Diversity in the MHC Debt Markets
As we approach the beginning of the third quarter of 2020 it is apparent that we are in an unprecedented time in the market with historically low interest rates and uncertainty in the market surrounding COVID-19. As a borrower in the Manufactured Housing Community (MHC) space you may not consider this earth-shattering news, or much of a surprise. Owners have been direct beneficiaries of historically low rates for years, and it looks like it will continue.
As the cost of capital continues to compress with 10-year fixed rate debt at historic lows of approximately 2.50% and a 10-year US Treasury yield hovering around 0.676%, it is making a lot of math work for lower cap rate opportunities and owners looking to refinance and hold. The relative value of mortgages over corporate debt and many other fixed income alternatives should keep this trend alive for a while. Nearly every lender is focused on diversifying their offerings based on current events and allocations of capital to provide more products to more borrowers across the spectrum.
Over the past few weeks there has been a resurgence of life insurance companies back in the market quoting loans in the low 3.0% range, but we expect the rules to bend if a lender really wants to win a deal that fits the box. Life insurance companies provide the ability to lock an interest rate at loan application, offer non-recourse and the ability to forward rate lock as far out as 12 to 15 months. This really only applies to 4.5-5 star communities.
Fannie Mae and Freddie Mac individually reported new records in 2019, which is pretty well known at this point. They continue to manage flows of $1.5 billion a week to each hit their new $80 billion allocations. Mission driven business will continue to be a driving force in 2020. Based on meetings my team had earlier this year, the takeaway was that this year is less about the race in the front half of the year (this way pre-COVID) and more about spreading allocations evenly throughout 2020. Fannie and Freddie continue to be a driving for in the MHC space and we expect this to be a consistent theme in perpetuity.
For the same capital flow reasons outlined above, most lenders have become investment managers. Our team has raised discretionary debt vehicles for some of the largest lending institutions. Many other lenders are doing the same on virtually every level of the risk spectrum. Permanent long-term fixed rate, short term bridge, mezzanine, etc. all have homes within these funds that continue to shift allocations into debt strategies.
Debt funds pre-COVID were raising a tremendous amount of capital and were in constant search of ways to differentiate themselves. This has become more apparent than ever in the MHC and RV park space. Debt funds have the flexibility to get creative on structure and rarely require recourse. The majority of these will underwrite Park Owned Home income and higher concentrations of RVs and park models to push leverage, while still getting aggressive with pricing. This is a great alternative if you have a business plan that requires good news funding for deferred maintenance or capital repairs, and to bring in new or refurbished homes. Pricing has increased in this space due to the way these loans are structured, however, we have started to see coupons compress and more debt funds enter back into the market as COVID fears ease.
Our group continues to believe that this is an excellent time for MHC owners to consume capital through a sale, or by locking in long term financing. Over the past 12 months the playing field for debt transactions has been wide open and is only amplifying. For an existing owner or a buyer, running a debt process can prove more valuable now than ever. It only takes one lender to make a market with a strategic reason to step out and differentiate themselves through a change in risk tolerance, allocation, new source of funds, and geographic or asset need. If you are a seller, think critically about how this could influence valuations and bidder turnout in a marketing process. We are encouraging our clients to be proactive in this environment and take advantage of the current debt market. Fortunately, this is a great time to be a borrower even in the middle of a Pandemic.
PM me if you want to learn more about MHC capital markets.