2Q Newsletter - 2020
With the first half of 2020 now behind us, we wanted to reach out to all our clients, lenders, colleagues, and friends with a quick update on positive developments happening at Medalist Capital.
While we continue to embrace social distancing and the flexibility of working remotely, a few Medalist Capital teammates battled in the office throughout the shutdown. Most others began returning to our offices around June 1st as Georgia, North Carolina, and South Carolina began re-opening. In early June, we also welcomed our summer interns: Alex Lis, a rising senior at Clemson University, is working in our Charlotte office, and Austin Dowler, a rising senior at UNC Chapel Hill, is working in our Raleigh office. We thought it was important to give two deserving students a meaningful summer experience, and they have made the most of it!
During the 2nd quarter, we closed 23 loans totaling $110.8 million, including 5 acquisitions with the balance being refinancings. Not surprisingly, this volume was somewhat less than the levels we were on pace to achieve prior to the shutdown following a record 1st quarter. Participating capital sources for these 23 loans were represented by life insurance companies, banks, and Fannie Mae. Property types included Multifamily, Office, Industrial, Retail, and Self-Storage.
While demand for debt has slowed considerably since the shutdown began, our view of the financing markets has remained relatively stable for the last 3-4 weeks, particularly as lenders digested the bulk of relief requests and started focusing on new production. Banks have navigated the rush of PPP loan administration and are re-gaining bandwidth for new mortgage loan requests, albeit with a slightly more conservative approach. Existing customers and prospects inside a bank’s footprint may see rates slip into the mid 2% range. For higher leverage, short-term financing, banks and active debt funds are quoting rates closer to 4.50-6%. Debt Funds waiting on demand to return to the leveraged capital business model have been quoting rates that start as high as 7-8%. Fannie and Freddie continue to adjust P&I escrow requirements and jockey for the lead on the Multifamily side with aggressive pricing, particularly on lower-tier LTV deals that offer full-term interest-only and sub-3% rates.
Life companies have been taking a similar stance toward new business but have struggled with how to price for risk. Many life companies follow treasury yields and BBB corporate bond spreads to balance relative value for pricing mortgages. Average BBB Corporate spreads have steadily tightened to the current low of 1.97% from the 4.88% peak on March 23rd. Over a similar time period (except for 1 week in early June when it spiked to 0.96%), the 10-year UST yield has settled into a consistent trading range and currently sits at 0.65% after bottoming out at 0.32% on March 9th. Adding in a premium for the illiquidity of a mortgage currently places typical life company coupons in the low-to-mid 3% range.
As the unusual disparity in these market conditions continues to evolve, there is no better time to work with Medalist Capital. We have helped clients navigate some of the most tumultuous financial events in recent history from the Great Recession to an international economic shutdown spurred by a global pandemic. We remain committed to our business and our client’s needs now more than ever. We greatly appreciate your relationship and look forward to speaking with you soon!
Roger M. Montague