Benjamin Cohen

Multifamily Operator & Investor | I Buy & Operate Apartments in Houston, TX

[Benjamin Cohen @benbcohen]

Blackstone's third quarter shows how much a fund's strategy and leverage decide what a rate move does to its values.

Per Bisnow, values in Blackstone's opportunistic real estate funds fell 3.2% in the quarter while its core-plus funds rose 1.6%. Blackstone blamed higher-for-longer rates for the markdown, said it was concentrated in older funds, and named multifamily as one of its weaker sectors.

Same manager and same quarter, so the gap comes from what the funds own and how they're financed. Core-plus holds stabilized assets with in-place income and lower leverage. Opportunistic funds hold business plans with more leverage, and their value depends on reaching a stabilized NOI and selling into a cap rate that's now higher than the plan assumed. When rates rise, the levered equity on top of a business plan takes the first hit.

We don't underwrite an exit cap below the going-in cap, and a value-add plan has to work even if we sell at a higher cap than we bought at. The return has to come from NOI we created.

If you're an LP in a value-add fund, how is your sponsor marking the exit cap now?

https://t.co/9jTcgu3SHS

[Benjamin Cohen @benbcohen]

@GrantCardone Find the deal first

[Benjamin Cohen @benbcohen]

Mezz and pref equity fill the same gap in the stack, and they give the investor very different remedies when the deal goes wrong.

A mezzanine loan is debt secured by a pledge of the ownership interests in the entity that owns the property, not by the property itself. If the borrower defaults, the mezz lender forecloses on those interests under the UCC and takes over the ownership entity, subject to an intercreditor agreement with the senior lender.

Preferred equity is an ownership position in the joint venture with a fixed return paid ahead of the common. Its remedies live in the operating agreement, typically the right to remove the sponsor as manager, take over major decisions, or force a sale if the pref isn't paid or redeemed on time.

On agency deals the choice is usually made for you. Fannie and Freddie generally don't allow mezz behind their loans, so the gap gets filled with pref, and the agency reviews its terms.

When I look at pref in a deal, I read the control triggers before the rate. A cheaper pref with a hair-trigger removal right can cost the common more than a pricier one that gives the sponsor time to cure.

How do you weigh the pref rate against the control rights?

[Benjamin Cohen @benbcohen]

When a would-be buyer's house deal falls apart, that resident usually renews, and in underwriting it shows up as lower turnover rather than higher rent.

NAR says pending home sales in the South fell 12.0% from a year earlier in September, and it pointed to fast-rising mortgage rates. Fewer contracts means fewer of our residents giving notice because they bought a house.

That's worth real money to an owner. Every renewal avoids a make-ready, the vacant days, the marketing, and usually a concession to fill the unit. Make-ready and turn costs, including vacancy, are the biggest expense we control on most properties.

It doesn't give us room to push rent, though. Houston effective rents are still down year over year, and a resident who can't buy can still move across the street to a lease-up that's offering a concession.

So in a deal we'd let this support the renewal and turnover assumptions, with a lower turnover rate and lower turn cost, and leave the rent growth line alone. If retention improves, the gain comes from money we didn't have to spend on turns.

Are you seeing fewer move-outs to buy a home this fall?

[Benjamin Cohen @benbcohen]

@AlexHormozi Completely agree, most people have an excuse for under performing or not even starting.

[Benjamin Cohen @benbcohen]

A negatively levered deal is a bet that NOI grows enough to fix the spread, and right now most of that growth has to come from operations.

Say you buy at a 5.5% cap and borrow at 6.0% fixed with 30-year amortization at 65% LTV. The loan constant is about 7.19%, so debt service eats more than the property earns on the borrowed portion, and the cash yield on your equity falls to around 2.4% from the 5.5% you'd earn all cash. For the cap rate on your purchase price to get back above the loan constant, NOI has to grow about 31%.

Rent growth won't carry much of that with income under pressure in most markets. That leaves collections and expenses: getting bad debt down, cutting turn costs, rebidding contracts, and fixing what the last owner let slide. Those levers are real, but they have limits and somebody has to execute them.

We focus on deals where the going-in yield is clearly above the loan constant, so the leverage helps from day one. When I look at a negatively levered deal, I split the NOI growth into what comes from rent and what comes from operating fixes, and I underwrite it as an operations bet.

How much negative leverage are you willing to take going in?

[Benjamin Cohen @benbcohen]

When a maturing loan won't refinance for what's owed, somebody has to fund the difference, and LPs should know who before the maturity date.

NMHC's October survey asked apartment executives how they're handling loans coming due. Of the ones with meaningful maturities, 45% said they or their clients will put in more equity to get the refinance done.

There are only a few ways to close that gap. The sponsor can write the check from its own balance sheet. The LPs can get a capital call, which dilutes anyone who doesn't fund. The deal can bring in pref or mezz, which sits ahead of the existing equity and takes a cut of the upside. Or the building gets sold at whatever the market pays today. A lender extension only moves the date.

