Arbor just foreclosed on $230mm of multifamily in Houston
I think many of us saw these types of deals over the last two years and were scratching our heads, I guess some of these chickens are coming home to roost. It sounds like this one specifically is being driven by an inept Sponsor, but I know there are plenty of other borrowers like this that tried to execute on the same type of business plan so I would guess this is not going to be the last (Nitya next?).
A little surprising that there were no bidders at or above the debt level - I figured that multi was probably still money good for these lenders but that may not extend to these Class C, operationally challenged assets.
At least some of these were also CLO loans - would require meaningful capital on Arbor's end to pull these out. If they have more of these landmines they may have some real capitalization issues coming soon.
This is a fall out of short term floating acquisition debt with high leverage capital stacks. These guys were expecting to get in, stabilize in 18 months, boost value by 15 - 20% through forced appreciation construction and NOI increases from increasing rents. Many of these syndicators were buying on the expectation of 5 - 7% rent increases though out their hold periods. Guess what, you pay too much you get fucked in the ass. The biggest issue I personally see coming out of this will be the scrutiny on the fee structures of these syndicators. Many were hosing their investors with fees, putting little to no actual cash in themselves, and some like that dbag who likes to make tiktok videos on his plane seem to be outright defrauding investors by essentially wholselling deals to themselves at huge markups and basing the return targets on the lower numbers.
wdym by wholeselling deals to themselves? do you mean the sponsor exits the project by selling it to one of its other funds?
also wdym by basing the return targets on the lower numbers? wouldn't they be basing return targets on the 5 - 7% rent increases throughout their hold periods?
If I am a syndicator that finds a deal and I put it under contract at $10M. Then I turn around and raise money from investors and the bank and I tell them the purchase price is at $11M, I have done a wholesale transaction to myself pocketing $1M in the process. This isn't exactly ethical, but also isn't exactly illegal if I am not charging a bunch of other acquisition fees on top of that. The wholesale fee can be seen as a replacement for those other fees charged. The issue is, many of these syndicators rely on unsophisticated people who don't know any better then they hit them with a mark up on the sale AND transaction based fees.
If I run numbers on the above example at $10M and say it will earn 15% IRR, then I mark up the price $1M on the transaction that will push that 15% IRR down. Some really deceptive sponsors will market that 15% on the $10M underwriting and then bury the assumptions down in some fine print. When they then underperform it is because they "can't predict returns", but some will then advertise their next fund on the 15% performance on the $10M number.
Syndicators as a whole a slimy, shady, under informed, and have had a good run because anyone with a pulse could have made money in the past 12 years.
There will be more.
First thing I do on potential acquisitions these days is checking what kind of debt it currently has on it. A few of these started popping up last fall when the 10-year was heating up and high-octane floaters were getting expensive, but a decent number of the sponsors had some time on their rate caps and could temporarily weather the storm (despite already being cash flow negative in some cases).
That isn't the case today. Many sponsors in the Class B/C space only bought two year rate caps, as that is all the bridge lenders were requiring at that time. There will be a wave of cap expirations and maturities this year and next given the enormous volume of bridge-funded deals done from late 2020 to early 2022. Many of these deals are looking at $1-3M+ for a replacement cap, all while rents are flats, expenses have gone through the roof (looking at you insurance and payroll), and the property may or may not be cash flow positive - even with a cap in place. Owners who bought at the peak in re-assessment jurisdictions are also stuck with high RE tax burdens via the stupid pricing they paid and optimistic UW re-assessment ratios (heard some people in TX were UW 65-70% in 2021...when historical precedent is 85-95%).
Re-margining or replacing any of these loans will require substantial equity in. Many syndicators (particularly those with retail investors) have zero ability to go get more capital at the moment.
This hasn't really been the case on Class A stuff, but there are some floating around out there (bad pun, I know). There's a 400+ unit deal in Denver where sponsor refi'd out all their equity with a ~75% LTV floater at the peak...and did not buy a rate cap. Went from $200-300k/month positive cash flow to feeding it $500-600k/month. Offers came in below par value of the debt. Two groups still in the mix with strike price now at par, but wholly dependent on current lender re-casting a loan with a sub-5% fixed rate for 5 more years.
Btw, all the ratings agencies' origination reports are actually goldmines for info on the debt, business plan, sponsor, etc. Even if it doesn't explicitly state the spread, you can usually back into it using the rated DSCR's and the reported NOI's. These reports are definitely eye-opening though to just how much risk there was in the system at the time. Even with huge NOI increases projected, coverage was still relatively thin on the base case model in many cases.
Buckle up boys and girls
Great insight - could you please elaborate on where/how you get the rating agencies reports? Would love to get my hands on some of these for properties I've been eyeing for awhile
Sometimes you can get lucky just by Googling property name + location + name of bridge lender + vintage year. Even if that doesn't give you the exact PDF report you can often find the CLO/CMBS issuance number. Sometimes this number or some other legal identifier can be found within the debt notes on Yardi Matrix or on CoStar public record page.
From there you can go on the websites for DBRS Morningstar, Moody's, etc and search by issuer (name of bridge lender), issuance identification number, etc. Takes awhile to piece together sometimes, as most of these bridge lenders have put out numerous issuances in the last few years.
The really interesting stuff is when the ratings agencies put out their periodic update reports, but seems like those are on a 2-3 year lag from issuance. Really the only rating update documents I've found have been for 2019-2020 issuances.
Edit - by the way, works with some agency pass-thru's too. This is a random one I pulled as an example.
