Student Housing Q&A: Tim Bradley Provides Capital Markets Update, Post-Pandemic Outlook
In June, Student Housing Business, sister publication to REBusinessOnline, reached out to Timothy Bradley, founder of TSB Capital Advisors, for an update on the market for financing in the student housing sector and the outlook for the year ahead.
SHB: How would you describe the market for financing student housing at present?
Tim Bradley: The market is challenging but not impossible for the right deal with strong sponsorship. For cash-flowing student housing assets, there is still an element of “wait and see until fall” for refinancings and acquisitions in the debt markets. We are still receiving quotes from agencies on student housing transactions, but they include conditions such as heads in beds, school starting and upfront interest reserves. It’s also important to note that agencies are focused on best-in-class owners and operators and sound real estate at this time.
All-in rates are still in the low- to mid-3 percent range for fixed-rate quotes. National banks are being very selective on new originations for existing clients and we have found regional banks to be more active in the current market. Life companies are mostly on the sidelines for student housing until the fall semester plays out. For construction, we’ve been able to secure new debt on both 2021 and 2022 student housing deliveries in Power 5 university markets with best-in-class sponsors. Pricing is wider than it was pre-COVID-19 and most deals require syndication. We are actively pairing banks to get deals done today.
SHB: With the current interest rates, are a lot of owners seeking to refinance properties?
Bradley: All-in interest rates are not too far off where we were pre-COVID-19 — in the 2.75 percent to 3.75 percent range for fixed-rate financings, pending the lender and leverage requested. Due to the drop in Treasuries, swaps and LIBOR rates, we have seen spreads increase, but all-in interest rates remain consistent with rates seen prior to the pandemic. The debt market for refinancing prior to universities announcing plans for opening, and without collections in place for the fall, is extremely limited. Lenders will require upfront interest reserves to account for any potential shortfall in the first year due to COVID-19.
We have recently closed on two refinancings in the amount of $200 million with an institutional sponsor and agency. These deals were financed due to the strength of the relationship between the borrower and lender, along with irreplaceable real estate and university profile. Relationship lending is front and center during COVID-19 and we believe the same will ring true for the next six to 12 months. Outside of the transaction mentioned above, we have completed one other refinancing, but it had almost closed in February. The lender held terms, and we closed at a rate in the low 2-percent range for a five-year, fixed-rate deal with full-term interest-only. While we have a lot of clients who would like to refinance and take advantage of the current interest rate environment, there is — and will be — little to no market for refinancing student housing deals until we see what happens at college campuses this fall.
SHB: Who is lending? Are we in a wait-and-see period right now or are there loans available?
Bradley: While major money-center banks are in a wait-and-see period right now for most types of new originations, we have still been able to close a number of deals during COVID-19. We are continuing to arrange financing for our clients on both new construction and existing property opportunities. In the short term, most new financing executions will occur with regional and local banks and a few debt funds. Mortgage REITs have been hammered with mark-to-market margin calls, but the well capitalized debt funds with portfolios that were largely unaffected by COVID-19 are still being aggressive, albeit with wider pricing today — generally in the all-in, 6 percent-plus range. Agencies are selectively lending for top-tiered clients with assets in Power 5 markets, but again, this is subject to what happens in the fall.
SHB: Who can get a loan now? What are you advising clients who are seeking permanent financing?
Bradley: Not to be redundant, but capital is still available for strong sponsors and deals that are within walking distance of Power 5 universities. So far, COVID-19 has really only reinforced what the industry has been saying for years prior to this crisis — strong sponsorship with extensive student housing operating experience and well-located properties are always going to be the most attractive lending opportunities in our space. We are advising clients that timing is going to be a bit more of an unknown to get deals done due to the current conditions.
SHB: What is the market like for construction financing?
