When the pandemic hit the commercial mortgage finance industry in the spring of last year, Ladder Capital Body
The CEO spent so much time glued to his desk in his home office that he developed a rash on the back of his legs.
âI haven’t moved from the chair for three days,â recalls CEO Brian Harris.
Its New York-based real estate investment trust appeared vulnerable on Wall Street due to the large size of its real estate securities portfolio, Harris said. Ladder’s liquidity concerns persisted even after the company paid $ 100 million in margin calls to its backers, he added.
Today, Ladder and other so-called non-bank lenders are on track to have one of their biggest years in lending volume, analysts and industry executives say. Ladder made $ 803 million in loans in the second quarter, mostly to developers needing bridge capital to finance new developments or renovations, up from $ 260 million in the second quarter of 2019, according to JMP Securities.
âThe amount of loans made outside the banking system is incredible,â said Harris.
The Federal Reserve, which continued to lend and helped convince many banks to take it easy with troubled mortgage finance companies, was the main reason the industry survived those dark days, said Mr. Harris. âIt could have been an absolute mess if the Fed hadn’t intervened,â he said.
The revival of the non-bank lending industry has been good news for the entire real estate community. It is helping real estate developers get back on their feet as the economy reopens, especially those who need short-term financing to pay off construction loans or buy and upgrade older properties.
Non-bank lenders are “critical to maintaining properly maintained, desirable and income producing real estate inventory,” said Steve DeLaney, analyst at JMP Securities.
Ladder’s loans this year have included a total of $ 300 million to the new owner of the Citigroup Center in Miami, investors who plan to modernize office buildings in Manhattan’s Garment District, and developers who have completed projects to apartments in the New York area during the pandemic.
Despite the rise of remote working, which has reduced demand for office space, Harris believes Manhattan office buildings are acceptable risks. Although their occupancy rate is lower than historical averages, the amount of loans is well below the cost of replacing buildings, he noted.
He also noted that apartment rents in New York City have rebounded after nosing around at the start of the pandemic. Mr. Harris expects demand for apartments to remain strong as colleges reopen and retirees move to the city.
The growth of non-bank lenders, such as Blackstone Mortgage Trust Inc.
and Starwood Property Trust Inc.,
in commercial real estate began as a result of the global financial crisis. They filled the void left by many smaller regional banks that withdrew from the business of bridging loans and riskier redevelopment loans to developers.
In 2019, these unregulated, non-traditional businesses generated $ 66.1 billion in loans, or about 9.8% of the total, according to data firm Trepp LLC.
Many had problems when the Covid-19 pandemic hit because they funded their loans with money borrowed from banks under short-term renewable repurchase agreements. They have used these ârepoâ loans in part to charge commercial real estate titles, which can be volatile in times of economic crisis, making non-bank lenders vulnerable to margin calls.
Mr. Harris co-founded Ladder in 2008. Public scrutiny of his business has increased in recent years because he was a friend and lender of former President Donald Trump. In February, the Wall Street Journal reported that New York prosecutors were investigating loans made by Ladder to Mr. Trump and backed by some of his buildings.
Mr. Harris declined to comment on the investigation.
When the pandemic struck, TPG RE Finance Trust,
a subsidiary of private equity giant TPG, was one of the first commercial mortgage finance companies to start faltering in part because of the sharp decline in the value of securities held by the company. The company eventually had to sell some $ 961 million in securities to meet margin calls and was recapitalized with $ 225 million from Starwood.
Concerns grew on Wall Street about Ladder, who had a much larger $ 2 billion portfolio in real estate securities. The company’s financial situation was not as precarious as TPG’s as its securities were rated higher, Harris said.
But these three months have been difficult, he said. Ladder shares fell more than 80% and the company cut its dividend in the second quarter. Mr. Harris paid Ladder’s $ 100 margin call in full and spent weeks restructuring loans with homeowners who owed the company money.
Ladder reduced its reliance on funding riskier pensions and other sources of secured lending to less than 35% of total assets in the second quarter of this year, from over 55% in the fourth quarter of 2019, according to a report released earlier this month by Moody’s Investors. Service.
TPG RE Finance Trust, which is lending at the same pace as before the pandemic, also strengthened its balance sheet by relying less on pension funding than it did in the years leading up to the pandemic, according to people familiar with the matter.
Other non-bank lenders have increased or maintained their use of secured finance. âThe heavy reliance on secured funding continues to be a major credit challenge,â the Moody’s report says.
Write to Peter Grant at [email protected]
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