Everything Real Estate Equity & Credit (Part I)

Commercial Real Estate Basics, Technicals, and Opportunities

Real Estate Basics

What is Real Estate Credit (Debt)?

Similar to corporate private credit/direct lending, RE credit deals with the origination & management of CRE debt

  • -  Like any credit investment, RE lenders are aiming for stability in cash flows, meaning:

    • -  Large emphasis on reducing risk in terms of creditworthiness

    • -  Looking for longer-term tenant leases, diversified tenant base, strong

      management

    • -  Strong credit fundamentals, a track record of servicing debt and repaying

      principal, and healthy debt-related metrics (more on this later)

    • -  Perhaps even examine factors like covenant protection and collateral strength

  • -  Credit shops usually pursue downside protection in order to maximize their risk-adjusted returns & invest in the most attractive position in a capital structure

    Quoting Are’s RE Debt business here:

  • -  “Our investment strategy relies on intensive due diligence, structuring experience,

    disciplined underwriting and active portfolio management. We actively monitor our investments to ensure operational control and in an effort to provide more value to our borrowers and their sponsors”

  • -  “While we are primarily a direct lender to owners of commercial real estate, we also selectively consider third-party-led senior and subordinated debt financings, review portfolio purchases and opportunistically consider the purchase of distressed and discounted debt positions.”

    Other (typical) differences between RE equity and debt investing include:

  1. Whereas RE equity professionals usually focus on one or two asset classes, credit investors are generalists and would cover all major and emerging asset types

  2. Deal velocity in RE credit is also much faster than equity, which would require longer diligencing cycles

  3. More diversified experience than PE - can dip into different properties with a smaller emphasis on holding the actual asset and operating it

Typical Responsibilities of a RE Debt Analyst

  1. Diligencing lending opportunities

    1. Due diligence on capital structure, terms of transaction

    2. Having a full understanding of the underlying asset

  2. Exposure to technical analyses: working with RE modeling, leasing schedule, capex schedule, amortization schedule → understanding the debt paydown process

  3. Preparing internal memo & materials, present to IC to get deals approved 

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