Session B3 11:30 AM DEBT AND CAPITAL MARKET: THE OUTLOOK FOR SPREADS, COSTS, AVAILABILITY AND PRIMARY SOURCES FOR THE REMAINDER OF 2016

Transcription

1 Session B3 11:30 AM DEBT AND CAPITAL MARKET: THE OUTLOOK FOR SPREADS, COSTS, AVAILABILITY AND PRIMARY SOURCES FOR THE REMAINDER OF 2016 Moderator: Henry Lu, CFO, Retirement Concepts Panel: Paul Chin, Executive Vice President, Real Estate Lending, Otéra Capital David Franklin, President, CMLS Financial Ltd. Vickie McDonnell, President & CEO, Westminster Management Corporation Dale Telfer, Vice President, Commercial Real Estate Lending, BC/Alberta Region, HSBC Bank Canada

2 2016 Vancouver Real Estate Forum Debt and Equity Panel CMLS FINANCIAL Vancouver Convention Centre / March 30, 2016

3 2015 CMLS Commercial Mortgage Market Survey Quantitative and qualitative survey of Canada s largest commercial mortgage lenders 6 th annual CMLS commercial mortgage market survey Over 90% response rate Detailed survey results available only to participants Real Estate Forum / March 30, 2016

4 CMLS Survey Results Lower availability of capital forecast year-over-year for 2016 Notwithstanding a generally optimistic group, 20% of respondents believe capital availability will decrease Y/Y, the largest downside bias since we started the survey Higher spreads forecast for 2016 For the first time in 4 years, a strong majority of respondents (76%) are forecasting higher spreads Y/Y, up from 6% in our 2014 survey. Bias to slightly tighter underwriting standards year-over-year 76% of respondents believe underwriting standards tightened or remained the same in 2015 vs Real Estate Forum / March 30, 2016

5 CMLS Survey Results 2015 Outstanding Balance!"#$%& Outstanding Balance ($billions) $250 $200 $150 $100 $50 $ E Real Estate Forum / March 30, 2016

6 CMLS Survey Results 2015 Origination!'#%& 2015 Origination (in $billions) $45 $40 $35 $30 $25 $20 $15 $10 $5 $ Real Estate Forum / March 30, 2016

7 Cost of Funding Mortgage Coupons Near All-time Lows Low base rates driving coupons lower for borrowers Spreads relatively consistent around 200bps for good quality product 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2.78% Coupon Mortgage Spread Mortgage Coupon Real Estate Forum / March 30, 2016 Source: CMLS Financial

8 Availability of Capital Commercial Mortgages vs. BBB Corporate bonds!! Availability of capital in part driven by alternative investments!! Commercial mortgage spreads tend to lag corporate spreads (Bps) ,.11203&4/1256&7288&928-7&:;& (Bps) Mortgage Spread - BBB (OAS Adj.) Mortgage Spread BBB Spread Real Estate Forum / March 30, 2016 Source: Bloomberg, CMLS Financial

9 Capital Markets Funding Availability!! Issuers turned to secured market for funding as capital markets spreads widened CMBS Issuance Senior Unsecured Issuance $2.5 $2.5 $2.0 $2.0 ($ Billions) $1.5 $1.0 ($ Billions) $1.5 $1.0 $0.5 $0.5 $0.0 $0.0 Real Estate Forum / March 30, 2016 Source: DBRS, CMLS Financial

10 Lending Landscape Overview Credit Ra*ng AAA A/AA BBB < BBB- Asset descripeon Gov t- backed mulefamily buildings Trophy assets in 4 major food groups in major city centers May include assets outside of 4 major food groups Asset not stabilized/poor quality Secondary /tereary markets Cash flow stability No credit risk High degree of cash flow stability in cyclical lows Average level of cash flow stability VolaEle cash flow Primary lenders SecuriEzed (e.g. CMB/ NHA) Banks Lifecos Lifecos Banks Credit unions Pension funds CMBS Pension funds Mortgage funds (e.g. MICs, private funds etc.) Lending Rate Range 110 bps bps bps 450 bps+ Real Estate Forum / March 30, 2016

11 NHA MBS Issuance (965/966 Pools)!! Spreads on multi-family insured buildings steady!! Availability expected to remain in-line with recent past 8.0 NHA MBS Issuance (965/966 pools) ($ Billions) Real Estate Forum / March 30, 2016 Source: CMHC

