Multifamily REITs- What are the chances of their success going forward?
I had the opportunity to intern for a multifamily REIT this summer. This REIT specializes in multifamily investments. They do some JV, but mostly PE and Mezz investments. This firm has been crushing it from what I could tell. Within the first couple of weeks however, some of the analysts told me that they were concerned with the industry outlook. Most of their concern came from the uncertainty surrounding interest rates. Since REITs can borrow money at the current low interest rates and charge upwards of 12% on their loans, they can make a substantial profit. The analysts concern is that when/if the Fed raises interest rates, the firms profit margins will decline as borrowers will not be willing to pay more than 12% or whatever they charge on their loans. Is this stance justified or are there more factors at play? If the Fed does raise interest rates, will the market adjust so that REITs are able to charge higher interest and therefore maintain their profit margins? (All other things being considered equal.)
Well you've presented a bit of a dichotomy here - your question has nothing to do with the multifamily industry. Is this a mortgage REIT? Otherwise seems kind of weird that they'd be so concerned with what should be a minor segment of their business.
My question is why is 12% such a reasonable rate to lend money at(at which to lend money, yes I know). So they lend in the mezz space and when rates go up their margins will ostensibly just go down by the same amount. So now they make 11% net on their mezz loans, all is lost? Or maybe you think that 13% for mezz is high, but a deal that will pencil out at 12% will likely pencil out at 13%.
I wouldn't worry about too many 'rate hikes' as the Fed is in a real bind and we're stuck with low rates for the foreseeable future. The most they could do is a couple token 25 bp hikes but even that seems risky given the current environment.
12% does sound high for RE mezz right now for multifamily....assume these are highly leveraged subordinated loans which could go bust in any sort of economic downturn (and follow HY).
Yeah I wasn't clear, I was thinking worst case scenario even if rates go up that much it will not affect monumental change in markets and returns.
Post Properties (major MF REIT in Atlanta) just got bought for something like $4 Billion if my memory serves me right. I think the market is pretty bullish on MF REITS.
Uh, those are some pretty extreme hurdle rates the LPs must have if the analysts are worried about the possibility of a small interest rate.
What REIT is this? 12% is high for mezz. To get that you have to be lending to like 90% LTV. Most debt funds top out at 80% for mezz and that's at like 10%. Granted that's for office. But 12% is too high there is no way you're making money or even covering debt service with cap rates where they are. Interesting though, more info please!
OP,
You talking about an asset-liability mismatch? This a private reit?
12% is a high pref. I wonder which operators are willing to pay that? Must be either new or unsophisticated shops. I would be more concerned with shops gaining a track record with lenders and getting better terms/leverage and effectively cutting you out.
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