Pricing of mezz loan sell off
SL Green puts One Court Square loan up for sale
https://therealdeal.com/2020/07/23/sl-green-puts-…
Does anyone know how you come up with a price/math involved when buying a mezz loan?
I posted a link above as an example
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You would run a dcf on the expected cash flow of the loan and then divide the PV by the face amount of the debt to produce a price.
Mezz on an empty office bldg in LIC that even SL Green is trying to sell, indicating that that one of the largest NY Office REITs thinks the asset/market is in trouble is going to trade very heavily below par.
I don't think it's going to trade at much of or at any discount. Why would they sell at a huge discount to par? If you read the article they backfilled a lot of space and SL Green is raising cash to take buy back their shares to take advantage of the disconnect between private and public markets.
Selling debt is an easy way to unlock liquidity given the strength of the debt markets right now. Whereas there is very little liquidity in the private equity markets right now.
To answer the original question, I generally think of mezz pricing in the 65 - 80% LTV position at Libor + 700 - 1200bps.
I'm not necessarily saying that SLG will actually choose to execute below par, but given the circumstances of this deal, I think it would be very difficult to get par.
One Court Square is 1.5MM SF in LIC. The property is currently ~40% leased in a sub market with >15% vacancy.
To get par, you would have to assume a YTM play, which means that you have to find an investor that believed that Savanna can lease-up 900k SF over the next 3 years at the rents underwritten pre-COVID.
Right now, even if you could find tenants willing to sign leases for that much space, with the way that rents are dropping right now in NYC, there is almost no way that it would be at pre-COVID lease rates (which is the only way it stays a 65-80% LTV slug). With that in mind, this is probably more like a 80-100% LTV slug at today's underwriting.
And when you get to 80-100% LTV, you are taking equity risk, which means that you want equity return and 8.5% isn't going to cut it.
Modeling the loan as a YTM at 15%, yields a price of around 86. Once you start taking into account some sort of probability of actually having to foreclose, spend additional capital for TI/LC + assume or buyout the senior, that pricing drops significantly.
^I'll second that, spot on. Regarding how to price below par...
If the LTV has dipped since origination you are just pricing below par to achieve a yield in line with the new perceived last dollar risk (i.e. 900 - 1400bps at 85% LTV). That is assuming you expect the borrower to perform and be paid off.
The natural buyer doesn't always price from a lender POV though, wanting or expecting the borrower not to perform is another story... the mezz yield is irrelevant or even your downside scenario if default isn't a sure thing. You price to the basis you would happily own the asset for. Not uncommon to buy at par despite a significant drop in value if you have the ability or high probability to gain control of the asset at a discount.
1) Value the collateral 2) Make sure you like your LTV. Would you wanna own the building for the sum of the debt? 3) Enjoy equity-like returns for bond-like risk
Been running some BOE valuations on One Court Square to see where the Mezz loan would end up LTV wise and I can’t get close to a $1B stabilized valuation. I’m stabilizing around $700m which obviously doesn’t take into account TIs, LCs, Free Rent and the time it’s going to take to lease up 600,000+ SF in LIC during a recession.
Curious to hear some thoughts on whether people on this board agree with this valuation. I know there’s not really a market in general right now so it’s a shot in the dark.
Also where does this leave the Mezz debt considering at a $700m valuation it’s above 100% LTV?
What are your basic assumptions? Market rent, general vacancy, OI, opex PSF or profit margin, and stabilized cap rate?
RSF - 1,401,630
Gross SF - 1,203,753
Current Occupancy - 45.00%
In-Place $ / SF - $55.00
Market $ / SF - $45.00
Vacancy - 7.5%
RE Taxes % of EGI = 25%
OPEX Net of Recoveries - $8 PSF (off gross)
Stabilized NOI - $38.5M
Valuation at 5.5% Cap = $700M
Maybe my leasing assumptions are low? Just tough to image $/SF not dropping below $50 PSF for all that space in LIC right?
A few folks mentioned that One Court Square is 'empty' - while there may be little to no people in the office, I recall that it is leased (unsure what %) by decent tenants.
It's ~40% leased
Thanks - i remember seeing a financing OM 1.5 years ago where it was touted as being >60% leased, but couldnt remember if they were all signed leases or not.
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