Why are the lenders pretending like nothings happening?
Can anyone explain what the lenders are doing/thinking? All we hear about is this looming wall of maturities and the massive amount of lender exposure to crappy Sunbelt multi-properties... but every lender I speak to tends to agree that everyone else is holding onto dog sht wrapped in cat sht, except for them of course. Why are they pretending like they are fine or is it they just don't understand how screwed they actually are!?
We're in the wall of maturities, it's not looming, it's here!
For example, I won't mention names but can use context clues, there is a CLO shop currently holding onto a note collateralized by a typical 70s multi in the Sunbelt owned by a crumby syndicator. This note was originated in Feb 2021, with a 3-year maturity, so it came due this month. Now the occupancy of the property is in the 60% range, the NOI is negative, the Sponsor is crying for cash from everyone, and the property is being mismanaged. One would expect that at maturity it defaulted because the Sponsor couldn't meet any extension covenants and weren't able to refi, right? When we reached out to the lender we thought, hey I'm sure they'd love to sell us this note and we could pick it up at a few cents below par, and they can get rid of this headache, right?? Nope! All the lender had to say was, we're not interested at this time as we're working with the Sponsor... like what!? Not even interested in engaging in a conversation to hear about structuring a deal here? The lender rather let this dog sh*t operator run it's collateral into the ground and get into a worse situation in a few months than cut their losses now!? Might as well give these dudes the kerosene and matches. This is one example of the type of stuff I'm talking about, it seems to be every lender out there is delusional.
I feel like we are all Steve Carrell's character sitting in the back of a taxi going "What the hell is going on!?"
So please can anyone explain to me, what is happening!?!?
The crash is imminent
Agree to an extent. And none of the note holders want to be the first to start marking loans for sale below par. They’d rather stick it out till the last second, because then they can blame it on the overall market as a whole. Kinda like “ hey look, everyone is losing their shirts on these deals”. Perception is the highest priority these days, apparently.
It depends on the lender. Are you only referring to multi? High leverage floaters on 3.5% cap purchases to 25yr olds probably should feel some pain. On the flip side, there are plenty of older apartment deals that are totally fine because they have a good sponsor who put some decent cash into it and manages it well.
This is the worst part about the doom and gloom posts. Everything gets lumped in together when outcomes are not evenly distributed (CLO value-add multi is different than low leverage agency which is different than an STNL Amazon warehouse that a lifeco may have). Not all CLO lenders are created equal either. Believe it or not, there are some decent office deals out there today too...although I'm not allowed to touch them.
Bingo. Plenty of people/firms will be absolutely fine. It is not an all or nothing scenario.
Depends on the lender. Small banks are way friendlier to borrowers and will just keep extending your loan (annually, of course) for like 5+ years even if the deal isn’t getting any better. The special credits guys at my bank think that getting a $15k fee for a 1-year extension of a $20mm loan counts as a win. It’s ridiculous.
There was guidance from regulators to play nice in the sandbox with Borrowers for Banks
Curious, have you been successful originating these loans from lenders at all? Have you discussed selling the asset with the sponsor? what about refinancing the lender out with a whole loan where you can take control quickly while maintaining a strong basis/LTV?
Can anyone in the debt fund world advise on what their line lenders are currently charging them?
I’m hearing rates are 15% for a fund. If so, the fuse has been lit if they are anywhere close to their 50% leverage limit on a fund with severe impairment. This could be a forcing function leading to end the of extend and pretend or to discounted note sales.
I work in lender finance. Depends on your size but the credit facilities are always floating rate. Typical index is 1 month term sofr. Spreads range from 250 for lines from Wall Street to 500+ for lines from non-bank finance companies. If you’re at the stage where you have access to cre clo’s you almost surely have a line from Wall Street plus a smaller line from another lender for loans that fall outside the Wall Street lenders eligibility criteria.
The margins are pretty thin right now
Curious what these rates were during the best of times - like 2021?
It takes time. A lot of the loans (3-5 year terms) that were originated in 2019-2021 are maturing in 2024. So we shall see.
Additionally, loan modifications/distressed restructurings take time, months. We haven’t seen a lot of the capital events that will lead to losses come to fruition. We are still in a price discovery phase, once the big guys start buying, everything else will start to trickle down. I’ve seen BOVs and appraisals this year conclude values 50-100% less than the values in peak 2021.
Multifamily purchased in 2019-2020 is probably OK, 2021 gets dicey and you're right, we are still a quarter or two away from maturities / decisions being made.
Sign me up for those that are 100% less. 100% non-refundable deposits day 1.
