Tax Bill, Data, Relative Value to the Bund Combine to Push 10 year to 2.50%

After trading in a relatively tight range for many weeks, the 10 year T jumped 14 bps in 2 days as the tax bill passed the House, Senate, the House (again) and is now ready for signature (note that the bill most likely will be signed after New Year’s). The rise actually started with an allocation announcement by Germany regarding their bond issuance. Germany is the Euro zone’s benchmark bond issuer and they announced that they will borrow more in 2018, specifically by issuing more than expected long bonds (30 years in particular). This supply news caused a selloff in 10 and 30 year bonds in Europe, driving yields up internationally and domestically. With stronger than expected existing home sales in the United States combined with the final tax bill passage convinced investors that growth and deficits are on the horizon. The combination of expected events (tax bill) and unexpected (Euro announcement) proved to be volatile. All of this is exacerbated by end of year illiquidity as many institutions have filled their allocations and are winding down 2017. The movement spiked the 10 year yield past key technical levels including the October top of 2.46%, the next test is the March top of 2.62% (before the legislative dysfunction that slowed down policy movement). The next test for Washington is avoiding a government shutdown on Friday. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

On December 18th, David Pascale was interviewed by Howard Kline, Esq. of CRE Radio to discuss the most recent December Fed meeting and rate hike. Click here to listen to the podcast.

George Smith Partners identified a national floating-rate balance sheet lender funding bridge transactions up to $25,000,000 on a non-recourse basis. With the ability to advance up to 80% of total capitalization, pricing starts at LIBOR + 400 for partial or non-cash flowing assets. All core asset classes in primary and secondary markets are underwritten with no minimum DCR or debt yield required at funding.

David Pascale, Senior Vice President of George Smith Partners was interviewed by Howard Kline, Esq. of CRE Radio to discuss the most recent December Fed meeting and rate hike.  For the past two decades, Mr. Pascale has positioned George Smith Partners as a thought leader, providing insight on the macro and micro-economic factors influencing the commercial real estate capital markets through his weekly column, “Pascale’s Perspective” published in the FINfacts weekly newsletter.

Click here to read a transcript : Podcast Transcript 12.18.17

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The mid-December rate increase has become a holiday tradition over the past 3 years. Today’s rate hike was no surprise, the “action” was all in the commentary and the two no votes. Yellen’s final press conference as Chair was notable for commentary on the tax cut (it may deplete ammo to fight future recessions), bitcoin (highly speculative), her greatest disappointment (inability to achieve the Fed’s target inflation of 2.0%). The inflation “miss” was highlighted by this morning’s lower than expected CPI report. The lack of wage inflation is especially troubling to the Chair. The rate hike is notable as it shows confidence in the strength of the US Economy. The two “no” votes show some members afraid that rate hikes may damage the recovery and/or that the recovery is weak. The “dot plot” indicating three rate hikes for 2018 (and 2 or 3 more in 2019) is being looked at skeptically by markets, the futures index indicates they expect 2 next year. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

 

GSP is originating debt with a national life company for transactions from $5,000,000 to $125,000,000. Fixed or floating non-recourse bridge loans start at $5,000,000 and above with pricing starting at LIBOR plus 4.50% with leverage up to 80% LTV. Properties with below break-even debt coverage will be reviewed on a case by case basis. This balance sheet lender will finance non-recourse construction loans $50,000,000 and above to 65% LTC starting at LIBOR plus 4.50%. Typical terms for bridge and construction are interest only for 3 years fixed with leverage up to 70% LTV. Permanent loans are 5 to 20 years fixed. The capital provider will fund asset classes that other life companies typically shy away from.

Next week’s Fed meeting, policy announcement and accompanying statement/presser has been heavily telegraphed in advance. There should be no surprises. First off, a 0.25% rate increase is a slam dunk, with the futures market at about 90% likelihood (note that the other 10% is on a 0.50% increase). Also, with Jerome Powell set to take over in early 2018, Yellen is unlikely to lay out policy for next year. So the focus will shift to Powell’s upcoming speeches/remarks and his first meeting as Fed Chair next month and beyond. Meanwhile, 30 day LIBOR is already up from 1.25% to 1.40% in the last month on anticipation of the move and year end liquidity issues. LIBOR’s “expiration date” of year end 2021 is gaining certainty as the Bank of England last week announced it is requiring participating banks to continue reporting until 2021, but they may stop reporting after that. This should add momentum to the alternative rates being discussed (SONIA in England, Overnight Treasury REPO in the USA). There is a lot of work to do in the next 4 years as trillions of dollars in derivatives and contracts need to be adjusted. Treasuries: The yield curve is flattening even more dramatically as the short end is certain of increases (see above) and the long end is still “show me the inflation and/or growth”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

