AUSTRALIAN COMMERCIAL REAL ESTATE DEBT

Transcription

1 AUSTRALIAN COMMERCIAL REAL ESTATE DEBT Market dislocation creates opportunities October 2016 Madison Financial Group

2 SECTION 1 Why invest in commercial real estate debt?

3 ASSET SIDE Senior secured credit position with multiple layers of capital protection Registered 1 st mortgage loans Mid market loans secured over non-specialised commercial real estate Average loan size of $2m - $10m Mid-market securities are less complex, require less capital and easier to manage in event of default Lending to a conservative percentage of market value. At LVR of 60% the value decline must exceed 35% to give rise to the prospect of a principal loss Additional protection provided by borrower corporate and personal guarantees Australian legal system supportive of mortgagee interests Industry default ratio less than 0.50%, loss given default circa 0.10% 3

4 LOSS RATES ON WELL UNDERWRITTEN CRE DEBT ARE LOW Loss rates on Australian and US life company CRE debt compared ( ) 4

5 RETURN SIDE Reliable income streams and high capital stability High returns relative to other credit investments but significantly lower and more easily understood risk Monthly income returns Low volatility Low levels of loss given default High level of capital stability Low correlations with traditional fixed income and other floating-rate investments Resilience to margin pressure But: Very limited liquidity 5

6 ENDURING MARKET OPPORTUNITY Significant mispriced credit opportunities Major Australian banks retreating from key CRE mid-market debt sectors Foreign banks not active in CRE debt sector Securitisation only financing small ticket CRE debt programs (<$2m) Retail mortgage funds all but non-existent Private capital scarce for transactions >$2m Investment banks and PE funds not active in sub $50m transactions Major participants have exited market (e.g. GE Capital Holdings, Capital Finance, BOSI) Very limited competition in mid-cap sector Low supply and strong demand creates significant opportunity for new sources of loan capital tat are able to assess risk and provide opportunistic financing solutions Due to market consolidation experienced borrower groups are seeking alternate sources of capital 6

7 SECTION 2 Credit

8 RISK ASSESSMENT PROCESSES Risk management fine-tuned from 30 years lending experience 8

9 BALMAIN S CREDIT MANAGEMENT APPROACH Capital protection paramount Focus on borrowers with proven track record that are known to manager Mortgage security enhanced by sponsor/corporate guarantees Sensitivity analysis of various scenarios - financial, operational, macroeconomic, etc. Careful conditioning and loan structuring to maximise protection of capital Engagement of expert legal counsel to draft loan and security documents Thorough, ongoing monitoring of each loan and the portfolio as a whole Constant monitoring of portfolio and early responses to changing market conditions Comprehensive and proprietary management and compliance systems 9

10 ORIGINATION - SETTLEMENT - REPAYMENT Stringent processes and separation of functions 10

11 APPROACH TO MITIGATING RISKS Experienced loan origination teams, aligned, educated and operating to portfolio guidelines Loan origination separated from credit via loan acceptance as a distinct discipline Cycle-experienced credit team with capacity to manage peak work loads Experienced credit committee with independent members and unanimous decision making Lending procedures and processes well documented and understood by all parties All processes from origination to repayment supported by live IT systems infrastructure Active loan and portfolio management post settlement Investment committee regularly reviewing external data relevant to future portfolio performance Independent loan servicing Internal asset management and recovery expertise separated from credit 11

12 SECTION 3 About Balmain

13 BALMAIN GROUP 35 YEARS Long-term focus on CRE debt 13

14 BALMAIN GROUP EXPERIENCE AND REACH Long-standing partner of major institutions 14

15 AUSTRALIA S LARGEST NON-BANK CRE LOAN MANAGER Sole focus on CRE debt and proven track record Proven capacity in loan sourcing ($21b CRE debt originations last 10 years) Proven expertise underwriting & managing large-scale CRE debt programs Largest non-bank commercial loan servicer in Australia/ New Zealand (AMAL) S&P rated strong Long term mortgage fund management and credit underwriting experience AFSL, Credit licence holder and fully capitalised Responsible Entity and Trust Manager. Largest commercial loan recovery capacity in Australasia Engaged as Asset Manager, Special Servicer &/or Trust Manager on over $6b in CRE assets. Clients include Goldman Sachs, Blackstone, Deutsche Bank, Bain Capital Credit & Morgan Stanley 30+ years solely focused on the commercial property loan market More than 150 staff in 8 offices in Australia and New Zealand 15

16 FULLY INTEGRATED ACROSS ALL ASPECTS OF THE LOAN CYCLE 150 staff dedicated to all aspects of the loan cycle process, single party accountability 16

