Trillion Dollar Baby, A Regulator Riffs, Maverick Nibbles on Signature & AY Revamps

Trillion Dollar Baby 

Big-ticket real estate has always been a game of finding riches in ruins, from the S&L crisis to REO deals during the GFC to the Reichmanns buying Manhattan for $33 a foot in the late 70s. We may be back in one of those eras now, says Fortress co-CEO Josh Pack, with a “trillion-dollar opportunity” looming in distressed CRE debt.

(Listeners: Catch the👂️ version of the lead story here)

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Fortress (cont.)

“There is an interconnectivity between real estate and banks, and you’re seeing that unwind,” Pack said on Bloomberg’s Credit Edge pod. “We were reminded that banks aren’t in great shape when we saw NYCB start to fall apart, and that was actually one of the rescue banks that the FDIC put together in a shotgun wedding with Signature Bank.” Pack said that the “FDIC may have mispriced the assets that they were acquiring, and the folks like us who were pricing that stuff at 50 and 60 cents on the dollar are looking to be more correct.”

Key nuggets from a more frank conversation than I’d have expected:

• CMBS: Market has ID’d “haves” (HQ assets, good sponsors) and “have-nots” and priced them accordingly. However, when some of those HQ assets get into trouble and you start seeing sponsors hand back the 🗝️ on them, “that’s when you’ll see a real shift in how people are underwriting and approaching the CMBS market.”

• CRE-CLOs:  “There’s definitely issues with the bridge lending that’s occurred,” which allows for “folks like us” to come in and recap and “end up taking more of the upside. You’ll have the borrowers that end up hanging on for a hope note or want to continue operating the asset for some economic incentive. But the bulk of the upside that they may have had on a particular project will be transferred to the lenders.”

• Banking: More consolidation/liquidation of US 🏦 . “I don’t think the govt. regulators like the idea of pvt. capital making a profit off the woes of these banks, especially when they were supposed to be regulated v closely by govt. entities… there’s been a lot of reticence to deal with us and other PE firms. The processes they’ve employed have been fairly schizophrenic 😱 …you had them make announcements on a Friday that they were guaranteeing all the deposits, you had these mergers… occurring over a weekend.” 

Biggest takeaway here was that regulators will have to play 🏀: “The underlying stress here is just so big that they’ll eventually get to a point where they’re just going to have to utilize private capital to clean up the mess and recapitalize the system.”

Fun tangent: For a highlight reel of some of Fortress’ RE distressed-debt plays (Macklowe, Stuy Town, the Sheffield), check this out.

A Candid Chat with a Bank Regulator

 I mentioned in The Promote last week that I’ve been following a fascinating tête-à-tête between an active CRE credit investor, @CleanTo2ndLien (Vetted, legit) and a banking regulator. They’ve had another chat about where things stand, and readers of The Promote get a first look below (with my edits for clarity/context). Very interesting chat to pair with the Fortress discussion above- HS 

By CleanTo2ndLien 

“Wall of Maturities” is the CRE hoodie slogan of the moment. Not a week goes by without a new article throwing out warnings about the sheer volume of property-backed debt set to mature in the next 24 months. The headline numbers are big, they’re scary, and they keep rising – depending on the day and whom you ask, you’ll see estimates of anywhere between $1.1T and $1.6T. 

But what does that mean in practice? I’ve had a series of conversations this month with a Federal banking examiner about the CRE capital markets and how he’s seeing things shake out. (Quick note: Federal examiners tend to prioritize the safety & soundness of banks, whereas the FDIC adds the touch of depositor protection oversight.)

As the Fed conveyed over the summer, regulators want banks to work things out with borrowers- no one’s looking for mass liquidations here. So it’s likely we’re going to see many more extensions, bringing that scary Wall number down. But that’s going to come at a price. 

Regulators will be scrutinizing loans to understand what banks asked for when giving the modifications/forbearances. Did the borrower, for example, cough up more reserves? Pay down the loan some? Effectively enhance the credit of the loan?

If YES, the regulator is likely to cut the bank some slack. 

If NO, the bank will likely be asked to “recognize the risk,” by putting up more reserves against the loan - this is a hit on bank earnings. The regulator may also push the bank to  downgrade/reclassify the loan, which can affect the bank’s CAMELS 🐫 rating.

Back up.. what’s that? It’s a handy pneumonic for 

^{C - Capital Adequacy A - Asset Quality M - Management E - Earnings L - Liquidity S - Sensitivity}

These scores are nonpublic, but go from 1 (great, nothing to worry about) to 5 (house on 🔥 ). Once a bank’s 🐫 rating hits 3, expect regulators to be breathing down its neck, likely leading to loan sales and crucially, hurting a bank’s ability to borrow. 

Think of the rating as the giant asterisk on the Wall: if banks are in the safe zone, they’ll continue to have the ability to work things out with borrowers, and the wall could turn into more of a scalable fence. (Caveat: Things will take a hot minute to figure out. Remember, regulators are reactive, and banks don’t truly have the reserves for the underlying problems.)

The big question: Which banks will get ahead of this, and which ones will choose to roll the regulatory dice 🎲 ? 

Blackstone Breaks the Signature Cookie

It has begun. Blackstone/CPP/Rialto sold a $247M chunk of the Signature CRE loan book (backed by 8 as-yet-unID’d NYC buildings) to Maverick Real Estate Partners (David Aviram/Ted Martell). The Blackstone JV scored a 20% stake in the $17B book back in Dec. for $1.2B, and is just doing Blackstone things by offloading chunks of it ASAP. 

Maverick’s a growing presence on the distressed scene, where it’s picked up a rep for strictly enforcing loan contracts. Per Bloomberg, it’s bought $800M in distressed loans since ‘10 (200 investments in total as of January, per Aviram), and is 1/3 of the way through its $500M raise on a new fund. 

Here’s Aviram riffing on “extend and pretend” on 60 Minutes. He declined to comment to me, but more to come on the firm in the next couple weeks. 

Avison Nears Restructure - Should we Care?

“They miss a payment, they start acting like they’re doing you a favor if they give you anything.” - Tony Soprano

Avison Young, one of those major brokerages you sometimes forget is around, defaulted on its senior term loan, resulting in a downgrade by S&P late last week. The brokerage said it’s close to a restructuring that will slash its debt burden by more than half. 

The default was a technicality, CEO Mark Rose told Bisnow, stemming from AY’s disclosure to S&P on Friday of the impending restructuring. The firm and its lenders had already hashed out a non-repayment plan, which is why it didn’t make its principal and interest payments in Q3 and Q4, Rose said. 

AY will slim down its board to 5 members, down from 11. The Caisse (Quebec pension fund, parent of Ivanhoé Cambridge) made a $250M pref investment in AY back in ‘18 and pumped in $65M in equity the following year. Some of that pref has now been converted into equity.

Here’s Rose: "The actual term debt of the company is going to be much, much smaller, the total obligations are going to be more than 50% reduced in total. The next obvious question is ‘well, then you must have given up something else.’ No, it's just eliminated. It just goes away, because everybody believes in the company and our strategy and where we're going."

It’s worth keeping an eye out on this as a barometer for how the market is perceiving brokerages as investments, particularly given how much chatter there’s been about Cushman. But on a player level? With a few exceptions (James Nelson in NYC, for e.g.), there’s not much to see here.

Unquotable Quotes

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