn't know if there was an end game or what the end game was, and we've known, you know, since day one, that COVID was going to be temporary. Uh, you know, was it going to be six months? Was it going to be two years? Was it going to be three years? You know, no one was really certain, but we did know that there was some, uh, end date in place. And I think to, you know, to everybody's pleasure while it has been a dismal 2020, uh, the end is near, uh, I think we firmly all believe at this point, you know, come the spring, uh, and certainly the summer of 2021 that we will be living in a very, hopefully COVID free world. Uh, so I think investors at this point are really looking through the next, you know, two to four months, which are going to be, you know, painful obviously if, you know, especially in the U S given the caseload. Um, but from an investor standpoint, I think they're looking through the next, you know, 60 to 120 days and getting comfortable that the country will be back on a more normal operating path, uh, going forward and as such are investing today, uh, with that force.
Speaker 1:Interesting. Now you mentioned a couple of time ranges. One was a couple of months, then one was a number of days. What are the benefits trading partners real estate macro view is your view, red, yellow, green, as it relates to the proverbial stoplights and as well, could you add any perspective on that specific to real estate debt versus real estate equity? And then since your specialty is real estate debt, any specific context towards your red, yellow, green appetite for investing within senior debt versus mezzanine debt
Speaker 2:Of questions there, let me do my best to address them all. Um, so when we're looking, you know, from a macro level at the market, I think we're focused on two primary variables, you know, location and asset class, uh, you know, we're never going to have an all green or an all red for either of those categories. So I, I think it really behooves us to spend just a few minutes on, you know, what we like, what we don't like and why, uh, both from a geographical standpoint and from an asset class standpoint. So we have, you know, been very bullish, uh, on multifamily and industrial for, for years and years. Uh, if you look at our portfolio makeup, I would say almost two thirds, maybe even three quarters in the aggregate of our existing portfolio is dedicated to multi-family and industrial. Uh, we will continue to have a green light on those faces, uh, for the foreseeable future, you know, specific to multifamily. We would carve that out to be in class a and class B, uh, a little less, um, bullish on the, uh, workforce housing class, the type multi-family markets. Um, and then, you know, from there we view office, uh, as, as a difficult asset class today by no means a red, uh, but certainly a yellow where I think we're too early, still, uh, in the work from home world that we live in to know the long-term ramifications on the office market. Um, so if we're going to invest in office today, uh, it really is more about the narrative and having a really, really, uh, solid set of facts, you know, acquisition financing, a basis that we like a market that we like a sponsor that is, you know, well-versed in office in that market. So it really has to be kind of a perfect storm of positive narrows and narratives within the office space. Uh, you know, hospitality, I think is really bifurcated to, uh, you know, convention slash airport type hotels, which we think are going to recover and be fine. But we do think that that could be a 2023, 2024 event before that happens. So it's still potentially a little bit early there, uh, versus more resort, uh, drive in type markets, uh, for hospitality, which have actually performed fairly well. Um, so we have, we have seen some of our hotel assets really perform in some cases better than 2019, uh, Lake taco, the Florida beaches. Uh, some of those markets have really done well. And then lastly, I would just address retail. Uh, we have been very bearish on retail overall for years. Uh, we only have about 4% of the portfolio, uh, in retail today. And I think we'll continue to hold that view. Um, you know, I think malls are going to struggle for the foreseeable future. I think power centers are going to struggle for the foreseeable future, just in that the universe of tenants that needs 30, 40, 50,000 square feet of box space, uh, is probably shrinking over the next five to 10 years. So demand for those boxes is going to decline. Uh, and there's only so many trampoline parks that you can put into these to backfill the space. Um, if we were going to dip our toe into retail, you know, potentially grocery anchored or, you know, really neighborhood centric type retail, uh, and then from a geographical standpoint, I would say, you know, we are very bullish on low to no income tax state and lower cost of living States. So we have been actively investing in Florida, Texas, Tennessee, uh, greater Phoenix MSA, uh, the Carolinas Atlanta. And we kind of like that, you know, the smiley face of the us as, as our investible, uh, geography. Uh, it's not to say that we won't go outside of that, of course, but I think we've done a very good job of following, uh, the demographic patterns, uh, and the I'm sorry, the, the migrational patterns within the U S and following, you know, population count and population growth. And we'll continue to do that. Um, and then lastly, I just want to address the, you know, your question about investing in the senior stack, uh, versus mezzanine, very difficult to give a generic answer there. I think what we have witnessed is, you know, we thought the mezzanine market was, was mispriced for the risk it was taking for the past several years. Uh, I think that that has corrected itself in some capacity as a result of COVID. And I think it certainly has corrected itself, uh, within the middle market, um, mez lending space. So we find, you know, junior debt and mez pricing much more interesting today, uh, than it was yesterday. Uh, but I do think it is still very dependent on the transaction you're looking for, right? Like all mez pieces are not created equal. So if you've got an asset class, like in a market that you like with a sponsor that you like, uh, we are much more bullish, uh, and open to mezzanine and sub debt financing today than we would have been, you know, a year or two or three ago.