17 SECTION 4 Current and Recently Closed Balmain Private Loan Transactions

18 MARSDEN PARK NTH, WESTERN SYDNEY, NSW Advance of $16m, LVR of 16%, Margin 600 bpts over BB Type Description Opportunistic Senior 763 hectares of land in Western Sydney growth corridor Advance $16,000,000 LVR 16% Term 24 months Whole loan 8.10% Margin Sponsor Guarantees 6.00% above 90day BBSW Singaporean corporate investor, owned the land for many years. Corporate & Personal Attributes Asset being rezoned into residential via PAP agreement with NSW Government Significant and proven surrounding development including Stockland and Mirvac. 18

19 KIRRA BEACH, COOLANGATTA,QLD Advance of $12m, LVR of 70%, Margin 900 bpts over BB Type Description Other senior residual stock 14 residential apartments and 9 strata retail lots Advance $12,000,000 LVR Term LVR 70% (in-one-line valuation) Term 24 months Whole loan 11.40% Margin Sponsor Guarantees 9.00% over 90 day BBSW Substantial Brisbane development company owner and a major telco investor. Corporate & Personal Attributes Covenants required sell down over loan term with penalties for non-compliance Advance equated to less than $3,000 per m 2 of apartment floor space. 19

20 BAULKHAM HILLS, NORTH-WESTERN SYDNEY Advance of $5.72m, LVR of 55%, Margin 818 bpts over BB Type Opportunistic Senior Description Advance $5,720,000 13,364m 2 Medium Density DA approved residential land on Windsor Road, Baulkham Hills (44 apartments) LVR Term 55% (valuation) 47% (purchase price). 12 months Whole loan 9.90% Margin Sponsor Guarantees 8.18% above 90day BBSW Chinese national and experienced businessman who owns and runs a successful chain of supermarkets & shopping malls Corporate & Personal Attributes Located in highly prominent Windsor Rd position DA approved, with construction certificate application in progress Multiple exit strategies 20

21 DIXON STREET, SYDNEY, NSW Advance of $11.15m, LVR of 50%, Margin 1265 bpts over BB Type Description Opportunistic Senior Commercial properties in sub grade condition Advance $11,150,000 LVR 50% Term 12 months Whole loan 9.75% Margin Sponsor Guarantees 7.65% over 90 day BBSW Pharmacist Corporate and personal guarantees provided Attributes Low LVR tertiary assets in strong locations Collateral security lien from other income producing assets. 21

22 LUDDENHAM, WESTERN SYDNEY, NSW Advance of $3.4m, LVR of 27%, Margin 985 bpts over BB Type Description Opportunistic Senior Land advance site DA approved for 56 residential lots Advance $3,400,000 LVR 27% Term 12 months Whole loan 12.00% Margin Sponsor Guarantees 9.85% over 90 day BBSW Sponsors comprised 3 experienced developer and AMP Corporate guarantees provided Attributes Debt cover of $31m from qualifying pre-sales against land advance of $3.4m 22

23 SECTION 5 Balmain Private Debt

24 BALMAIN DISCRETE MORTGAGE INCOME TRSUTS On-line investments in stand alone first mortgages 24

25 BALMAIN PRIVATE DEBT CRE loan investment platform for HNW investors and wealth advisors Each mortgage investment has a Supplementary PDS with sufficient information to make an informed decision on risk vs return No cross default risk between investments as all loans are stand alone trust structures Investments are made as loan units which represent equal ranking parts of the total mortgage amount Provides investors with opportunity to build a diversified portfolio of first mortgage secured commercial loans Options available: Advisor managed advisor holds authority to transact on behalf of clients Advisor recommended advisor recommends to clients whom sign up and transact directly 25

26 BALMAIN PRIVATE LOANS Investment performance 3 Attribute Repaid Sub-Trusts Open Sub-Trusts Number Total Value $43,259,500 $42,096,000 Period March 14 to Sept 16 Current Targeted Weighted Average Return to Investors 7.16% 7.21% Actual 2 Weighted Average Return to Investors 7.42% TBA Weighted Average Loan to Value 52% 53% Average Loan Term 14 months 17 months Average Loan Duration 13 months TBA Default % 0.00% % Loss given default % 0.00% 0.00% 1. Two facilities were subject to technical default (missed due date repayment which incurred a higher rate penalty). 2. Additional loan interest and fees may be earned from early repayment fees, penalty interest for financial or technical defaults or loan variation fees etc etc. Any additional income above Target Return is shared 50/50 between investors and the Manager but is only paid to the Manager once the Investors receive full Capital Repayment and full Targeted Interest Return. 3. Historical and current performance is no guide to future performance. 26