12 Multifamily Cost of Borrowing Cost savings associated with CMHC-insured funding may be offset by other factors: Execution speed Flexibility in structure and underwriting constraints Strict guidelines/control over asset Conven*onal CMHC- Insured Savings Loan Amount $10,000,000 $10,000,000 Lender ApplicaEon Fee 33 bps n.a. CMHC Insurance Premium* n.a. 2.00% CMHC ApplicaEon Fee n.a. $150 /Unit Annual P&I payments $545,000 $500,000 Effec*ve Cost of Debt 2.70% 2.34% 36 bps *CMHC insurance premium applicable on LTV over 65%. Real Estate Forum / March 30, 2016

13 Session B3 11:30 AM DEBT AND CAPITAL MARKET: THE OUTLOOK FOR SPREADS, COSTS, AVAILABILITY AND PRIMARY SOURCES FOR THE REMAINDER OF 2016 Moderator: Henry Lu, CFO, Retirement Concepts Panel: Paul Chin, Executive Vice President, Real Estate Lending, Otéra Capital David Franklin, President, CMLS Financial Ltd. Vickie McDonnell, President & CEO, Westminster Management Corporation Dale Telfer, Vice President, Commercial Real Estate Lending, BC/Alberta Region, HSBC Bank Canada

14 VANCOUVER REAL ESTATE FORUM March 30, 2016 DEBT & CAPITAL MARKETS JOINT VENTURE EQUITY INVESTMENT By Vickie McDonnell, President & CEO Westminster Management Corporation

15 VANCOUVER REAL ESTATE FORUM March 30, 2016 OUTLINE Deal Structure Assessment Partnership Balance Deal Structure Due Diligence Examples Multi-Family Development Industrial / Office Development Questions

16 VANCOUVER REAL ESTATE FORUM March 30, 2016 DEAL STRUCTURE ASSESSMENT Assess Partnership Balance Fees Acquisition, Development, Construction, Sales Developer s % of Total Equity, 20% Minimum Cash Equity versus Land Lift Guarantees required for Financing Guarantee Fee Preferred Return, Promote and Hurdle Rates Target IRR s Dependent on Risk, Developer Equity, Location, Product Type Profit Split relative to Equity Split WMC s portion of Total Profit, ranging 40% to 65% with Equity ranging 50% to 80%

17 VANCOUVER REAL ESTATE FORUM March 30, 2016 DEAL STRUCTURE ASSESSMENT (continued) Typical Joint Venture Development Structure Minimum Deal Size C$2.0M Limited Partnership Structure, with Development Management Agreement Proforma 20% IRR, minimum for a development project Equity Split, ranging 50% to 80% (WMC s portion of Equity) Preferred Return on Equity, ranging 7% to 10% Equity Multiple, ranging 0.5x to 1.0x Typical Waterfall Structure Preferred Return of 7% to 10% on Equity Profit split 80% to Partners (proportional to their Equity invested) and a 20% Promote to the Developer, until Partners achieve a 15% IRR Residual Profit split 70% to Partners (proportional to their Equity invested) and a 30% Promote to the Developer

18 VANCOUVER REAL ESTATE FORUM March 30, 2016 DEAL STRUCTURE ASSESSMENT (continued) Typical Joint Venture Development Structure (continued) Developer Fees Acquisition Fee, 1% of land cost Development Management Fee, ranging 3% to 4% Based on total project costs excluding land, development fee & financing costs Construction Management Fee, ranging 3% to 5% Based on construction hard costs Sales Fee, ranging 2% to 5% Based on sale revenue US Joint Venture Structures vary, primarily due to cross border issues

19 VANCOUVER REAL ESTATE FORUM March 30, 2016 DUE DILIGENCE Location Analysis and Site Visit Financial Analysis Base Case Upside and Downside Scenarios Debt Analysis and Granting of Guarantees Developer Experience and Reference Checks Minimum 5 years development and successful financial track record Economic and Market Analysis Risk Analysis (i.e. rezoning, new submarket) 3 rd Party Appraisal and Environmental Report(s) Board Approval

20 VANCOUVER REAL ESTATE FORUM March 30, 2016 Example: Multi-Family Development 120 condominiums, located in Vancouver, BC DEVELOPMENT PROFORMA $ Total $ / Unit $ / NSF Sale proceeds $69,550,000 $579,583 $768 Selling costs (1,520,000) (12,667) (17) Net Proceeds $68,030,000 $566,917 $751 Land & Related Costs $20,000,000 $166,667 $221 Hard Costs 29,400, , Soft Costs 4,900,000 40, Financing 2,700,000 22, Total Project Cost $57,000,000 $475,000 $629 Profit $11,030,000 $91,917 $122 Return on Net Sales 16.2% Return on Costs 19.4%