I would add that the prospectus on the two loans in the CLOs detailed that there was pref, which equates to the low/mid 90s LTC. The leverage combined with tight exit DYs at the time spelled troubled combined with lack of interest rate caps.
Trepp has CMBS data, I think Costar & RCA have loan info if I'm not mistaken. Few other players as well but they're skipping my memory.
Ricky_GiveEmTheHeater
Thanks for the great overview.
Also interested to learn how to get access to the rating agencies reports.
Are rate caps something that sponsors work into the debt financing for the project?
Like Ricky said, you can make an account on DBRSMorningstar to find most presale reports for all major CRE CLO offerings. You do need to know the names of the major issuers to navigate their search function, but they're the usual suspects (MF1, Arbor, Readycap, Bridge, Harbor Group).
There are some 2021 vintage Surveillance Performance Updates that provide some interesting insights into ongoing business plans as well.
Thanks for the awesome response. If anyone is interested this video came out today and is very topical:
edit: also https://wolfstreet.com/2023/04/11/trouble-in-multifamily-cre-two-big-me…
Great writeup. I spent a short stint doing these acquisitions in 2021 in AZ, TX, Vegas, Atlanta, and a few other spots. Left because the risk felt way too high and everyone in that network was rich and very confident about every deal...which just didn't make sense to me. The upcoming bridge loan dilemma might be very bad as I have to assume those loans got syndicated and bought/sold further down the line. Then again, this world was always a bit of a wild west.
Just thinking through the steps...overpaid for asset with low rate bridge loan means it might be hard to takeout the bridge loan debt...unless you go short term and high rate with some private lender, which is basically the same as a pre-determined foreclosure. Yikes
Did you go to the allocators website? Applesway or something… their intro video is terrifying targeting unknowing mom and pops to invest
It is pretty standard for a syndicate. I would actually say it is marginally better than most.
lol i think the website is down now
Leverage works both ways.
Honestly the people investing in syndications mostly deserve to lose their money. Imagine giving cash to Grant Cardone, you’re begging to be scammed.
Look I hate Cardone as much as the next guy, but losing money and a low return are two different things. Cardone Cap historically has paid distributions, but are shit. His investors are getting screwed due to sky high fees but they still walk away with something. Companies like Nitya are even worse, because they are touting high IRRs and have completely stopped paying distributions to their LPs.
Our debt brokerage side financed one of Cardone's deals and you'd be surprised how many repeat investors he gets. The guy on our debt side gets their equity cap list. Many choose to reinvest. I guess for those people they feel good getting 3% on their money whereas they were getting close to nothing in their account. I do think these syndicators are going to take a beating unless they can show investors they can outearn CDs, money markets, etc.
Do they? I mean really? For them to walk away with something that means they would need to beat the S&P. None of them have done that. This isn't a return of capital question, this is a positive positioning question.
WSJ Article today: "Multifamily Sector Gets Hit by Rates"
This is only the beginning. Buckle up
Stupid question but is this a bad time of trying to get into debt/equity brokerage?
Careers are long, it's going to be a slow time for a while, but you're going to get the recession experience no matter where you are.
@ real estate boys
does this mean my rent in Houston will go down (or at least stay flat)?
Maybe a stupid question but would this force fire sales, then purchase of properties below previous prices, then lowering rents to fill the properties/undercut competition?
Houston vacancy is so high due to new supply coming into the market. Most owners are focused on retaining occupancy so id be surprised if they hit you with a meaningful rent increase. Always remember to push back and show rental comp support if you think that they are overcharging you. Always good to hit them with the amortized turnover expense savings by you not moving out vs rental premium they are trying to achieve.
Always good to go into any negotiation with some leverage so the more information you have on the owner, their debt story, or if they are trying to sell the building, the better.
How theoretically could all this filter through to those developing it, not acquiring?
Spend 100 worth 90.
That is pretty much the answer.
Your underwritten NOI is still getting squeezed the same way existing assets are, so your exit valuation gets a hit. Then caps are up because rates have gone up, so you take another hit there. Construction prices are still high and land values haven't come down to match, so your basis is higher. If you're getting a deal to udnerrerite at all you better pray the market doesn't deteriorate anymore, and if you're working on stale UW from 1-2 years ago, you better hope your still above water.
I'm working on a project that is just wrapping up construction and we're actually doing fine on rents in preleasing, but our insurance cost doubled on our perm policy, so that's screwing us.
I would think multifamily development is generally fair to ok. Many of these projects were planned and underwritten several years ago. How much are rents up since then? Heck, Phoenix had 26% YOY rent growth according to a report I read recently. Many other cities in the south are the same way. Sure, cap rates are kind of a guess right now, but funds still have to place money. And I guarantee the replacement cost is higher.
Now on development projects that are at risk probably involve several characteristics if not all:
- cost over runs
- extended construction timeline due to supply chain or labor shortage
- slower lease up
- or a combination of the previous two and the construction loan runs out before stabilization
- no cap on interest rate during the construction timeline. So you go from 4% when the construction started to 8%+ during when the loan balance is highest
I’m sure that I missed a few. Those come to mind off the top of my head.
This is absolutely great, but how you going to throw MG into this shit mix.
Tides should be there in the middle as the free space.
Someone took your advice on the “Tides Equity?” thread
Surprised to see Trion in the mix here
Why is S2 Capital in there? Listened to a podcast by their CEO ... seemed like a knowledgeable guy. He's not entirely a multifamily syndicator either ... he's actually pulled some LP institutional money on some of his deals? KnightVest as well.
This was for fun, don’t take it too seriously.
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