MPA Morrison Park Advisors Creating a Housing Sector Bank Housing - PowerPoint PPT Presentation

MPA Morrison Park Advisors Creating a Housing Sector Bank Housing Partnership Housing Canada Regeneration Forum May 2016

Index • Morrison Park Advisors – background and qualifications • Social/Affordable housing finance – 6 basic premises How the current alternatives work • Criteria for an effective housing finance solution • Financing options evaluation matrix • • Case studies: – TCHC Regent Park regeneration financing – THFC (UK) – First Nations Financing Authority – BC Housing Progress to date • What comes next • Trust, Expertise, Value 2

Who is MPA? Morrison Park Advisors is a Toronto based financial advisory firm • – Formed in 2004, 100% employee owned – M&A, Corporate financing advisory assignments – “Big Bank” expertise for non - ”Big Bank” clients and situations – Over $50 Billion of financing transaction experience • Housing experience – Advisor on TCHC Regent Park regeneration financing – Variety of follow on TCHC assignments › Lawrence heights, energy business, strategic planning – Trillium Housing: affordable housing initiative – NOSDA financing alternatives – City of Toronto Tower Renewal project – Extensive for-profit multi-family financing and M&A experience Trust, Expertise, Value 3

Social/Affordable housing finance – 6 basic premises Premise #1: There is a critical, ongoing funding need that is not going away • – Aging stock – Growing demand – Withdrawal of Federal participation – “Pecking Order” of funding needs – Lack of an economic regulator to “de - politicize” funding Premise #2: The sector is highly fragmented, and the nature of the need is complex • and multi-faceted – Geographic – Physical – Jurisdictional – Size Trust, Expertise, Value 4

Social/Affordable housing finance – 6 basic premises • Premise #3: Housing is different – Housing people are housing people – Landlords or caregivers? – Commercial vs social mandate Premise #4: There is a very large knowledge gap • – Financing transactions have not been a core activity – Skills sets are different – Outside personal “comfort zones” Trust, Expertise, Value 5

Social/Affordable housing finance – 6 basic premises Premise #5: The sector is essentially creditworthy • – This has been our experience – Key elements: › Sufficient cash flow to service debt › Project “equity” sufficient to allow for a reasonable debt level – Grants, land value, reserves, redevelopment profit, etc. › Professional management › A reasonable business case › An engaged, supportive stakeholder group › Ongoing compliance with standards Trust, Expertise, Value 6

Social/Affordable housing finance – 6 basic premises Premise #6: Any large scale solution will have to carry a very low cost of funds • – Senior levels of Government will demand this › Issue is efficient “Use” of implied credit support – Implications: › Access to wholesale funding › Scale › Independent assessment of creditworthiness (ie a rating) › Portfolio diversification › Management capacity Trust, Expertise, Value 7

Bridging the Gap Trust, Expertise, Value 8

How Banks Work Mutual RSP’s Pensions Retail Funds Deposits, GIC’s, BA’s, term debt, pref shares Bank value added: Trust, Expertise, Value 9

How Banks Work Mutual RSP’s Pensions Retail Funds Deposits, GIC’s, BA’s, term debt, pref shares Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Trust, Expertise, Value 10

How Banks Work Mutual RSP’s Pensions Retail Funds Deposits, GIC’s, BA’s, term debt, pref shares Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Trust, Expertise, Value 11

How Banks Work Mutual RSP’s Pensions Retail Funds Deposits, GIC’s, BA’s, term debt, pref shares Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Consumer Credit card Commercial Retail Corporate Mortgages loans Loans Balances Loans Trust, Expertise, Value 12

How Non-Bank Lenders Work Mutual RSP’s Pensions Retail Funds Deposits, GIC’s, BA’s, term debt, pref shares Non-Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Consumer Credit card Commercial Retail Corporate Mortgages loans Loans Balances Loans Trust, Expertise, Value 13