Sounds suspiciously like Arbor Realty. Very interesting case. After having been dragged into the spotlight like that by Viceroy they probably got their door ran into by people wanting a piece of the pie for cents on the dollar. Short float is at 35%. I think they know they are sitting on a time bomb full of shit but probably want to avoid being one of the first to go bust. Imo inevitable though within the next 1 1/2 years since that it when most of their CLO vintages mature.
In this case it isn’t arbor, but I did talk to them. They were at least willing to have a conversation about selling some of their notes, but were pretty upfront with saying they’d likely only pull a loan and sell to groups they’ve transacted with before, or would go through a marketed process for any loans they want to unload.
From a bank lender’s perspective, we aren't hammering borrowers because we take sponsorship seriously and our borrowers have been through cycles, shown willingness and ability to support projects and honored their recourse. Two situations that look identical from the outside can be wildly different based on these factors.
Depends on the lender. Some have AM arms and will just take the properties over (case in point Benefit Street taking DB Capitals San Antonio property). Most of the large debt funds are also aggressively expanding their AM capabilities at the moment because they know we are VERY close to let’s finally given back (2-4 months). Other debt funds are absolutely talking to sponsors to transfer title and restructure but a) you need to have a relationship with them. They aren’t just going to start fielding calls and sending out information en masse on their portfolio. And b) They aren’t structuring outright sales because that would require write downs. They are attempting to create structure where’s new sponsors bring in a small but not nominal amount of new equity, transfer title and they only subordinate the estimated lost debt to the new equity and create some form of waterfall to hopefully recoup it later on.
Lenders themselves are not forced sellers yet so very few below-par actual trades of notes are taking place. Need a few more failed CLOs and warehouse lines to dry up.
No debt funds I’ve spoken to are open to a JV scenario and profit share like you pointed out; none. They’d rather stay with the current sponsor than restructure and bring in a new, fresh relationship. The lenders I’ve seen lately are trying to make money on their notes (that are underwater) or have taken over the entire cap stack and are trying to sell and make money somehow lol. It’s honestly quite laughable watching debt guys operate and think like equity, it’s like me trying to speak full Chinese. The asset management teams themselves are not capable of handling equity type transactions either, so idk how that’ll save them ultimately, they just help work on all of the day to day oversight and modeling. But at the end of the day, lenders are going to have to take a hit on bad loans, there’s just no way around it. The equity will be wiped out and they know it too, but debt rarely thinks they make bad bets and aren’t willing to admit it I guess… I’m hoping to be wrong and sponsors/lenders start selling these like hotcakes at discounts, but every tree I’ve ran up is the same BS story and emotional trap.
To clarify, it's not a profit share. Waterfall was probably the wrong descriptor. It's simply a new loan agreement that structures the lender to recoup the debt that they are subordinating to the new capital. Also allows the lender to not have to technically write off the loan amount. I had conversations last week with two of the more well known debt funds out there, so just letting you know it's happening or at least being discussed. Yes, I'm sure the preference is still to want to work with the existing sponsors if: 1) Lender still has confidence in the abilities of the original sponsor, and 2) the original sponsor is able to provide the fresh capital that a new sponsor would provide. Given the number of inexperienced sponsors out there and the number of capital calls that have already taken place, it makes sense that one or both of these points would lead a lender to bring in a new, fresh relationship.
Depending on the lender they can play the long game to recover as much as possible. For example, a bank can take an asset REO and work to maximize value and sell when there is more liquidity in the market. Generally, they have 5 years to sell, and this is frankly the worst time to try to sell an asset
Biden 2024. That's why
I disagree with this characterization... maybe smaller lenders in the sunbelt are all holding onto their pants and pretending otherwise but most lenders know just how bad things are. This real estate crisis is not like 2007-08 and it'll take years to work it's way through the system. Most bank lenders are regulatory capital constrained to hold onto underwater debt and will do whatever it takes to avoid equitizing the debt, preferring to sell it at a discount. The real bag holders are mezz lenders who stepped up in the 2020-22 period thinking that they'll be able to play the role if liquidity provider now realizing they have to actually asset manage buildings they have no experience managing.
I agree with you that this is not like 2007, I actually see it as completely the opposite.
now vs then:
1. high-interest rate vs low-interest rate environment
2. ample liquidity vs illiquid market
3. not enough deals (multiple bids / high amount of interest) vs too many opportunities (nearly no bids / no transaction activity)
The hope note / extend and pretend narrative leaving the GFC made a lot of sense looking back. We had these high-interest-rate loans, refinancing into lower-interest-rate loans that offered safer coverage ratios and lower leverages for any groups with cash on the sideline. This is the opposite story, we're now talking 3-4% rate loans refinancing into 6-10% rates. The cap rates, which theoretically are supposed to follow interest rates, have widened significantly, all leading to destroyed dscr/ltvs.
