More Prager Mezziness & OZK Called Out

Little Rock, paper, scissors, plus: WeWork's adulting era

Author

Hiten Samtani
May 31, 2024

Little Rock, Paper, Scissors

George Gleason’s Bank OZK faces perpetual Qs about its CRE exposure

“You must pay for everything in this world, one way or another.” - True Grit

What does Bank OZK know that no other lender does? How does it continue to give developers money to build new stuff while all its peers retreat? And how is it comfortable with its operatic levels of CRE exposure – 620% of its total equity, per a recent analysis – when regulators, especially now, are squeamish when banks go over 300%?

These are not new questions. The bank has fended them off for ages, while continuing to post fat profits and make developers’ hearts leap. Other banks are flavor-of-the-month types, OZK’s boss George Gleason argues, construction lending when the market’s hot and hiding in the prairies when it’s not. OZK though, is all-in, all the time.

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OZK (cont.)

This attitude periodically rings alarm bells: A Citi analyst hit the bank w/ a double downgrade this week, flagging potential risks for loans made on a major life-science project in San Diego ($915M) and a mixed-use project in Atlanta. “The company has had its name associated with skyline altering commercial development projects, with minimal total loss content,” the analyst wrote in a client note, per Bloomberg. “However, we have newfound, but substantial concerns with what we believe to be OZK’s largest individual loan, a multi-use project in Atlanta, and Life Science construction lending in general.” OZK’s stock plunged 17% after the news, but has rallied somewhat since. Meanwhile, Rebel Cole, the finance prof who compiled the CRE exposure analysis I cite above, is predicting the bank’s full-on demise.

“I'll be shocked if OZK is still around in twelve months,” he wrote on LinkedIn. “Likely to be forced into a ‘shotgun wedding’ by its primary regulator.”

(Bonus: A federal bank regulator walks us through a CRE loan book)

OZK’s eagerness to dole out construction loans – $3B+ in ‘23, per MSCI – far exceeds that of JPMorgan and Wells Fargo, even though those 2 are magnitudes larger. Gleason says the bank’s playbook hasn’t changed – it’s just that its peers have gotten more gun-shy. “We're getting a much larger share of the pie right now,” he told Bisnow earlier this month, “but it's just a smaller pie.”

Recent OZK construction lending deals: $200M for an office project in Chicago’s Fulton Market (equity comes from FO of Jacksonville Jaguars boss Shahid Khan); $259M for Ritz-Carlton Residences in Pompano Beach; $95M for MaryAnne Gilmartin’s resi project in Manhattan’s Turtle Bay (equity comes from the OG Eyal Ofer). South Florida has been a particularly massive bet: OZK today has $4.4B in O/S loans x Miami, Ft. Lauderdale and West Palm Beach, per Bisnow.

Gleason has long pooh-poohed naysayers. Conservative underwriting and requiring sponsors to put serious skin in the game insulate the bank from even Great Recession-era drops in property values, he said in 2018.

“It’s almost impossible for it to end badly” he added. 🍿 

Friends of Ours: More Prager Mezziness

Shaya Prager also lost an Arlington office complex to foreclosure

We covered the Shaya Prager vs. Pinnacle Bank drama at Fort Worth’s tallest tower in Wednesday’s edition. In a nutshell: Pinnacle alleges that Prager took out a mezz loan under false pretenses, by claiming that Prager represented the building and the ground lease as being controlled by different parties, when in fact they were controlled by the same party: Shaya Prager.

Turns out, a similar telenovela is playing out over in Arlington, where Pinnacle took control of a Prager-owned office park through a $30M credit bid earlier this month. Pinnacle has filed suit there, and the Tarrant County records around the transaction are super interesting. A tipster did some digging - here’s his summary:

Bought w/ 1 LLC for $68.9M, Borrowed $34.5M from UMB (Riverside 👀 in the mix). Ground lease to another LLC (Liberty Centerpoint), which borrows $40M from Pinnacle.

Tale of the tape for Arlington’s Centerpoint (Source: Tarrant County Clerk)

Couple interesting names in the mix: Stephanie Cartagena - remember that Prager’s regular collaborator is a certain Katherine Cartagena – and Shulamit Prager, who is sometimes billed in the press as Opal Holdings’ other co-founder, but doesn’t appear on the firm’s website.

Look, I’m no Bob Woodward – I’ll be the first to admit that. But a Woodward type should DEFINITELY look into this.   

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WeWork’s Adulting Era

Anant Yardi has successfully fended off Adam Neumann to take control of WeWork

One, a tequila-chugging carnival barker chasing big waves 🏄‍♂️ and fantastical valuations. The other, the classic Indian-American success story: an IIT nerd who started and profitably scaled a proptech company, deciding to keep it in the family even as revenues kiss $3B. The Adam Neumann era of WeWork is decidedly done, with the founder and former CEO withdrawing his bid to take back control of the company. Going forward, it will be run by Anant Yardi of Yardi Systems (PropertyShark, RentCafe, Yardi Matrix) in his signature disciplined manner.

“WeWork is such a popular and well-known brand, it didn’t seem right to let it go down,” Yardi told the FT in a new interview. “I realize financial decisions are not made on right and wrong. But there’s also a tremendous opportunity in terms of turning around WeWork.” He bought into the business anonymously <2Y ago through a $200M+ debt & equity placement, and kicked in a further $337.5M as part of a bankruptcy reorg that gave him control. The post-bankruptcy entity is valued at $750M, compared to the peak VC valuation of $47B in ‘19.

Yardi will look to market WeWork to small businesses and launch an affiliate program in partnership w/ other co-working players. What’s certain is that there’ll be no private jets - Yardi himself flew coach until v recently.

Bullets Over Broadway: Catch us on Odd Lots

We went back on Odd Lots to discuss 1440 and 1740 Broadway

Two fascinating case studies playing out in the Manhattan office market rn

1) 1440 Broadway (CIM, QSuper 🦘 ): Just received a painful loan mod + extension , appraised value cut by 46%, WeWork stays put w/ a cut-rate lease, Macy’s bounces. A wild ownership journey (VA scion to Rockpoint to American Realty Capital!)

2) 1740 Broadway (Blackstone): Bought from VNO for $605M in ‘14, got $308M single-asset CMBS, anchor tenant (77% of space) bails, Blackstone walks away, debt sold to Yellowstone for $186M, but after fee juicing 🧃 only $117M returned to bondholders = first AAA losses since the GFC 

We went on Bloomberg’s Odd Lots pod to talk through it all. Listen on Apple or Spotify.

Quickies

Unquotable Quotes

 “If you take too much blood out of the patient, you kill the patient.”
- Invesco’s Matt Brill, on offering tough – but not too tough – financing terms to struggling office REITs 🩸