Today’s 3rd Quarter US GDP report showed a 3.3% expansion. This is the strongest in 3 years and indicated that total economic output was near the “maximum sustainable output” as determined by the Congressional Budget Office, for the first time in 10 years. This means there (finally) should be very little slack in the labor and purchased goods markets, which should lead to inflation. Fed Chair Yellen’s testimony today had some interesting comments about inflation. She said that the Fed is committing to gradually raise rates even in a low inflation environment to avoid a “boom-bust condition”. She mentioned moving from “accommodative” policy to a more “neutral” policy (that means moving the Fed Funds rate, now 1.25% closer to the stated neutral rate of 2.75%). This indicates a Fed still feeling as if some of the factors holding prices down are “transitory”. The 10 year T hit 2.39% today (after dropping to 2.31% earlier in the week). High sales figures for Black Friday and progress with the Tax Bill are also pushing yields up. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

GSP is originating debt with a balance sheet lender specializing in heavy bridge loans from $20,000,000 to $100,000,0000 to 65% LTV. Recent tombstones include vacant buildings and a fractured condo. Ground-up construction financing is also available on a non-recourse basis to 60% of cost. Pref-equity may be layered on to 75% of total capitalization. All structures are priced from LIBOR + 425 and 1 point. There is no exit fee for the three-year term.

“Tourism, development and infrastructure activity are the driving factors behind the planned conversion of a 13-story office tower near Los Angeles World Airports into a dual-branded hotel.  The office structure at 5959 Century Blvd. will be renovated into a 129-room Hyatt House and 272-room Hyatt Place Hotel for Hyatt Hotels Corp. of Chicago, according to investment banker George Smith Partners.  The Century City-based firm arranged $50 million in construction financing for the conversion project on behalf of the owner, a limited liability entity named 5959 and an affiliate of West Los Angeles hotel financier and developer California Real Estate Regional Center…”

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With the majority of local and regional banks focused exclusively on multifamily products, GSP is originating commercial real estate loans with a regional portfolio lender offering five and seven year fixed terms mid-to-high 4% range. A personal repayment guarantee will net a 10 basis point reduction in rate. Ten year terms are structured as a 5+5 with a rate reset at the beginning of year 6. Prepayments step down from 3% and are open the final 12 months of the fixed term. Stabilized and light-bridge West Coast transactions from $3,000,000 to $10,000,000.

This past week has been pretty volatile for Treasuries. Last Friday was technically a holiday but trading still occurred. The 10 year T jumped 7 bps up to 2.39% as investors focused on (1) The progress of the proposed tax bill, ie. an increased supply of Treasuries next year due to expanding budget deficits and (2) An updated European GDP forecast indicating robust growth and increasing the possibility of an earlier than expected end to quantitative easing over there. Then Tuesday’s PPI numbers came in much higher than expected (0.4% vs 0.1%) indicating strengthening inflation. However, lower than expected growth numbers from China brought up global growth concerns and yields didn’t rise as much as they should have (however the 10 year hit 2.41% yesterday morning). Today’s CPI numbers were softer than expected, but still strong enough to add certainty to the widely expected December rate increase by the Fed. Note that the Fed’s preferred gauge of inflation, the PCE, is still under the stated target of 2.0%, the next release is Nov 30. The soft CPI and statements by some senators against the tax bill rallied yields down today back to 2.32%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners identified a national portfolio lender offering a permanent fixed rate structure with step down prepayment penalties. This capital provider offers 5, 7 and 10 (5+5 and 7+3 options) year fixed rate terms for multifamily, manufactured housing, office, industrial, retail, hospitality, and self-storage, up to 80% of cost/value for Multifamily and MHC and 75% of cost/value for the other property types with flexible levels of recourse depending on LTV and DSCR. Transactions range from $5,000,000 to $25,000,000+ for the program. Funding is underwritten using in place cash flow to a 1.25x DSCR.