Where I disagree is the timing, the crystalizing losses on loans shouldn't take years to work itself through the system and should be pretty quick once it starts to happen. I imagine it to be the same way we are seeing the wave of maturities, it to be a complete crash on the shoreline when it hits.
Mezz lenders, definitely! They are the most screwed, completely wiped, and there will not be a crumb left for any subordinate group when the dust settles. So many of those pref and mezz groups who put out dollars will be the biggest casualties of all this. But to quote the very wise Once-ler, I will feel sad as I watch them all go, but business is business and business must grow regardless of crummies in tummies you know.
https://therealdeal.com/la/2024/02/16/tpg-sells-playa-del-rey-multifami…
anyone have any color into this? Wild stuff all around.
Dumb sponsor here, I swear to god that like 90% of office refis/extensions are completely made up and every single appraiser is lying over and over again to themselves. At least with multi refis there are fundamentals that seem reasonable with housing shortages/demands etc, but I feel like there's such a massive glut of office that they're all pretending is A/Trophy in valuation that should be >B.
I feel like it's COVID retail all over again where so much supply that has to get converted, except there's so much supply in high density areas that any uses other than what you get with office rents is going to be a much higher relative delta compared to converting a mall with a massive footprint.
Maybe I'm missing something, but it feels like there's going to be a massive come to Jesus moment after the extensions/refis go and half of the operators can't cover debt service even with a lower interest rate environment.
The appraisers are in a really challenging spot for office. Most of them are not terribly sophisticated and don't have a great grasp on capital requirements / constraints. They are really just comp'ing off other transactions, which don't exist right now. What's an office cap rate today?
I can actually provide some insight here as I've been digging into office the last few months.
The short of it is the debt capital markets for office are nearly non-existent outside of some debt funds in NYC. Even then, these lenders of last resort are being very picky in terms of location, asset quality, leased and occupancy %, WALT, and leverage. Cost of capital on the debt is around SOFR + 500 bps, so think 10%+. LPs are not willing to take on negative debt to equity in office and want some positive risk premium. Therefore, I'm seeing stabilized office with 5+ years of WALT trade at 11% - 12% cap rates.
You'll see some lower cap rates published on transaction summaries, but those are conveniently excluding the fact the Seller provided significantly below market rate debt to get that deal done. It's all a big game to hide the ball right now as GPs are trying to find creative means to prevent poor comps for future sales. Unfortunately for them, as more notes go back to the Lenders they are not so creative / focused on the market versus getting out at their basis, if possible.
Curious what you expect the lender to do. If they sell one loan for X% below par, that's a new comparable that will affect their entire book as well as affect their competitors. How would you explain to an investor that as of the most recent audit of your portfolio, the value of the book has gone down Y%? What happens if an investor says they want their money out? How do you stop a geyser of capital calls?
A massive market correction is not a good outcome. It means people lose jobs and lots of money. Retirement funds, savings, pensions, etc.
Great - So instead of taking a small loss today, take a much larger one tomorrow because that'll help the investor. Most of the "losses" today, at least for CLO lenders, would be at the equity exposed tranche, so you'd be making the investors/bondholders whole selling now for a smaller discount. Waiting will only make it worse and force those bondholders to be exposed to losses. So in reality it's actually better for them to sell now, as they have a duty to their investors to do so. Unless you think 3 cap 70s multi deals in sunbelt will start to sell again at those prices, then we have a whole other bag of problems to address.
You ever heard of the term cutting your losses? not chasing bad money with good money? That's precisely NOT what the lenders are doing. This extend and pretend narrative will only worsen the problem. Let go of it now before it becomes much worse, and yes that will more likely lead to a massive market correction, which would lose jobs and lots of money, but only worse in the future. The only thing this is doing is preventing it for a little while, but it's just amplifying the problem for a later date.
A bank run is inevitable for a lot of groups, but again if they start at the slightly discounted pricing now they could potentially survive another turn. But if they wait and this crap keeps deteriorating, because let's be honest, no Sponsor is actually putting in serious money into the collateral or trying to improve them, they are just using whatever cash they have to modify loans and keep lenders happy enough by pumping them into rate caps or reserves, so the collateral will be worse, and the loans will take on greater losses.
