Capital market utilization

Prior to the market collapse in 2008, HCRE generally preferred CMBS loans to traditional bank financing, because the differential between interest rate spreads were minimal. The collapse of the CMBS markets required a shift in strategy to maintain our goal for asset growth. This case study displays how HCRE remained nimble and adjusted key strategies to maintain positive asset growth.

Advantage Bank Debt

Banks are apt to lend to borrowers, like HCRE, who are liquid. The HCRE Golden Rule is to have more cash than contingent debt. During the recession, we were not only able to grow our portfolio, but we substantially improved our cash flow through the use of bank debt. Interest rates fell, banks spreads tightened and we witnessed a sharp increase in competition between banks for our business. Overall, we reduced our cost of debt by more than 300 basis points and were able to reposition assets to maximize future value in the CMBS market.

Strategy Moving Forward

The shift away from CMBS debt was a temporary shift in strategy aimed at maximizing growth and cash returns. As the CMBS market continues to improve, the HCRE strategy is to purchase value-add properties with bank debt, stabilize them by utilizing the HCRE value optimization plan and bringing them to the CMBS market within three years. The successful implementation of this strategy will allow HCRE to achieve $1 billion in assets within 3-5 years, keeping the integrity of the Golden Rule.

Example: Clayton, Mo.

Following the collapse of the CMBS markets, the debt matured in HCRE’s Class A office tower in Clayton, Mo. At the time of maturity, the interest payment was 5.8 percent interest on a 30 year amortization schedule. Converting debt to recourse dropped the interest rate to a floating rate of 150 basis points over Libor, (Current Libor is 18 bps) effectively reducing HCRE’s debt service by more than $800,000 annually. Now that the CMBS markets have improved, we have placed the asset back to the CMBS market, successfully capitalizing on our value optimization plan by pulling in excess of $6 million out of the transaction.