Many multifamily owners were glad to have Fannie Mae and Freddie Mac around throughout the downturn. After all, the availability of well-priced debt has a direct effect on apartment values—capitalization rates often move in concert with interest rates. By keeping the flow of cheap money going, Fannie and Freddie placed a safety net on values, giving the industry a soft landing in the recession—and a quick rise out of the recession—that every other commercial real estate asset class could only dream about.
Yet, not every owner would stand to lose if the GSEs weren’t around. The largest apartment owners, notably the public REITs, would actually stand to gain should the GSEs disappear.
Unlike smaller entrepreneurial players, the REITs have many financing avenues available to them by virtue of their size and public-company status. And should the GSEs go away, many small owners might be forced to sell—and large owners would be there, capital in hand, ready to buy.
“We’re probably less concerned about the GSEs going away than maybe some of the smaller individual players,” says Dennis Steen, CFO of Houston-based REIT Camden Property Trust. “It would make the ability to access the capital markets much more of a competitive advantage. If they did go away, long term, it’s probably better for someone like us.”
That's not to say that Camden has no need for the GSEs. Like many REITs, Camden leaned heavily on the agencies during the downturn, when the unsecured credit markets were going haywire and private-sector lenders shut down. Camden brought on credit facilities to the tune of $800 million, split evenly between Fannie and Freddie, in 2008 and 2009.
Like Camden, Denver-based REIT UDR isn’t exactly rooting for the GSEs’ demise. The company is still in a joint venture with Fannie Mae struck in early 2008. And like Camden, the company closed some sizable credit facilities through the GSE during the downturn, so much so that 80 percent of its permanent secured debt is from Fannie or Freddie.
But the company also knows that it would stand to benefit should the GSEs go away. “I always hesitate to say this, but if the GSEs went away and took away some of that cheap form of capital for the private guys, it may actually push more assets to market,” says David Messenger, UDR’s CFO. “The private owners would be unable to roll maturing loans, and it might force people into being sellers versus being able to refinance.”
In February, on the same day that the Obama administration released its white paper on housing finance reform, Addison, Texas–based Behringer Harvard COO Mark Alfieri sent out a survey to his peers in the REIT world. He wanted to gauge their thoughts on the matter.
“The responses were overwhelmingly in favor of privatization of the mortgage business,” Alfieri said earlier this year. “The REIT CEOs were basically saying, 'Let the strong survive and the poor will be eaten,' that more disruption in the market is good for us.”
But Alfieri didn’t feel the same way. “Having lived through two of these cycles, I think you’ve got to have the backstop to prop the industry up during periods of disruption,” he said. “I just don’t see how we could do without it.”
Stand and De-lever
The way that large apartment firms are approaching the possibility of a GSE-less world does offer some lessons for the rest of the industry.
The first lesson is diversify your debt sources. For instance, life companies are extremely active and competitive with the GSEs right now. But the second lesson is don’t push for every last dollar in leverage—private-sector lenders such as life companies favor low-leverage deals.
“The most prudent thing to do as a borrower is to not rely on a leverage point that makes the GSEs your only market,” says Jay Hiemenz, CFO of Phoenix-based Alliance Residential. “There’s always going to be liquidity at a moderate leverage point—if you structure it properly, then you’re probably always going to have debt options.”
In fact, many of the industry’s largest owners and developers are beating back offers of additional leverage from lenders—a dynamic that probably didn’t happen too often during the last boom period.
“In some cases, we’re turning down leverage from our construction lenders,” says Joseph Keough, CFO and COO of Atlanta-based Wood Partners. “We want to be sure that even in a downside scenario, or in a situation where Fannie and Freddie are less active, we are not overlevered and that we still have the ability to take out the construction lender if we decide to hold the asset longer term.”