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Insights

Building resilience with real estate debt

Nashville at night
 

Direct lenders make loans secured by the underlying real estate assets to experienced real estate sponsors. Lenders have the ability to offer more flexible terms not available in the commercial mortgage-backed securities market.

How does direct lending fit in a real estate portfolio?

Debt’s loan-to-value (LTV) ratio creates an equity cushion, reducing market downside risk in a portfolio. The lender’s likelihood of experiencing a loss is lower than the equity investor’s, who is in the first-loss position. This downside risk mitigation helps explain why debt funds can potentially deliver expected returns even if capital values are falling. The low volatility of capital values and solid income flows mean that the focus of debt investments is resilience rather than growth.

Debt case study: 55 Grand

  • 3 industrial buildings
  • 9 acres
  • 364,000 square feet
  • 5 miles east of Manhattan in Maspeth, New York
Property

The business plan was to reposition this class B asset by demolishing two of the 1920s vintage buildings, renovating the remaining building and changing the use from manufacturing warehouse to traditional warehouse. The borrower intended to maximize value by optimizing on-site parking in the area vacated by the demolished buildings.

The sponsor acquired the property in an off-market transaction from the previous owner/operator with a one-year sale leaseback. Shortly after originating the loan, the sponsor executed a 20-year lease with a leading e-commerce company.

Loan

A three-year floating rate loan had an initial loan-to-value of 53%. It provided flexibility to upsize the total loan amount, allowing additional advances based on the sponsor executing the lease under agreed lease terms.

The loan upsizing contained favorable lender protections, including loan and interest rate re-margin clauses.

The total fully funded loan size was $100 million, with an interest rate that varied between LIBOR plus 235 and 285 basis points (bps).

Strategy

The loan was bifurcated between a senior and mezzanine loan, secured by a mortgage on the asset and a pledge of the borrower’s equity interests. Within three months, the senior mortgage position was sold, while the junior mezzanine position was retained at a higher yield. The retained B-note was at a coupon of LIBOR plus 570 bps.

Outcome

After the lease was finalized and signed, the sponsor repaid the note in full.

55 Grand is a Nuveen debt investment that closed in March 2019. Past performance is no guarantee of future results.

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Endnotes
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

A word on risk
Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.

Nuveen provides investment advisory services through its investment specialists.

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This material must be preceded or accompanied by a prospectus for Nuveen Global Cities REIT. This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offering is made only by a prospectus to individuals who meet minimum suitability requirements. This sales literature must be read in conjunction with a prospectus in order to understand fully all the implications and risks of the offering of securities to which it relates. A copy of the prospectus must be made available to you in connection with this offering. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of our securities or determined if our prospectus is truthful or complete. Neither the Attorney General of the State of New York nor the Securities Division of the Office of the Maryland Attorney General has passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense.

The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients.

All information is as of 28 Feb 2023, unless otherwise disclosed.

Nuveen Real Estate is a real estate investment management holding company owned by Teachers Insurance and Annuity Association of America (TIAA). Nuveen Securities, LLC, member FINRA and SIPC, is the dealer manager for the Nuveen Global Cities REIT, Inc. offering.

Diversification of an investor's portfolio does not assure a profit or protect against loss in a declining market.

Risk factors:
Nuveen Global Cities REIT, Inc. is a non-listed REIT, which offers limited liquidity as compared to other products, such as publicly listed REITs. Investors in Nuveen Global Cities REIT, Inc. are not receiving publicly listed shares. An investment in Nuveen Global Cities REIT, Inc. involves a high degree of risk, including the same risks associated with an investment in real estate investments, including fluctuations in property values, higher expenses or lower expected income, currency movement risks and potential environmental liabilities. Please consider all risks carefully prior to investing in any particular strategy, including the following risks for Nuveen Global Cities REIT, Inc.:
  • There is no assurance that we will achieve our investment objectives.
  • This is a “blind pool” offering and other than the investments described in the prospectus, you will not have the opportunity to evaluate our investments before we make them.
  • Since there is no public trading market for shares of our common stock, repurchase of shares by us will likely be the only way to dispose of your shares. Our share repurchase plan provides stockholders with the opportunity to request that we repurchase their shares on a monthly basis, but we are not obligated to repurchase any shares and may choose to repurchase only some, or even none, of the shares that have been requested to be repurchased in any particular month in our discretion. In addition, repurchases are subject to available liquidity and other significant restrictions. Further, our board of directors may modify, suspend or terminate our share repurchase plan if it deems such action to be in our best interest and the best interest of our stockholders. As a result, our shares should be considered as having only limited liquidity and at times may be illiquid.
  • The purchase and repurchase price for shares of our common stock is generally based on our prior month’s NAV (subject to material changes as described above) and is not based on any public trading market. While there is independent periodic appraisals of our properties, the appraisal of properties is inherently subjective, and our NAV may not accurately reflect the actual price at which our assets could be liquidated on any given day.
  • We have no employees and are dependent on Nuveen Real Estate Global Cities Advisors and its affiliates to conduct our operations. Nuveen Real Estate Global Cities Advisors will face conflicts of interest as a result of, among other things, the allocation of investment opportunities among us and Other Nuveen Real Estate Accounts, the allocation of time of investment professionals and the fees that we pay to Nuveen Real Estate Global Cities Advisors.
  • We cannot guarantee that we will make distributions, and if we do we may fund such distributions from sources other than cash flow from operations, including, without limitation, the sale of assets, borrowings, return of capital or offering proceeds, and we have no limits on the amounts we may pay from such sources.
  • This is a “best efforts” offering. If we are not able to raise a substantial amount of capital in the near term, our ability to achieve our investment objectives could be adversely affected.
  • There are limits on the ownership and transferability of our shares.
  • If we fail to qualify as a REIT and no relief provisions apply, our NAV and cash available for distribution to our stockholders could materially decrease and we could face a substantial tax liability.
  • Our investments in International Affiliated Funds may be subject to currency, inflation or other governmental and regulatory risks specific to the countries in which the Funds operate and own assets.

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