27 MORTGAGE FUND STRUCTURES Pooled v non-pooled Attribute Pooled Fund Contributory Fund Sector Returns Between 5.00% and 7.00% Between 6.00% and 9.00% Fund Structure Pooled Stand alone Loan Structure Senior 1 st mortgage Senior 1 st mortgage Construction exposure Yes No Default contagion Yes No Cash drag Yes No Asset Selection Manager Investor Asset duration mismatch Yes No Liquidity Partial 1 No 2 Asset look through Opaque Clear Portfolio protection Manager created Investor created 1. Subject to cash availability. Historically not available in stressed markets. 2. Investors funds are perfectly matched to individual loan duration. 27

28 CURRENT OPEN INVESTMENTS 28

29 RECENTLY CLOSED INVESTMENTS 29

30 SECTION 6 Recovery experience

31 $430m MID-CAP COMMERCIAL LOAN PORTFOLIO Underwritten pre-gfc and successfully recovered post-gfc Securitisation warehouse $1b CBA/NAB funded Originated, underwritten, serviced and managed by Balmain from inception $434m portfolio built between during significant competition in credit markets and recovered in during subsequent credit market dislocation 100% return of capital plus an Annualised Total Return of 7.33% p.a. net Target Return achieved despite the low margins and high LVRs prevalent pre-gfc Parameter Amount Peak Portfolio Size (as at Feb 2008) $434m Total Number of Loans (as at Feb 2008) 261 Target Margin (as at Feb 2008) % Actual Margin Delivered 1.84% Annualised Total Return 7.33% Number of Loss Making Loans 11 Net Capital Losses 0.00% 31

32 $2.54bn DISTRESSED REAL ESTATE LOAN PORTFOLIO Appointed by Morgan Stanley and Blackstone 2011 & 2012 appointed as Special Servicer and Portfolio/Asset Manager by Morgan Stanley and subsequently Morgan Stanley and Blackstone to manage two separate Bank of Scotland (BOSI) commercial loan portfolios totaling $2.54bn 83 separate commercial property exposures (average size $30m) Assets across Australia and covering entire gamut of commercial property sector Balmain undertakes credit management loan administration trust management portfolio and asset recovery management Recovery work undertaken by dedicated team of 20 asset management professionals supported by extensive credit and internal legal support Morgan Stanley and Blackstone have on-line access to all facets of credit and asset recovery work 32

33 $2bn DISTRESSED REAL ESTATE LOAN PORTFOLIO Appointed as portfolio / asset manager / trust manager by Goldman Sachs 2013 appointed as Special Servicer, Portfolio/Asset Manager & Trust Manager by Goldman Sachs to manage the former Suncorp commercial loan book of $2.05b 28 borrowers, 108 loans (average borrower exposure $73.40m) Assets across Australia and covering entire gamut of commercial property sector Balmain undertakes credit management loan administration trust management portfolio and asset recovery management Goldman Sachs have on-line access to all facets of credit and asset recovery work 33

34 $240m COMMERCIAL / RURAL REAL ESTATE LOAN PORTFOLIO Appointed as portfolio / asset manager / trust manager by Deutsche Bank 2013 appointed as Special Servicer, Portfolio/Asset Manager & Trust Manager by Deutsche Bank to manage the former Banksia Securities commercial loan book of $244m Originally, 506 small ticket property exposures with strong rural emphasis; assets are spread across Australia (chiefly eastern seaboard) Balmain undertakes credit management loan administration trust management portfolio and asset recovery management Credit management work undertaken by dedicated team of 8 credit professionals supported by extensive internal legal and administrative support Material reduction in loan delinquency and credit deficiency (momentary and non-monetary) achieved in the first 6 months Multi-pronged reporting system featuring an online, real-time bespoke proprietary platform 34

35 GE CORPORATE DEBT PORTFOLIO Appointed Special Servicer / portfolio manager by Bain Capital Credit & Deutsche Bank 2016 appointed as Special Servicer, Primary Servicer, Portfolio/Asset Manager & Trust Manager by Bain Capital Credit to manage the GE corporate loan book of $2.5bn Separate loan books included Asset Backed loans, Equipment Finance loans, Aviation finance, Debtor finance and Leveraged finance (syndicated facilities) Corporate Asset Back Lending book of $800m over 45 separate facilities and equipment finance book of over 10,000 contracts Balmain undertakes Credit management Loan administration Trust management Portfolio and asset recovery management Balmain developed a bespoke servicing platform to manage the multiple assets classes and provide multipronged reporting featuring an online, real-time access to data and individual loans 35