Fortress Cracks Billionaire Skulls & CLO Buyout Frenzy

Fortress Cracks Billionaire Skulls

In the fall, I said that 1345 Avenue of the Americas, from where Fortress maps out its “trillion-dollar opportunity” in distressed CRE debt, has to be the most interesting boardroom in New York. We’re now seeing some of the bets the firm made over the past couple years, particularly on office buildings, bear fruit, in ways that Scorsese would probably describe as “pure cinema” 🎥 

Today’s sponsor is: Constitution Lending

Invest in non-performing & performing loans secured by real estate with the Constitution Real Estate Credit Fund. By using our established lending platform, proprietary deal sourcing & banking relationships, the fund aims to generate strong absolute risk-adjusted returns. Accredited investors only.

Learn more about the fund here.

Fortress (cont.)

The investment giant is pursuing a $548M UCC foreclosure – as big as I can remember – against a portfolio controlled by billionaire (still?) cinephile and reluctant developer Charles Cohen, TRD reports. UCCs allow a lender to leapfrog the courts by foreclosing on the shares of the controlling entity, rather than on the actual real estate itself.

In March, a Fortress subsidiary had sued Cohen, demanding a $187M (payment guaranty ++), and last week Cohen fired back, accusing the lender of an 11th-hour pullout from a payment deferral and loan extension in exchange for additional collateral (49% stake in 2 Manhattan towers) agreement that Cohen says the two parties had struck in December. When Fortress suddenly said no dice at the end of January and gave him just 48H to cough up $19M, Cohen found himself in an impossible situation, he alleged. “Smacks of bad faith,” he said of the maneuver, while further alleging that Fortress was cavalier 🎠 with his sensitive information such as bank account numbers and rent rolls in its lawsuit, a screw-up that will cost his portfolio $1B+ (Numbers are just numbers, so you might as well go hard.)

It’s a tough spot for Cohen to be in, especially because Fortress is pretty cozy in these situations: it’s also going after Harry Macklowe (again) on two properties.

NYCB Sees the Light Ahead

We have adults in the room now, and they’ll be taking clear steps to reduce our CRE lending exposure: That was the message from NYCB’s new leadership in Wednesday’s earnings, and investors seem to have liked it – shares were up 30% in early trading.

“My focus has been on transforming New York Community Bank into a high-performing, well-diversified regional bank,” said CEO Joseph Otting, a former acting comptroller of the currency installed by Steve Mnuchin in March. Otting added that he sees a “clear path to profitability” in the next 2Y. The bank reported $335M in losses for Q1, and said NPLs surged by $370M (from Q4 ‘23) to $798M, much of that stemming from its CRE loan book. The bank estimates that office properties are down 42% in value, while multifamily buildings – a source of a great deal of its pain in New York – are down by about a third. The bank’s provision for credit losses in Q1 was $315M (compared to $170M a year ago) and execs expect that to increase for the rest of ‘24.

Another big takeaway: the bank is in hardcore selling mode, it said, having “identified an opportunity” to sell $5B in assets to get more liquid. 🌊 Expect news in 2 months, if not sooner, Otting hinted. 👀 

(Bonus: If in need of a primer on the CRE lender landscape, go here.)

Quickies

• Taste of your own landlording: NYC asks judge to place Daniel Ohebshalom under house arrest ⛓🔗 at one of his one derelict apartment buildings, so he really feels his neglect of tenants 👏 

• The Aston Martin Tower in downtown Miami, a $1B projected sellout condo, has only 1 unit left, per the developers, who gathered to fete the opening w their motoring partners 🏎️ (For more on the curious economics of branded condos, check this out.)

• RFR’s first employee sues Aby Rosen 🤿 and Michael Fuchs for allegedly stiffin’ him on a promised $20M payout 

• Yardi says it will run its new baby (pending) WeWork as an arms-length business from its core data offerings (catch up here)

• Mega property management M&A done: Pretium completes BH acq.

• Witkoff plays peacemaker in Trump-DeSantis détente 

CRE-CLO Buyback Frenzy

Lenders are falling all over themselves to buy back CRE CLOs (debt securities backed by shorter-term, floating-rate loans, key vehicle for the multi buying spree), in a quest to keep their share of bad loans from getting out of control.

Lenders bought back $520M of delinquent credit in Q1, a 210% YoY jump, according to JPMorgan estimates cited by Bloomberg. To fund these buybacks, some lenders have been tapping into their warehouse lines (the power dynamic between syndicators, debt funds and warehouse lenders is a messy, constantly shifting one - I suggest starting here to get some background on it.)

“The reason these managers are engaged in buyouts is to limit delinquencies,” JPM CMBS guy Chong Sin told the publication. “The wild card here is, how long will financing costs remain low enough for them to do that?” If the Fed doesn’t show rate cuts any love for a while, multifamily syndicator delinquencies could jump so much that it’d “stifle issuers’ ability to buy out loans,” said Barclays Anuj Jain. The syndication business is already on the ropes: a recent CRED iQ analysis found that that the distress rate for CRE CLOs jumped 4x in 12 mos, and an MSCI analysis cited by Bloomberg found that nearly $10B of multi is classed as distressed as of the end of March. The publication cited surging short interest (37%) in Arbor Realty Trust (always catchin’ strays 🌲) , and though it couldn’t get the company to comment, it did reach billionaire Leon Cooperman who said Arbor founder Ivan Kaufman has been “a good steward of my capital.” 🫡     

Vibes Pricing in Brickell

Brickell is the shining exception to the national office misery, and one longtime owner in the area is testing just how far that can go. Having sold 801 Brickell for $250M-ish, or $600 a foot in October, Nuveen now wants north of $700 a foot nearby. It’s shopping 701 Brickell with the JLL brokerbabble (always look out for “expected to fetch” 🤩) throwing out a number north of $500M, or $700+ a foot. Both 801 and 701 are over 90% leased to blue-chip finance tenants, and both are 80s-vintage buildings that Nuveen renovated in ‘21 as the area took off.

The average effective rent (what a tenant actually pays) hit $115 psf in ‘22 (Vlad Doronin’s 830 Brickell crushed it), more than double the average in 2019, per CompStak, but fell to $85 in 2023. Leasing activity was down 25% YoY in ‘23, per JLL. Still, in the land of the blind 👁️ … consider what’s happening in Chicago 🐻 , where titans like GEM are defaulting on trophy towers, or DTLA, where Brookfield just lost its buyer on a 1M sf skyscraper, or SF, where office lenders are being advised to “forget about the original money.” 

Billionaire Schnitzel-Measuring ™️ 

Listen: there's a hell of a good universe next door; let's go.” - E.E. Cummings

The merely wealthy like to think of wealth as a spectrum, but once you’re a certain kind of rich you play in a different universe altogether, and I believe the same applies to luxury real estate markets: post-pandemic, the very top product in Dubai, Aspen, Manhattan, London etc. are all catering to the same rarefied buyer pool. There’s not enough data out there on this still nascent trend, but fortunately, the folks at Odd Lots - a podcast I admire for its wonky, polymathic brilliance – indulged me and had me on to talk about it. There’s not enough data out there on this still nascent trend, but fortunately, the folks at Odd Lots - a podcast I admire for its wonky, polymathic brilliance – indulged me and had me on to talk about it. A few themes: global wealth 💰️ , capital flight from authoritarian governments 🛠️ , Jacob the Jeweler, and of course, billionaire schnitzel-measuring ™️ You can listen on Spotify here, Apple Podcasts here, or read the transcript here.

Unquotable Quotes