If I'm an LP in a 2021 or 2022 deal with a loan maturing in the next 18 months, I want the sponsor to tell me now which of those it plans to use and how big the gap is at today's rates.

If you have a maturity coming up, has your sponsor told you how the gap gets filled?

https://t.co/ItCHJUS4fD

[Benjamin Cohen @benbcohen]

@BillAckman Homeschooling my kids all the way until they're 25, lol

[Benjamin Cohen @benbcohen]

@robbiehendricks Irresponsible and unethical

[Benjamin Cohen @benbcohen]

@credealjunkie Wouldn't be surprised if these urban infill markets stay this tight for the next 10 years.

[Benjamin Cohen @benbcohen]

@jonbrooks It's because no one can afford them. Or the rent doesn't cover the mortgage payment as a rental.

[Benjamin Cohen @benbcohen]

@ChrisRamsey60 This is so true. You're right. This is a long-term trend, though. This won't happen over the next couple of years.

[Benjamin Cohen @benbcohen]

@jayparsons When do you think these rates finally force cap rates to expand above them?

[Benjamin Cohen @benbcohen]

@theficouple The only equation that works in this market to lower and cost and deflating prices is building access supply, but the problem is the economics for builders make no sense so it’s going to be a very long cycle

[Benjamin Cohen @benbcohen]

@RayDalio Which is why these open-ended funds that offer Real Estate or alternative investing access is what anyone with a few thousand and disposable cash should put their cash do as the long-term trend is less valuable US paper money

[Benjamin Cohen @benbcohen]

@unusual_whales Market specific Houston prices, and Cost have declined some controllable expenses have gone up but now with AI a lot of ongoing admin, marketing and maintenance cost can be reduced significantly because of AI

[Benjamin Cohen @benbcohen]

Debt for a good stabilized building is available in this market, and the harder financing problems sit elsewhere.

New York Life gave Price Realty a $57M five-year fixed-rate refi on The Standard at CityLine, a 403-unit property in Richardson that opened in 2015, per The Real Deal. That works out to about $141K a door of debt.

Life companies lend off their own balance sheets, so they choose their spots: stabilized, newer product in good locations, a sponsor with a record, and usually lower leverage than the agencies. When a deal fits that profile, they compete hard for it.

For most stabilized deals we still start with Fannie and Freddie, where I'm seeing spreads around 120 to 150 bps over the 5-year. On a clean, lower-leverage deal I'd get a life company quote next to the agency one, because a second real bid is what tightens the spread.

The harder financing is for the 1980s value-add with soft collections and a loan coming due, which usually means bridge debt, a debt fund, or more equity. The senior loan on a newer stabilized building gets done.

When you refi a stabilized deal, do you get a life company quote or go straight to agency?

https://t.co/URmzbNwRq8

[Benjamin Cohen @benbcohen]

A value-add schedule rests on a labor assumption, and in Texas that assumption is weaker right now.

Marketplace spoke with a homebuilder near Harlingen whose framing crews have thinned out under immigration enforcement. He says a phase that should take 12 months will take 18, and he has already had to extend his construction loans. He builds houses, not apartment rehabs, but interior crews for apartments come from the same labor pool.

On a value-add, rehab pace drives three things: how long down units sit vacant, when the rent premium shows up and therefore when stabilized NOI arrives, and whether the business plan can pass the extension test on bridge debt at initial maturity, which is usually a debt yield or DSCR hurdle.

We pace renovations to the crews we can actually lock up instead of the number in the GC's bid. We ask the contractor how many crews are committed to the job and what happens if one leaves. We carry down-unit vacancy for the real turn time, and we add a few months of slippage to the reno schedule before sizing the loan.

If you have renovations running in Texas, are your crews keeping the schedule?

[Benjamin Cohen @benbcohen]

The Fed meets Tuesday and Wednesday, and whatever it decides will reach mostly one kind of apartment loan.

Floating-rate bridge debt prices off one-month Term SOFR plus a spread, and SOFR moves with fed funds. Say you have a $20M bridge loan: a 25 bp cut saves about $50K a year in interest.

That saving disappears if the rate cap is in the money. When SOFR is above the strike, the cap pays the difference, so a cut mostly benefits the cap provider and your all-in rate doesn't move until SOFR falls below the strike. The cut does help with the next cap you have to buy at extension, since that is priced off where the market expects SOFR to go.

A fixed agency loan prices off the 5-year Treasury, which the Fed doesn't set. The 5-year closed at 4.82% on Friday, well above the short end, and it moves on expectations for inflation and deficits more than on any one meeting. A cut paired with worried language on inflation can push it up.

So on a deal we're about to fix, Fed week is a reason to watch the 5-year, and a lower coupon shouldn't go into the model.

If you're on floating debt right now, where is your cap struck relative to SOFR?