Never Say Never Again – Bonds are BackCurrent Market Update and Financing Observations

Texas Housing ConferenceTuesday, July 29, 2014Hilton HotelAustin, TX

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Table of Contents

Section A Interest Rate Overview

Section B Multifamily Housing – 10 year comparison

Section C Case Studies

Section AInterest Rate Overview

1

10-Year US Treasury/10-year AAA MMD Comparison (2004 to Present)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

07/16/2004 07/16/2005 07/16/2006 07/16/2007 07/16/2008 07/16/2009 07/16/2010 07/16/2011 07/16/2012 07/16/2013 07/16/2014

10 Year AAA MMD

10 Year UST

Source: Bloomberg

2

30-Year US Treasury/30-year AAA MMD Comparison (2004 to Present)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

07/16/2004 07/16/2005 07/16/2006 07/16/2007 07/16/2008 07/16/2009 07/16/2010 07/16/2011 07/16/2012 07/16/2013 07/16/2014

30 Year AAA MMD

30 Year UST

Source: Bloomberg

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

200.00%

07/16/2004 07/16/2005 07/16/2006 07/16/2007 07/16/2008 07/16/2009 07/16/2010 07/16/2011 07/16/2012 07/16/2013 07/16/2014

10 Year AAA MMD asa Percentage of 10Year UST

3

Down 95.47% to 90.59% on 7/16/2014

Peaked at 186.06% on 12/18/2008

10-year AAA MMD as a % of 10-year US Treasury (2004 to present)

Source: Bloomberg

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

07/16/2004 07/16/2005 07/16/2006 07/16/2007 07/16/2008 07/16/2009 07/16/2010 07/16/2011 07/16/2012 07/16/2013 07/16/2014

30 Year AAA MMD asa Percentage of 30Year UST

4

Down 109.50% to 100.30% on 7/16/2014

Peaked at 209.88% on 12/18/2008

30-year AAA MMD as a % of 30-year US Treasury (2004 to present)

Source: Bloomberg

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

07/15/2004

07/15/2014

5

MMD Yield Curves (7/15/2004 and 7/15/2014)

Down 141 bps

Down 143 bps

Down 165 bps

Down 157 bps

Down 145 bps

Down 155 bps

Source: Bloomberg

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

1 2 5 10 20 30

07/15/2004

07/15/2014

US Treasury Yield Curve (7/15/2004 and 7/15/2014)

6

Down 215 bps

Down 194 bps

Down 201 bps

Down 214 bps

Down 185 bps

Down 200 bps

Source: Bloomberg

Housing Bonds: Spreads to MMD (2004 to present)

7

0

20

40

60

80

100

120

140

160

01/06/2004 01/06/2005 01/06/2006 01/06/2007 01/06/2008 01/06/2009 01/06/2010 01/06/2011 01/06/2012 01/06/2013 01/06/2014

AAA Hsg Rate Spreads to comparable AAA MMD 10 yr

Source: RBCCM Indicative Housing Rates and Bloomberg

AMT Non-AMT

7/30/2008HERA Legislation enacted. PAB Housing Bonds become Non-AMT

Housing Bonds: Spreads to MMD (2004 to present)

8

0

20

40

60

80

100

120

140

160

01/06/2004 01/06/2005 01/06/2006 01/06/2007 01/06/2008 01/06/2009 01/06/2010 01/06/2011 01/06/2012 01/06/2013 01/06/2014

AAA Hsg Rate Spreads to comparable AAA MMD 30 yr

Source: RBCCM Indicative Housing Rates and Bloomberg

AMT Non-AMT

7/30/2008HERA Legislation enacted. PAB Housing Bonds become Non-AMT

Section BMultifamily Housing Finance – 10 year Comparison

9

2004

Public offerings (AAA rated) – Fannie/Freddie/FHA enhanced – long term bonds (15 to 40 years)

Variable rate executions with Fannie Mae and Freddie Mac – Swapped to Fixed

Private Placements with large institutional investors (Charter Mac and MuniMae)-High LTVs, low DSCR, 40

year amortization (45 year amortization in some cases)

S&P Affordable Housing Program, publicly rated sub debt.

Few CRA bank placements

2014

• Long-term (Fannie/Freddie/FHA enhanced) publicly offered bonds are rare

• Long –term variable rate executions from Fannie/Freddie no longer exist

• Private Placements with institutional investors are back after a large dip following the Charter Mac/MuniMae

disappearance in 2008/2009. Stricter underwriting.

• S&P Affordable Housing Program remains, sub debt is less prevalent. New criteria released.

• CRA bank placements are very prevalent in large CRA markets (FL, DC metro, NY, CA)

Multifamily Housing Finance - 10 year comparison

10

Multifamily Housing Financing Options

Multifamily Rated Conduit Executions

Agency (Fannie Mae and Freddie Mac) and FHA tax-exempt bond structures including 221(d)(4) and 223(f).

Private Placements Sale of unrated bonds directly to institutional investors, and both local and national banks as CRA motivated investors. Freddie Mac has a new direct placement program

Tax-Exempt Bonds/ Conventional Loan Hybrid

This hybrid structure requires the sale of short-term cash collateralized bonds (collateralized with FHA, Fannie/Freddie or conventional loan proceeds).

FHA Risk ShareSale of tax-exempt bonds enhanced by FHA under the Risk Share Program. Many State HFAs and a few local issuers have FHA risk share programs. Typically requires LOC during construction/substantial rehab phase

S&P Affordable Housing Program

Unenhanced debt supported by the Real Estate. A- ratings. New criteria recently released by S&P

Public Housing AuthoritiesS&P Issuer Ratings. Typically A rating category

Section CMultifamily Case Studies

11

Other Facts

Bonds were issued for permanent financing only. Conventional construction loan from Bank of America was used for the 2-year rehab. Rehab was completed in November 2012.