So, yes, sorry if I sound like a crusader or a naive, but I think the lenders fcked around and now it's time to find out, and should do the right thing by taking on smaller losses early, then to cower in the group mentality and take larger losses for their investors in the future.
Don't disagree with anything you wrote, but it is a bit naive. You're asking for people to do the "right" or "honorable" thing, but why would they?
If it helps, take out a margin loan and short anyone who is public (or buy long dated OTM puts). That should make you feel better about these injustices + you'll make a few bucks...and it seems like guaranteed money right?
I think they would disagree with you on small loss today and taking much larger one tomorrow. They're thinking the exact opposite actually and I'm not sure I'd disagree, although it's highly uncertain. I would hate to be a forced seller today, the future is likely brighter. They won't be 3 caps again but they're currently 6.5-7% caps and they could reasonably be 6% 12-24 months from now. And, different than the equity which is having to contribute capital, debt is receiving cashflow today. Perhaps not at the 9% that loan terms dictate but likely 5-7%.
Capitalism without bankruptcy is like Catholicism without Hell.
The FDIC/regulators are telling banks to 'work with' their borrowers, which is code for do not foreclose or take back the keys on these assets. This is a massive mistake IMO, because now we will have a lost decade like Japan has with their 'zombie' companies except we have 'zombie' assets that are not allowed to find their highest and best use. In the case of B/C office, self storage conversion or demolition for new ground up that is actually in demand. In the case of over-levered, 0.5-DSCR multifamily, get a new buyer at the true basis who can actually implement a business plan instead of whatever current sponsors are doing now (letting them depreciate).
The sponsors who took huge risk in 2020-2022 are effectively being bailed out, and the credit/capital propping them up is not being allowed to find a higher/better use. I can't get (reasonable) loan terms on very safe/core/de-risked deals because they're letting Johnny-gun-slinger extend/pretend into infinity. For anything to happen, impaired assets have to trade at their true, market-clearing basis with new sponsors and new business plans. Yes, that means Johnny-gun-slinger and his LP's get wiped out. That's capitalism.
Rant over.
TLDR: let capital find its highest and best use and stop with the head-in-the-sand games that is creating a moral hazard and prolonging/creating a worse outcome.
Yeah I agree with this except for the part where you've arbitrarily decided to blame it on regulators.
Agree with you, but I don't think this "extend and pretend" period will last much longer. Banks know their will be losses, the true FMV isn't accurate, which means their portfolio level LTV on their bad assets is probably way higher. The banks know this, but they are just not providing update info. I think what the Fed is trying to do is make sure the banks have enough liquidity to support the refinancing hole thats about to occur. So this extend period was really for the banks to beef up their cash reserves, not protect the borrowers. I think this year we're going to see the storm appear because the 3-5 year loans will start maturing now.
They did bad business. They were as crazy as their sponsors. Why wouldn’t they get wiped out?
Getting rid of bad businesses is good for the economy in the long run.
Losing your job sucks, but it isn’t the end of the world.
No shortage of projects <1.0 DSCR but also <100% LTV, even at inflated cap rates. Lenders suck at owning properties and they know it. May as well let things play out for a while.
This all assumes a borrower is saying they won’t cover shortfalls, buy a new rate cap, and/or pay down their loan to buy more time for the property. A lot of borrowers are doing some or all of the above, so why would a Lender not give them a year to see if they can turn it around when they have been carrying the asset and show willingness to continue. I haven’t seen many borrowers ready to throw in the towel yet, despite numerous requests for extensions and/or short term DS/ rate cap relief.
It’s another thing if they won’t commit new equity or can’t call capital to buy time, but we are seeing many find cash to make a deal.
Check out the Gainesville portfolio on Page 16 of the Viceroy report:
https://viceroyresearch.org/wp-content/uploads/2024/02/ABR-Baloney-with…
Arbor lent $43.9M on a $51M acquisition by syndicators called The Cyclone Group. (They were in the news for running out of money on a NJ property.)
The February NOI was a measly $88k, with 77% occupancy. That's $1,056,000 NOI, at a very generous 6 cap valuation this property would be worth $17.6M. These losses are staggering.
Can anyone shed light on what happened in May on 2023? It seems to me that Arbor gave them $2.3M to fund a reserve, in order to keep the loan "current".
It's possible this was future funding meant for capex that they allocated to this reserve. Regardless, it seems to me that Arbor is essentially paying the loan with their own funds, in order to keep it off the naughty delinquent list.
The Capex Future Funding was likely force funded into escrow and Borrower had to start paying negative arb on the Capex funds
Some of these are funny, on Page 17, Lantara apartments graphs are pretty great. You have a current balance jumping up and down by ALL the reserve balance. A 65% occupancy and an NOI that is going straight down.