Bradley: There are fewer construction lending options today. We are missing the large national banks, which are still mostly on the sidelines for construction financing on larger student housing deals. That said, we are seeing quotes on new deals — mostly 2022 deliveries — from regional banks and certain debt funds. One caveat borrowers should be aware of is the aversion to syndication risk in today’s market. If a deal is too big for a lender to execute exclusively, they are leaning on us and their internal syndication groups to ensure participants are lined up pre-close as opposed to taking any funding risk themselves. We believe the lack of liquidity in the construction market in the near term will reduce the supply in 2022 by 35 percent to 40 percent. Construction lending terms are falling into the 55 percent- to 60 percent-of-cost range, with all-in rates of 4 percent to 4.5 percent with bank, partial recourse and three- to -five-year initial terms. Most banks limit the hold to $40 to $50 million, hence the need for syndication for the larger deals we are financing today in the $70 to $100 million range.
SHB: How active or hungry are lenders for student deals? Are most sponsors after a long-term relationship or do they want the best deal? What about lenders?
Bradley: It varies from lender to lender and client to client, but we are still seeing interest in the sector, albeit from a smaller pool of lenders. That could change rapidly in the coming months as we learn which schools are returning for in-person classes this fall. We are already hearing rumblings of some of the larger banks being close to looking at new student opportunities in the next 30 to 60 days. Sponsors are interested in any debt provider that can accommodate their short-term needs and keep deals on track that are already teed up. We are pursuing both one-off and larger multi-deal facilities currently, so it really comes down to how to remove the financing risk for each individual client and their immediate needs.
SHB: Has your forecast on how much you will finance in 2020 changed due to the pandemic? How strong is your pipeline for 2020 and beyond?
Bradley: Of course. We were projecting our largest year by volume and revenue at the beginning of 2020, which is saying something given we’ve had record years at TSB Capital in each of the last three years. While we project our gross revenue at TSB will be down this year due to COVID-19, it isn’t the metric that is most important to us and our long-term business plan. We measure our success by that of our clients and the value we provide to each deal closing.
COVID-19 has undeniably had a material impact on our clients and the sector as a whole, but we believe that the pandemic has only further reinforced our value and capability in the capital procurement process. Our pipeline remains strong and we will close over $500 million in development deals between the months of March and August. If the market this fall is in a good place, we should have over $1.5 billion in additional sales or recapitalizations that close before year’s end. We are cautiously optimistic but still budgeting for the unknown this fall.
SHB: Looking ahead, are there any red flags for the industry, as far as financing goes? What are the positives?
Bradley: Lack of liquidity from debt and equity capital in the near term due to uncertainty regarding the upcoming academic year. We expect capital providers to continue the trend to Class A pedestrian deals in top-tier university markets with existing relationships. If there is any distress as a result of COVID-19, it is likely to be most apparent in secondary and tertiary university markets and deals farther than one mile from campus. It also depends on the reaction of lenders for deliveries in 2020 and 2021 and if those deliveries potentially miss covenants due to leasing — we will have to wait and see.
One positive that may materialize for purpose-built off-campus student housing owners in 2020 and 2021 is the influx of students from on-campus dormitories. In adhering to CDC guidelines, universities are likely to require lower on-campus resident densities in fall 2020 and for the foreseeable future. A number of our student-operator clients have already been contacted by universities that are looking to lease off-campus bed space to lower capacity in on-campus housing, where historically many students double-, triple- or quadruple-occupy a single unit and share bathroom facilities.
In the short term, there will be less liquidity in commercial real estate as a whole and — where available — debt is likely to be more difficult to obtain and pricier in most cases with less interest-only [loan terms]. Deals of all product types will be harder to finance coming out of the pandemic, but we believe student housing will be one of the first asset classes to thaw out with continued good news on collections, pre-leasing and fall 2020 university campus openings, which should lead to a strong 2021 and 2022 for our sector.
The biggest red flag is the unknown this fall, but assuming schools open and do not shut down, we think student housing will exhibit its strength through turbulent times in the market and real estate sector once again like student did in the Great Recession.