Pramerica Real Estate Investors
Mezzanine
Financing
Mathew Crowther
+44 (0)20 7766 2446
Pramerica Real Estate Investors, 6th Floor, Grand Buildings, Trafalgar Square, 1-3 Strand, London WC2N 5HR, Tel: +44 (0)20 7766 2400, Fax: +44 (0)20 7766 2449
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Pramerica Real Estate Investors
APB Annual Seminar
Mezzanine in 2010
• Why should Borrowers and Senior Lenders consider it?
• Where does it come from?
• What does it look like? – pricing and structures
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Pramerica Real Estate Investors
APB Annual Seminar
The “Funding Gap”
• Debt or preferred equity that fills the funding gap between borrower
equity and senior debt
• 60/65% to 80/85% LTV
EQUITY
• Primary mezzanine – back to basics
MEZZANINE
SENIOR DEBT
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Pramerica Real Estate Investors
APB Annual Seminar
Demand - ACQUISITIONS
• Transaction volumes remain low
• Core real estate investors / cash buyers
• Property companies / opportunistic investors
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Pramerica Real Estate Investors
APB Annual Seminar
Demand - ACQUISITIONS
• Transaction volumes remain low
• Core real estate investors / cash buyers
• Property companies / opportunistic investors
• Increases “buying power” / target larger assets
• Enables diversification across larger portfolios
• Increases returns / multiples
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Pramerica Real Estate Investors
APB Annual Seminar
Demand - REFINANCING
• More activity
• Institutional real estate investors
• Loans pooled in conduit CMBS
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Pramerica Real Estate Investors
APB Annual Seminar
Demand - REFINANCING
• More activity
• Alternative source of equity
• Institutional real estate investors
• Non-dilutive
• Fits into existing structure
• Loans pooled in conduit CMBS
• Visible exit for borrower
• Tax - efficient
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Pramerica Real Estate Investors
APB Annual Seminar
As always...
• Good quality property
• Strong sponsor
• Viable debt exit
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Pramerica Real Estate Investors
APB Annual Seminar
The “New” Mezzanine Market
• Banking market
• Real estate market
• Regulation
• Yield gap
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Pramerica Real Estate Investors
APB Annual Seminar
The “New” Mezzanine Market
• Banking market
• Real estate market
• Regulation
• Yield gap
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• Senior lender and mezzanine
providers working together
• Mezzanine “value-add”
Pramerica Real Estate Investors
APB Annual Seminar
The “New” Mezzanine Market
• Banking market
• Real estate market
• Exit / refinance risk
• “Equity buffer”
• Regulation
• Yield gap
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• Primary vs. secondary
Pramerica Real Estate Investors
APB Annual Seminar
The “New” Mezzanine Market
• Banking market
• Real estate market
• Regulation
• Senior lenders 60%-70% LTV
• Massive demand for mezzanine
• Yield gap
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Pramerica Real Estate Investors
APB Annual Seminar
The “New” Mezzanine Market
• Banking market
• Real estate market
• Regulation
• Yield gap
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• Cashflow driven funding
Pramerica Real Estate Investors
APB Annual Seminar
Cashflow Driven Funding
UK Yield Gap 2000 – 2010
Mezzanine returns more dependent on income returns
8.0%
Frequency
Distribution
of
Mezzanine
Loans
7.0%
6.0%
5.0%
Positive
Yield
Gap
4.0%
Expected
Returns
3.0%
All property prime initial yield
5-year swap rate (end-month)
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
2.0%
Source: Pramerica Real Estate Investors Research 2010,
Eurostat, Cushman & Wakefield, Bloomberg
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Mezzanine returns more dependent on capital returns
Source: Pramerica Real Estate Investors, Research 2010
Pramerica Real Estate Investors
APB Annual Seminar
Where does it come from?
• European market size comparable to US
US
€2.25 trillion*
* Figures are as at year end 2009 and assume €1 = $1.2. Source: Pramerica Real Estate Investors Research 2010, DTZ
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Europe
€1.9 trillion*
Pramerica Real Estate Investors
APB Annual Seminar
Where does it come from?
• European market size comparable to US
US
€2.25 trillion*
• Specialist debt funds
• REITs
• Private equity sources alone excess of 50 funds raised in 20082009 which total $40 billion**
* Figures are as at year end 2009 and assume €1 = $1.2. Source: Pramerica Real Estate Investors Research 2010, DTZ
** Source: Preqin 2010
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Europe
€1.9 trillion*
Pramerica Real Estate Investors
APB Annual Seminar
Where does it come from?