Speaker 1:Wonderful. Very helpful. Very enlightening. I have, uh, another question that is shorter, and I'd like to ask you to think of something that would be a example deal that comes to mind to highlight a recent transaction opportunity, whether you invested in it or not, that would substantiate the compelling nature to the investment landscape as it is today. And framing the question there is uncertainty, but we all know real estate assets are all specific and have unique circumstances. So if you could highlight a specific recent transaction that comes to mind that substantiates this investment opportunity today, we'd love to hear,
Speaker 2:Uh, sure. Um, you know, we, we recently provided a loan, uh, for a, uh, class, excuse me, a class, a multifamily asset, uh, that was just outside of downtown Nashville. And we have been, you know, longterm very bullish on Nashville. Uh, the, the population growth there has been tremendous, uh, you know, we, we love the income tax structure of the state. We love the cost of living in the state. So we're generally bullish on the MFA's within Tennessee overall. I, maybe the exception there being Memphis, but looking at national Knoxville Chattanooga, uh, find them all interesting. So there was a, a multi-family asset where a developer was about 85% completed with the project. Uh, they want it to get off the recourse of their construction, loan and elected to sell the asset. And we came in, uh, with new sponsorship, new borrower, and we provided both a senior loan and a mezzanine piece. And I would tell you, you know, pre COVID the amount of interest in a transaction like that would have been off the charts. Uh, the mez probably would have been priced in the high single digits, and there would have been, you know, eight to 12 mez bitters there, uh, because there was a small construction component left. And because the market has really had a, a void in the middle market for capital, uh, we were able to price that meds at close to 15%. So, you know, we love the investment thesis. Uh, we love the investment thesis a year ago, as much as we love it today. Nashville multi-family class, a acquisition, right at all, had those bullet points of the narrative. That we're just a great starting point for an investment, but we have the opportunity to invest mez dollars, you know, almost five to 600 basis points wider than where it would have been priced pre COVID.
Speaker 1:Mike, how do you think about utilizing leverage for senior positions? And additionally, can you tell everyone who is not yet familiar with a commercial real estate collateralized loan obligation or CRE CLO for sure what it is and what makes it better than a debt a manager could simply rely on from a more simple warehouse line of credit from a bank?