How Non-Bank Lenders Work Mutual RSP’s Pensions Retail Funds Deposits, GIC’s, BA’s, term debt, pref shares Non-Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Consumer Credit card Commercial Retail Corporate Mortgages loans Loans Balances Loans Trust, Expertise, Value 14

How Non-Bank Lenders Work Mutual Pensions Funds BA’s, term debt, pref shares Non-Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Consumer Credit card Commercial Retail Corporate Mortgages loans Loans Balances Loans Trust, Expertise, Value 15

How Non-Bank Lenders Work Mutual Pensions Funds BA’s, term debt, pref shares Non-Bank value added: Credit adjudication Credit diversification Equity Capital (5% to 10%) Scale Management Customer service Commercial Corporate Loans Loans Trust, Expertise, Value 16

Direct Capital Markets Issuance Accessing the capital markets directly involves selling securities to capital markets • investors • Advantage is “wholesale” pricing Capital Markets Investors • Significant costs and risks: – Scale: Minimum $100million initial issuance Bonds – Standalone credit rating › BBB or better Issuer Credit Rating › No diversification benefit – Management time and attention › 6 to 12 months – Ability to cover transaction costs: Minimum $500k › Lost in the event of a failed transaction – Significant disclosure requirements and ongoing profile • This is what TCHC did for Regent Park – Followed a careful evaluation of funding options as they existed at the time Trust, Expertise, Value 17

Criteria for an effective housing finance solution • Ongoing funding stability • Able to handle complexity Able to deal with a fragmented sector • Customized to social/affordable housing • Able to bridge the knowledge gap • • Takes advantage of sector creditworthiness • Provides a low cost of funds Trust, Expertise, Value 18

Financing options evaluation matrix Direct Capital Government Non Bank Dedicated Housing Banks Markets Debt Programs Commercial Lender Issuance (IO, CMHC) Lenders Only if it suits them Ongoing funding stability No Possibly Unlikely Yes Able to handle complexity Not usually No Not usually Somewhat Likely Able to handle fragmented sector Somewhat No Somewhat Yes Yes Customized to Social Housing Unlikely No Yes Possibly Yes Able to bridge knowledge gap No No No Possibly Yes Takes advantage of sector creditworthiness Possibly Yes Yes Possibly Yes Provides low cost of funds No Yes Yes No Yes Trust, Expertise, Value 19

Case Studies- - TCHC Toronto Community Housing • – Decided to go the direct capital markets route – Highly successful – $450 million raised in 2 deals – AA(low) rating – Funding cost very close to City of Toronto – Unsecured – 30 year term – Very few covenants But: • – It took almost a year – High management cost – Process not for the faint of heart • It has held up under pressure – Financial crisis, Rob Ford Trust, Expertise, Value 20

Case Studies - THFC THFC is an independent, specialist, not-for-profit organisation that makes loans to regulated Housing Associations, that provide affordable housing throughout the United Kingdom. THFC funds itself through the issue of bonds to private investors and by borrowing from banks. THFC, through its subsidiary, Affordable Housing Finance is the delivery partner for the Affordable Housing Guarantee Scheme. AHF makes loans to RP borrowers and funds itself through the issue of bonds and by borrowing from the European Investment Bank. AHF's obligations under the terms of its financings and the obligations of its RP borrowers are guaranteed by the Government. The scheme has been designed to allow RPs to access cost effective funding so as to act as a stimulus in the building of affordable housing. Trust, Expertise, Value 21

Case Studies – First Nations Financing Authority • “The FNFA was created to provide First Nations governments with the financial instruments to build their futures on their own terms. Its mandate, set out in the FNFMA and related regulations, is to provide financing, investment and advisory services for First Nations governments .” “Financing services of the FNFA parallel best • practices of provincial and local governments. These practices allow each of FNFA’s Borrowing Members access to low-rate and long-term loans on their own planning schedule .” FNFA is essentially the same concept as • applied to First Nations Initial funding was $90 million of 10 year notes • in 2014 • Rated A3 by Moody’s Trust, Expertise, Value 22