Use of a conventional construction loan provided lower rate and construction interest than could be realized in a construction/perm tax-exempt bond.

All NJ HMFA bond transactions are required by state statute to pay NJ Prevailing Wages which would add approximately 25% to 30% to rehab costs. Conventional construction loan eliminated the Prevailing Wage requirement.

2012F-2 Cash Collateral invested in 1 year Treasury maturing 12/31/13 with an interest rate of .125% reducing negative arbitrage on 2012F-2 bonds to .375%

Multifamily Case Study: New Jersey HFMA – Washington Dodd Apartments

$19,755,000

New Jersey Housing and Mortgage Finance Agency

Multifamily Conduit Revenue Bonds

(Washington Dodd Apartments Project), Series 2012F-1 & 2012F-2

Pricing Date: December 13, 2012

Delivery Date: December 20, 2012

Bond Ratings: Moody’s: Aaa

RBC Role: Sole Manager

Private Activity Bonds with 4% LIHTC issued through NJ HFMA as a conduit issuer. Two Series: 2012F-1: $18,540,00, 2012F-2: $1,215,000

Aaa rated Freddie Mac credit enhanced bonds. 2012F-1 structured with 35-year amortization, 15 year term. All-in-rate was 4.84%

2012F-2 bonds required to satisfy 50% aggregate basis test for 4% LITHC. Bonds have 1 year maturity (1/1/14) and interest rate of .50%. Bonds were fully cash collateralized

Capital Stack included LIHTC equity, deferred developer fee, existing project reserves, and a Seller Note.

Transaction Summary

12

Other Facts

Bonds were issued for the acquisition and moderate rehabilitation of 116 apartments located in East Orange, NJ. Rehabilitation will be tenant-in-place.

Project receives rental subsidy for 115 of the units from a project-based Section 8 Housing Assistance Payments contract which has an expiration date of September 29, 2029.

Project is entitled to PILOT Agreement which permits the Borrower to make payments in lieu of taxes in an amount that is anticipated to be less than the amount of real estate taxes that otherwise would be due for a period of 25 years.

Multifamily Case Study: New Jersey HFMA – Hampshire House Apartments

$6,400,000

New Jersey Housing and Mortgage Finance Agency

Multifamily Conduit Revenue Bonds

(Hampshire House Apartments Project), Series 2012D

Pricing Date: January 9, 2013

Delivery Date: January 11, 2013

Bond Ratings: Moody’s: Aaa

RBC Role: Sole Manager

Private Activity Bonds with 4% LIHTC issued through NJ HFMA as a conduit issuer.

Aaa rated Fannie Mae credit enhanced bonds structured with 35-year amortization, 18-year term. All-in-rate was 5.30%

Utilized two term bond structure with term bonds maturing on January 15, 2023 (2.375%) and January 15, 2031 (3.35%) to take advantage of steep yield curve

Capital stack included LIHTC equity and deferred developer fee

Transaction Summary

13

Other Facts

Bonds were issued for the acquisition and rehabilitation of 125 apartments located in Maplewood, MN. Rehabilitation will be tenant-in-place.

Project will receive the benefit of a Section 8 Housing Assistance Payments Contract covering all of the units. Contract expires December 31, 2032.

The mortgage supporting the Series A-1 Bonds will be insured upon completion under the HUD Risk-Sharing Program

Project also received a $4.172M forgivable loan funded from the proceeds of the Agency’s Housing Infrastructure Bonds.

Multifamily Case Study: Minnesota Housing Finance Agency Concordia Arms Apartments

$5,065,000

Minnesota Housing Finance Agency

Rental Housing Bonds, 2013 Series A-1 & A-2

Pricing Date: August 6, 2013

Delivery Date: August 14, 2013

Bond Ratings: Moody’s: Aa1; S&P: AA+

RBC Role: Sole Manager

Private Activity Bonds with 4% LIHTC issued by Minnesota Housing Finance Agency.

Aa1/AA+ ratings reflect the Agency’s general obligation pledge to pay debt service if necessary.

Structured as two series. A-2 bonds are short-term bonds maturing in 18 months issued to satisfy the 50% aggregate basis test for 4% LIHTC.

A-1 Bonds utilized a four term bond structure with term bonds maturing on August 1, 2023 (3.50%), August 1, 2033 (4.875%), August 1, 2043 (5.20%) and August 1, 2049 (5.30%) to take advantage of steep yield curve.

Transaction Summary

14

Transaction Highlights

Seattle Housing Authority was upgraded to AA from A+ prior to the issuance of the Bonds

Two series of tax-exempt bonds were currently refunded and one series of bonds was advance

refunded with RBC performing the defeasance calculation.

Multifamily Case Study: Housing Authority of the City of SeattlePooled Housing Bonds

$13,855,000Housing Authority of the City of Seattle Pooled Housing Revenue and Refunding Revenue Bonds, 2014

Pricing Date: March 11, 2014

Delivery Date: March 26, 2014

Bond Ratings: S&P: AA

RBC CM Role: Sole Managing Underwriter

Governmental Bonds issued directly by the Housing Authority

30-year bonds with optional prepayment on or after December 1, 2023

Bonds refunded the existing tax-exempt bonds and lines of credit for 11 housing authority properties.

Bond structure mixing serials and term bonds achieved a project DCR of 1.63x and a TIC of 4.660382%

AA rating supported by general revenue pledge of the Housing Authority

Reserve Fund equal to 1 year MADS was funded at closing

Transaction Summary