S2's Escape Hatch & Big 4 Broker Talk

S2’s Escape Hatch

Scott Everett is the syndicator everyone is waiting for to fail. The scrappy founder of S2 Capital amassed a multifamily portfolio of 45K+ units (pegged by the firm at $7.5B+) and became one of the matinée idols (along w/ the Tides and GVA and Rise48 crew) of the Sunbelt apartment boom. Theirs were tales of floating-rate chutzpah – “fixed-rate is for suckers,” Everett once said – and as the market turned, that leverage became lethal. The biggest players began hemorrhaging chunks of their portfolio – see here and here – and almost every time The Promote would cover them, someone would write in and say, “What about Scott???” pointing to watchlisted loans and unsustainable deals.

Everett, though, has been busy crafting an escape hatch, in the form of a private REIT.

S2 (Cont.)

In April, S2 announced the vehicle, targeting a $1B raise. It seeded the REIT w/ 10K units that it said were valued (this is a loaded word in this asset class, it must be said) at $1.6B, and said it would look to acquire stabilized assets directly from developers w/ a target IRR of 12%. There’d be plenty of product to choose from – at the time, Everett estimated that “truly distressed” MF could add up to $20B nationally.

S2 has been on a flurry of acquisitions – $500M over the past 12 months, according to the firm, incl. a just-announced 618-unit portfolio in suburban Atlanta. Now, TRD has an excellent dive into the REIT, reporting that it took S2 9 mos. to convince LPs to get on board and has cost the firm $5M so far. It has folded $1.4B in sr. debt into the REIT – 50-50 btw. fixed-rate agency and floating (8.25%) – $500M of the latter was refi’d via Fannie into fixed-rate debt. S2 still needs to renovate 5K units, per investor docs cited by TRD, and to raise the capex funds has sold founder’s shares to LPs - nearly $75M worth so far 👏

Not all investors are thrilled. One said that he received just 80¢/$ on a profitable Florida deal when it was rolled into the REIT, and complained that S2 never provided documentation on its rationale. So far, S2 has marked down the equity value of the REIT-seeding properties by less than a third, and TRD reports that the blended value of the assets converted at 93¢/$, though some investors took a much bigger bath.

What comes next? Everett will have to execute the reno and rent raising plan to perfection, continue the aggressive acquisitions, hope rates keep falling and convince investors that he can lead them to the promised land. A high-wire act that’ll be fun to watch. 🪂 

Earnings Szn: Big 4 Highlights

Earnings calls are a useful gauge of how the biggest CRE firms are spinning what just occurred, and how they wish to be perceived – are they balance-sheet babysitters ™️ (Cushman), steady eddies (JLL), jonesing for data centers (CBRE) or on the warpath (Newmark)? Here’s the latest from the just-wrapped earnings szn - keep in mind that they all report their numbers differently, so 🍎 to 🍎 is tough

JLL: Adjusted net income of $170M was up 60% YoY, w/ gains seen across most biz segments (obv not tech, that division has consistently lost $). CEO Christian Ulbrich shouted out the acquisition of SF tech industry-focused brokerage Raise as a way for the firm to up its digital game. The firm’s also looking to lever down, and Ulbrich said that he expected Q4 and ‘25 to be a steady improvement from where we are now - “there will be no kind of flood of new deals coming,” he said.

CBRE: GAAP net income of $225M was up 17.8% YoY. US leasing revenue was up by nearly a quarter, while US I-sales grew 20%. The firm also had a surge (52%) in mortgage origination revenue, particularly in the agency-lending space. CEO Bob Sulentic said a major growth area would be property management in hot asset classes such as data centers – CB has rejigged its ops through M&A to prep for it. He also noted that the firm’s Trammell Crow division’s holdings in industrial land set it up nicely to capitalize on the data-center frenzy - “it is a fact that the path to data center land does fairly regularly run through logistics land sites that happen to have adequate power,” he said.

Cushman: Saw net income of $33.7M, after losing just about that much during the same period last year. CEO Michelle MacKay noted that the firm had kept its word on reducing its leverage, and would continue to do so while now “funding and fueling our brokerage business while leaning into the capital markets recovery” - remember that there’s been grumbling within the Cushman ranks that the firm was becoming less fertile ground for dealmakers.

Newmark: The tiniest but fiestiest of the big 4 reported GAAP net income of $26.2M, up 86% YoY, and its capital-markets business has continued to grow – CEO Barry Gosin said that Newmark saw a 77% increase in debt placements, compared to the 25% increase industry-wide. “We’re winning market share in more complex, larger transactions,” he said. The firm too highlighted its triumphs in data centers, incl. this whopper $3.4B deal that led to a HoF Traded post.  

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Fortress’ Designer Digs

After trading cinematic allegations for months, the climax (for now?) to the Fortress-Cohen Bros. drama was anticlimactic: On Friday, Fortress took over 4 assets – Dania Beach’s Design Center of the Americas & Le Meridien plus a Westchester development site and British film distribution company Curzon – in a $149M credit bid. There was no other bidder – Fortress had Cohen Bros. on the hook for $534M, incl. $187M in PGs on principal Charles Cohen. (Cohen has already lost prized parts of his empire, incl. Tower57, which is back on the market after the ground lessor booted Cohen out.)

This whole mess might remind folks of an earlier Fortress foreclosure dispute, involving another golden boy industry scion, Kent Swig. But that one was a planned detonation – Swig’s the one who approached Fortress to come in on the Sheffield, in order to swat away his mezz lender Guggenheim & salvage at least some of the upside on the project.

“I’m going to let you be rough with me and push me over,” Swig told the Fortress execs, according to an account in our New Kings of New York. “I know you like to play rough. You can knock me out of the way, and you’re going to make a ton of money.”

Q Me Up

Noticing a wave of financing deals happening through Freddie’s Q Series, a 3rd-party securitization program the GSE created to juice the multifamily AH market. The program, per a Freddie investor presentation, targets loan pools w/ unpaid principal balances of $150M+, w/ a max LTV of 80% & a min. DSCR of 1.2x. As of June-end, banks made up just over half the Q Series deal volume. 🧃 

Arbor Realty Trust did its first Q Series deal in late ‘22, a $315M securitization. This summer, Slate Property Group (a retro chat I did w/ David Schwartz & Martin Nussbaum here) scored a $210M Q Series refi originated by JPM - that one even scored a social bond designation 🤲 . In Sept., we had Jordan Slone’s Harbor Group close the first-of-its-kind multi-sponsor MF deal through the program, a $200M transaction in which it and Bridge Investment Group were co-sponsors. The same month, Merchants Capital did a 13-loan, $325M Q-Series deal – here’s more color on that one 👇️ 

And now, Dwight Mortgage Trust (Dwight Capital affiliate) has closed a $384M deal, per CO.  

Quickies

• 📹️ Inside the obscure loophole that’s become a messiah for TX syndicators

• Freddie & Fannie’s preferred stock soars in wake of DJT win - more on his CRE doctrine here 

• If Trump attempts to dump Powell, the Fed Chair’s ready for a scrap

• Weintraub takes another crack at Malibu canyon hotel

• “That’s my quant:” The math wizards decoding pvt market returns

• 🎙️: Can you ever actually de-risk the banking system? 

Unquotable Quotes

Save the date: V short notice, but trying to put together a drinks thing in New York this Thursday, 11/14. Somewhere in the East Village most likely. 🗽 More deets in Wednesday’s edition - sorry, logistics are not my superpower 🙏