Makes sense it's obviously a Tides Equities property.
If you value it using a stabilized NOI then it paints a much different picture.
Arbor is absolutely fucked. How the hell do they have a $3b market cap, it is going to zero. I’m definitely team index funds but this demands action.
I read something which feels like an answer to this, but I didn't completely understand it at the time: so from what I can recall, the logic is that if the property is eventually foreclosed upon, the lender, sponsor or whatever can (or will?) get audited, which will invite scrutiny to the rest of their portfolio. I don't work in debt so I can't positively say if I didn't just mix some terms up. I imagine the concern is that by selling to you, you can possibly foreclose on the property. By holding all their loans hostage until they are forced to foreclose, they can avoid their obligation to acknowledge reality and the regulators. Analogous to holding their loans hostage. I'm not sure what the actual, specific legal circumstances for an audit are, so this is just speculation, assuming that their portfolio is actually trash.
Valuations have bottomed and they are comfortable with their last dollar exposure. Sponsors can beg for relief all they want, but lenders know once keys come back they can aggregate and sell to the big fish and turn a profit.
Values have bottomed? What IS group do you work at, MM?
DFW multi has bottomed 100%.
Phew! Thanks for the insight, anything else you can share with us, Nostradamus?
Anyone who says values have bottomed has no idea what they are talking about. There have been no trades, so not sure what these values are pointing at. The bid-ask spread is way too wide, capital markets are a hilarious disaster, and too much liquidity pumping into reserves/rate caps artificially keeping crap deals alive. So no idea what you are talking about, Yosemite? Every deal that comes to market is a last week 5 cap and every bid is a tomorrow 7, so yeah values really are there...
Nice blank deal sheet perspective sport. Plenty of multi trades happening in DFW, just because you work for a weak shop that can't structure a capital stack doesn't mean others lack skill and aren't closing. To think A/B multi is going to a 7 cap in Dallas is laughable.
I remember my first down cycle...
Not saying that they've bottomed but we've seen multiple best and finals this week with 10+ groups in best and final and pricing going over initial guidance. If distress continues to only trickle, the bottom very well could have been 4Q2023. Way too many uncertainties out there to call a bottom but demand is very strong right now on non-$hit product - 2000s and newer.
Things will start when the FED ends its Bank Term Funding Program (BTFP). Which just happens to be March 11, 2024, two weeks from now.
Why does this matter? Well, the BTFP is like a financial safety net the Fed utilizes to keep the money flowing, primarily in times of financial distress. For example, when Silicon Valley Bank collapsed, it caused ripple effects throughout the various markets. Banks were on edge and highly exposed to the risks that caused SVB's insolvency. The Fed stepped in with the BTFP and offered a lifeline to banks; a one-year loan collateralized by the bank's various assets.
The main idea? Keep writing loans and keep the cash moving - and that's what they did. Banks borrowed in order to write more loans and bolster liquidity for consumer withdrawals. But what happens if the banks collateral assets are non-performing?
Well, le'ts see:
$152b of the $162b or 94%, was issued in March 23.
When Powell says, "No extensions on BTFP lending," those trades will unwind. This will force banks to sell off bad loans and cut ties with non-performing assets (loans). If banks get desperate to sell these non-performing assets to stay afloat, they will start discounting the price.
I think credit spreads expand, sponsor's hand back keys, and banks with their pants down get slammed.
What do you think will happen?
This is great info, but I think the part you may be missing is the actual underlying collateral for the loans is ONLY collateral that are eligible for purchase by the Fed, like UST, US agency securities, etc. - So the part about the bank's collateral assets becoming non-performing is a bit of long shot, these are essentially risk-free.
What I can see that does lend to your narrative, is if the banks didn't have the most foresight (which they usually don't) and the mark to market on any of the securities is below the par value, and they borrowed at par, since that's what the BTFP was offering. This could spook depositors and cause a bank run, but would imagine the FED would again step in to secure the depositors.
Also, the only groups that were able to take advantage of this were depositories that are federally insured, so not a lot of the CLO market etc., but yes definitely major exposure to the CRE lending world.
Lastly, the notion of writing loans was also kind of eh, because most banks just took advantage of the arbitrage given by the treasury to draw on the loans, and then take those dollars and deposit them back at the fed, earning a higher rate from interest at the central bank. So there are not that many loans written on those annual term draws, just a bunch of banks taking advantage of the Fed's lifeline to get some free incremental interest.
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