Speaker 2:Sure. So, you know, similar to not every mez piece is created equal, not every financing vehicle is created equal. Um, and I think, you know, there, there are numerous ways for senior lenders to, to leverage their book. And I think, you know, the amount of leverage that someone is willing to take should be, you know, part and parcel with the type of leverage they're getting. So, you know, maybe they can sell off in a note, uh, maybe they're getting warehouse financing from a, from a bank or a warehouse provider. Uh, and then we, we have historically utilized the CRE CLO model as a financing vehicle for as much as we possibly could on our balance sheet. And we'll continue to do that. And the reason we like the CRE CLO uh, liability model is really for two reasons, one, it matched term funded and two there's no Mark to market structure and having the consistency of that liability being available to you, you know, throughout a, you know, a downturn and throughout a market volatility, uh, was tremendously helpful, uh, for our 2020, uh, operations. And so we'll continue to always have a, you know, a keen eye on the structure of our liabilities. Uh, I don't think they are as important as the assets. Uh, I do think that as long as you're writing good loans and good markets, a good borrowers, and you have performing assets, that's always the most important variable. Uh, but clearly, uh, what COVID has taught the market overall is, you know, assets do matter, but liabilities have to be a big focal point of the balance sheet as well. Uh, and so I think w w we were, we were, you know, rewarded for correctly, you know, being the largest CRE CLO issuer, uh, in the marketplace for the last three years. And we will continue to utilize that, uh, liability on a go-forward basis.
Speaker 1:Mike, what lesson learned from the global financial crisis comes to mind that you saw some managers forget in this year's pandemic and part two would be, what are the lessons learned for all of the marketplace to take away from this year's events?
Speaker 2:You know, I think the lesson learned, uh, or at least the reminder that I think is just so important for, you know, credit investing is paper equity versus cash equity, and, you know, very early in the pandemic, uh, I was interviewed by a bunch of different people, investors, rating agencies, you know, asking, you know, what do I think going forward? And it was somewhat counterintuitive, you know, being asked in March and April, what do I think going forward? And it was somewhat counterintuitive in that I took the position that the CRE CLO space is going to outperform the CMBS space. And I say, that's counterintuitive because naturally, you know, the CMBS space is intended for, you know, stabilized and air quotes assets where the CRE CLO space is, is generally considered, you know, unstabilized or, you know, bridge transitional type assets. And the reason that I, you know, firmly believed that the out-performance would take place was because of the difference between paper equity and cash equity. The vast majority of CRE CLO financing and bridge financing is acquisition financing, where a sponsor is writing a meaningful check and they have a meaningful investment cash, equity investment in the property that they have to protect, you know, through dislocation. Um, you know, now if this, this location lasted three, four or five years, there is a point at which the equity tapped out and they no longer protect. Um, but if you compare that to CMDS where a lot of the assets are providing, you know, 90 or a hundred percent of cost basis, but on a piece of paper, they're 65 or 60 or 70 LTV, uh, sponsors put in a position where they have to decide, do I want to go into my pocket book and continue to carry this out of pocket? When I don't really have any actual losses, my losses are going to be paper losses. Um, so I think this was a, you know, this was a huge reminder to the market that the V of LTV can come and go like the wind, but the C of loan to cost then LTC. Uh, that is, that is really what investors should be focusing on, especially from a, from a credit standpoint.
Speaker 1:Mike, thank you. This has been great listeners. Thank you very much for joining and listening in a quick summary to cover Mike's main topics. We find markets are healthy. What we find is this environment is certainly different than the global financial crisis. As markets do see an end date to this crisis, as it relates to investment opportunities and focus, it is about location and the asset class, and it has never all green or all red in either category. And the focus will always remain on the narrative, the basis and helpful as well is acquisition versus refinancing. Following major geographical migrational patterns and trends where us residents relocate in broader categories. And then on junior versus senior junior debt pricing has become more interesting than it has been in the last one to two years and numerous ways for senior lenders to leverage a deal, selling an AA note warehouse financing, or a theory CLO with definitive benefits of series CLL being match term funded and to no Mark to market structure. And Mike's reminder that assets are still most important, but liabilities always have a big focal point. And lastly, comments on CMBS versus Siri CLO, how core stabilized assets, typically make-up CMBS debt investments and a bridge and transitional assets typically make up the series CLL market with the punchline being that these can certainly perform differently. There are certainly more paper equity in the CNVs space than there is on the series CLO side. So with that, I'd like to formally conclude, thank you again. That was my Comarado had a real estate for benefit street partners, real estate. And this is Jerry[inaudible] benefits, tree partners, real estate. And thank you listeners for joining once again. And we look forward to you participating in the next one, all the best.