Lending to REITs and Debt Underwriting
Quick question for those on the debt side of the business, was just thinking about this earlier today. If you guys are lending to a public REIT, will you underwrite the REIT and analyze projected changes to the REITs IS, BS, and CF statement after your loan has been taken by the REIT? If yes, which I would assume you would look at it, at least briefly, how in depth is the underwriting?
Thanks!
It depends on what is the collateral for the loan. If the loan is a first mortgage secured by the property without any recourse, then the REIT's financial strength is looked at, but its strength is not the primary factor. I can not speak for the life insurance companies, but from a Bank's securitized or portfolio options, actions to secure the property are mainly based upon the property.
If the debt is in the form of, say, a line of credit or construction loan, then yes you would need to underwrite the REIT's financial statements.
My understanding is that REIT's rarely borrow at the property level, unless they are assuming a debt already on the property. They instead have a massive line of credit and leverage that instead.
It really depends on how easily they can access the debt. They generally do have massive lines of credit, but many REIT's do borrower on the property level. I would say a huge portion of Eastdil's debt placement revenue comes from REIT's securing debt on the asset level. There are a good number of REIT's that just need longer term debt than what the lines of credit offer. I would say that REIT's probably won't access the mortgage capital markets unless the transaction size is just too large, but even then, there are many of them that do.
Interesting info about Eastdil debt placement. Definitely didn't know that. Second the point by networkyournetworth
It was my understanding that REITs rarely borrow at the corporate level (rare in relation to their debt load). [See corrections to statement in next comment]
Anyway, given that 99% of REITs borrow at less than 50% LTV (and the good ones under 30% LTV), you're more than likely going to rubber stamp the deal.
As a point of reference, AvalonBay's Archstone acquisition sources and uses:
Uses (in billions): Portfolio Acquisition: $6.50
Sources (in billions): Equity raise: $2.10 OPUs: $1.90 Property-level debt assumption: $2.00 Cash on hand: $0.25 Property-level L-T debt: $0.25 Corporate debt: $0.00
That $250 million of property-level long-term debt would be rubber stamped by any lender from here to the Moon.
@Virginia Tech 4ever" IronChef204
You learn something new everyday.
Let me just point out that I was wrong. Did a little digging into some REIT annual reports and it looks like mortgage debt and unsecured debt is about 50-50, give or take (some have noticeably different weights), which is far from the "rarity" that I suggested. However, lines of credit specifically seem to be pretty small parts of unsecured debt. The unsecured debt looks mostly like standard, fixed-rate corporate debt.
Just wanted to point out that I was probably 75% wrong in my statement. 3 out of 4 Pinocchios :/. Sorry. But I wanted to make this correction because I know people silently read these forums over the years and didn't want to be accused of distributing false information.
SB for the DD.
^future undergraduate WSO lurkers will wonder wtf I just said.
We have a large REIT as a client and we exclusively arrange their debt financing. Each asset has it's own mortgage often
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