• European market size comparable to US
US
€2.25 trillion*
Europe
€1.9 trillion*
• Specialist debt funds
• Commercial banks
• REITs
• Specialist debt funds
• Private equity sources alone excess of 50 funds raised in 20082009 which total $40 billion**
• Non-discretionary investors
* Figures are as at year end 2009 and assume €1 = $1.2. Source: Pramerica Real Estate Investors Research 2010, DTZ
** Source: Preqin 2010
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• Opportunity funds
Pramerica Real Estate Investors
APB Annual Seminar
Where does it come from?
• European market size comparable to US
US
€2.25 trillion*
Europe
€1.9 trillion*
• Specialist debt funds
• Commercial banks
• REITs
• Specialist debt funds
• Private equity sources alone excess of 50 funds raised in 20082009 which total $40 billion**
WE MUST ATTRACT GLOBAL
INSTITUTIONAL INVESTORS
* Figures are as at year end 2009 and assume €1 = $1.2. Source: Pramerica Real Estate Investors Research 2010, DTZ
** Source: Preqin 2010
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• Non-discretionary investors
• Opportunity funds
Pramerica Real Estate Investors
APB Annual Seminar
Pricing?
• Arrangement Fees
• Coupon:
• Current pay
EQUITY
MEZZANINE
• PIK - accrued element of coupon, compounded at
total coupon rate and distributed at the repayment
of the mezzanine in priority to equity
• Exit Fees:
• Fixed Fee
• Sales Fee based upon the value or sales price of
underlying properties, payable upon sale or
refinancing
SENIOR DEBT
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• Profit Participation based upon a share of the
equity profit achieved upon sale or refinancing of
each security property
Pramerica Real Estate Investors
APB Annual Seminar
Pricing?
Arrangement
Total Coupon
Fees
Exit Fee
Sales Fee
Profit
Participation
High Yield
• Prime property
1-2%
10-14%
0-2%
-
-
2%+
12-15%
2-5%
0-2%
0-20%
3%+
10%+
5%+
2%+
20%+
• Income weighted return
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Pramerica Real Estate Investors
APB Annual Seminar
Pricing?
Arrangement
Total Coupon
Fees
Exit Fee
Sales Fee
Profit
Participation
1-2%
10-14%
0-2%
-
-
2%+
12-15%
2-5%
0-2%
0-20%
3%+
10%+
5%+
2%+
20%+
Core Mezzanine
• Good quality property
• Portfolios
• Some asset management
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Pramerica Real Estate Investors
APB Annual Seminar
Pricing?
Arrangement
Total Coupon
Fees
Exit Fee
Sales Fee
Profit
Participation
1-2%
10-14%
0-2%
-
-
2%+
12-15%
2-5%
0-2%
0-20%
3%+
10%+
5%+
2%+
20%+
Value-add Mezzanine
• Pre- let development
• Business plan delivery
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Pramerica Real Estate Investors
APB Annual Seminar
Structure – Relationship with Senior Lenders
• Separate facility agreements
• Cash waterfalls and amortisation
• Control / deposit accounts
• Cash sweep
• Covenants
• Cure rights - access to cash
• Intercreditor agreements - practicalities
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Pramerica Real Estate Investors
APB Annual Seminar
QUESTIONS?
Pramerica Real Estate Investors, a Pramerica Financial company*
• One of the largest global real estate investment managers ($43.1 billion gross assets under
management).(1)
• 39 year track record as a fiduciary for institutional clients.
• 19 offices worldwide.
Pramerica Financial*
• Size: One of the largest life insurance companies and financial service institutions in the United
States; $693 billion of assets under management.(2)
• Stability: Pramerica Financial’s credit rating is affirmed A.(3)
• History: Managing assets for more than 130 years.
Pramerica Real Estate Capital
• Global debt platform headquartered in London and New York.
• Discretionary specialist mezzanine debt fund.
• Institutional global investors.
(1)
(2)
(3)
*
Pensions and Investments, December 28, 2009. Ranked by total worldwide real estate assets, including mortgages. Figures are as at June 30, 2010, total net assets under management
equal $23.4 billion.
As of March 31, 2010.
Relates to Pramerica Financial. Reaffirmed by Standard & Poor’s, December 2009.
In the United Kingdom and various other jurisdictions in Europe, all investment activities are carried out by representatives of Pramerica Investment Management Limited ('PIML'), which is
authorised and regulated by the Financial Services Authority of the United Kingdom (registration number 193418). Pramerica Real Estate Investors, which is affiliated to PIML, is the real
estate investment management business of Pramerica Investment Management. Both Pramerica Real Estate Investors and Pramerica Investment Management are trading names of
Prudential Investment Management, Inc. the principal asset management business of Prudential Financial, Inc. ('Pramerica Financial') of the United States. Prudential Financial, Inc. is not
affiliated in any manner with Prudential plc, a company incorporated in the United Kingdom. PIML is registered in England No. 3809476 VAT no. 447 1835 36, Registered Office, Grand
Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR.
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