21 VANCOUVER REAL ESTATE FORUM March 30, 2016 Example: Multi-Family Development (continued) SOURCE OF FUNDS Construction Loan $45,600,000 80% Equity: WMC 75.0% $8,550,000 Equity: Developer 25.0% 2,850,000 11,400,000 20% $57,000, % Waterfall Structure Preferred Return of 10% on Equity Profit split 80% to Partners (proportional to their Equity invested) and a 20% Promote to the Developer, until Partners achieve a 15% IRR Residual Profit split 70% to Partners (proportional to their Equity invested) and a 30% Promote to the Developer

22 VANCOUVER REAL ESTATE FORUM March 30, 2016 Example: Multi-Family Development (continued) DISTRIBUTION OF PROFITS WMC Developer Total Equity % 75.0% 25.0% 100.0% Preferred Return of 10% on Equity $2,715,000 $905,000 $3,620,000 Profit Split until Partners achieve a 15% IRR 80% to Partners, proportional to their Equity invested 1,548, ,250 2,065,000 20% Promote to the Developer n/a 516, ,000 Residual Profit Split 70% to Partners, proportional to their Equity invested 2,535, ,000 3,380,000 30% Promote to the Developer n/a 1,449,000 1,449,000 Total Profit $6,798,750 $4,231,250 $11,030,000 % of Total Profit 62% 38% 100% IRR 22% 37% 26% Profit Multiple 0.8 x 1.5 x 1.0 x

23 VANCOUVER REAL ESTATE FORUM March 30, 2016 Example: Industrial / Office Development Industrial / Office strata building totaling 104,500 sf, located in Vancouver, BC DEVELOPMENT PROFORMA $ Total $ / Unit $ / NSF Sale proceeds $52,500,000 $1,050,000 $502 Selling costs (500,000) (10,000) (5) Net Proceeds $52,000,000 $1,040,000 $497 Land & Related Costs $13,400,000 $268,000 $128 Hard Costs 22,000, , Soft Costs 5,000, , Financing 2,300,000 46, Total Project Cost $42,700,000 $854,000 $408 Profit $9,300,000 $186,000 $89 Return on Net Sales 17.9% Return on Costs 21.8%

24 VANCOUVER REAL ESTATE FORUM March 30, 2016 Example: Industrial / Office Development (continued) SOURCE OF FUNDS Construction Loan $34,200,000 80% Equity: WMC 80.0% $6,800,000 Equity: Developer 20.0% 1,700,000 8,500,000 20% $0 $42,700, % Waterfall Structure Preferred Return of 8% on Equity Profit split 80% to Partners (proportional to their Equity invested) and a 20% Promote to the Developer, until Partners achieve a 20% IRR Residual Profit split 60% to Partners (proportional to their Equity invested) and a 40% Promote to the Developer

25 VANCOUVER REAL ESTATE FORUM March 30, 2016 Example: Industrial / Office Development (continued) DISTRIBUTION OF PROFITS WMC Developer Total Equity % 80.0% 20.0% 100.0% Preferred Return of 8% on Equity $1,440,000 $360,000 $1,800,000 Profit Split until Partners achieve a 20% IRR 80% to Partners, proportional to their Equity invested 2,160, ,000 2,700,000 20% Promote to the Developer n/a 675, ,000 Residual Profit Split 60% to Partners, proportional to their Equity invested 1,980, ,000 2,475,000 40% Promote to the Developer n/a 1,650,000 1,650,000 Total Profit $5,580,000 $3,720,000 $9,300,000 % of Total Profit 60% 40% 100% IRR 27% 52% 34% Profit Multiple 0.8 x 2.2 x 1.1 x

26 VANCOUVER REAL ESTATE FORUM March 30, 2016 QUESTIONS

27 Session B3 11:30 AM DEBT AND CAPITAL MARKET: THE OUTLOOK FOR SPREADS, COSTS, AVAILABILITY AND PRIMARY SOURCES FOR THE REMAINDER OF 2016 Moderator: Henry Lu, CFO, Retirement Concepts Panel: Paul Chin, Executive Vice President, Real Estate Lending, Otéra Capital David Franklin, President, CMLS Financial Ltd. Vickie McDonnell, President & CEO, Westminster Management Corporation Dale Telfer, Vice President, Commercial Real Estate Lending, BC/Alberta Region, HSBC Bank Canada