PGIM: Liquid Market Means ‘It’s a Good Time to Be a Borrower’
SAN DIEGO — In 2017, PGIM Real Estate Finance originated $14.8 billion in financing, led by production in multifamily and industrial lending. The company also announced that it has as much as $15 billion available for financing in 2018 and will target growth in international markets and agency business in the Western United States.
REBusinessOnline spoke with Paige Hood, CIO and senior portfolio manager with PGIM Real Estate Finance, at the Mortgage Bankers Association CREF Multifamily Housing Convention & Expo. The conference took place at the Marriott Marquis San Diego Marina on Feb. 11-14.
Based in Atlanta, Hood oversees the investment process for the company’s core and core-plus mortgage investment, as well as the general account and funds management portfolios, which were valued at $57.8 billion in assets under management at the end of 2017.
What follows is an edited version of the conversation.
REBusinessOnline: What impact do you think the Tax Cuts and Jobs Act will have on commercial real estate lending, both from the borrower perspective and the lender perspective?
Paige Hood: There are a lot of things to discuss as far as the tax bill, and a lot of them could be negative in relation to real estate. Probably the most positive thing about it was that those [negative] things didn’t really get into the bill, such as a limit on the deductibility of interest or a limit on 1031 exchanges.
The other thing that we think about that adds some wind to the sails of the economy is that we’re unlikely to see a recession in the near term. As a lender, you’re always thinking about the downside. You don’t share the upside.
If the intent of the tax bill goes through, that may generate enough productivity to prolong the expansion much longer than a couple years. If it doesn’t happen, budget deficits and other things may make the pullback in a couple years more significant than it might have been. Those are the kinds of things that we think about.
REBO: We’ve had this expansionary period for a long time. It sounds like you’re feeling a little bit like this is rational exuberance?
Hood: Compared with 2016, there’s much greater confidence now that the expansion is going to continue for at least a couple more years. There’s greater confidence in the underlying fundamentals of the economy and the impact on real estate. Last year was a big maturity year in the CMBS world. There was a lot of loan volume out there to be financed.
In 2018, the level of maturing loans has dropped dramatically. I don’t know if there’s an expectation that acquisition and sales activity is going to increase enough to offset those lower maturity levels. Clearly, rising interest rates could cause more borrowers to think about refinancing out of floating into fixed [rates] and other dynamics.
From discussion I hear at the conference, there’s a lot of enthusiasm to do significant volumes this year. I’m a little concerned about whether the volume in the market is there to satisfy all the lenders. You do run the risk that there’s a bit too much enthusiasm. Underwriting standards get more lax and pricing gets affected, factors that might lead to unfortunate outcomes down the road.
REBO: Is there a property type that you’re most bullish on right now?
Hood: Last year, in our portfolio lending, industrial was the biggest property type and multifamily was a close second. Office was in the middle and retail was at the bottom. That really reflects our view on the market.
There’s a lot of momentum in industrial with e-commerce driving demand for warehouse space. The flipside is retail, which has suffered as a result. We’re not of the view that retail is going to dry up and go away, but it’s definitely been impacted. Industrial and multifamily have been our focus for 20 years, so this is not a new strategy.
Maybe one area that we do interact with that not everyone else does is seniors housing. We’ve been in that business for 30 years. We like the demographics.
REBO: Seniors housing comes in many forms. There are some concerns right now about overbuilding in certain markets. Within that seniors housing space, is there a certain niche that you’re privy to?
Hood: Most of our seniors housing is either assisted living or independent living, usually with some memory care in the mix. We don’t do any standalone memory care. That’s the sweet spot of our business. We’re focused on being with the right sponsors and the demographics of the markets that we’re lending in.
The real demographic wave for the growth in the age cohorts that use seniors housing is still a few years away. The prospects of business have been good; you just have to be careful about areas where there is a lot of construction.
REBO: You issued a press release for $14.8 billion in financing. Is there anything you want to highlight about that?
Hood: It was a really good year for agency business. It was a solid year for our portfolio lending. One of the new things that we focused on this year was higher-yield lending. We did roughly $300 million of higher-yield investments and first mortgages, where there’s some bridge renovation or repositioning component in the deal. We did a little higher yield in floating-rate loans. We’re hoping to push that effort closer to $1 billion in 2018.
REBO: There’s more risk there, right? Given the fact that your history as a company is somewhat risk-averse, how do you not go too far out on the plank?
Hood: Historically, we’ve had a debt business that’s been very focused on investment-grade first mortgages and we’ve had an equity real estate business that’s been pretty focused on buying equity properties. We had this space in between the two groups that we weren’t really covering, so we partnered with our real estate equity group to cover that space. We think it’s natural for us to cover that area and bring the full real estate product to the market.
REBO: Can you give an example of what might work with that structure?
Hood: We’re doing a financing on an office building in Milwaukee that is mostly leased. We think there’s a two- to three-year period of getting the leasing in place, burning off the free rent and getting it to the point where it’s ready for a permanent loan or a sale. That’s a classic example where the leverage on that deal is a little higher. The pricing’s a little higher to match that risk.
REBO: How long would the loan be for?
Hood: It’s typically about five years with all the extensions. If it’s a floating-rate loan, it’s a three-year term with a one-year extension.
REBO: No two borrowers are alike, but are you seeing any trend lines in terms of what borrowers need and want today?
Hood: Everybody’s struggling a bit with the recent run-up in Treasury rates and exactly how to think about that. There’s a lot of interest today in locking in rates longer term in case there’s more run-up in Treasury rates.
Beyond that, there are some challenges around construction lending, particularly in retail. But otherwise the market’s pretty liquid these days. There are a lot of financing options. As a lender, that doesn’t make you feel great, but for the market it’s a pretty good time to be a borrower.
— Compiled by Kristin Hiller and Matt Valley