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Ladder Capital and other non-bank lenders see booming business

When the pandemic hit the commercial mortgage financing industry in the spring of last year,

Scale Capital Body

the CEO spent so much time glued to his desk at his home office that he developed a rash on the back of his legs.

“I haven’t moved from my chair in three days,” recalls CEO Brian Harris.

His New York-based real estate investment trust looked vulnerable on Wall Street due to the large size of his portfolio of real estate securities, Mr. Harris said. Concerns about Ladder’s liquidity 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 for one of their biggest years in terms of lending volume, according to analysts and industry executives. In the second quarter, Ladder issued $803 million in loans, mostly to developers in need of bridge capital to finance new developments or renovations, compared to $260 million in the second quarter of 2019, according to JMP Securities.

“The amount of lending outside the banking system is incredible,” Harris said.

The Federal Reserve, which continued to lend and helped persuade many banks to spare struggling mortgage companies, was the main reason the sector survived those dark days, Harris said. “It could have been an absolute mess if the Fed hadn’t stepped in,” he said.

The awakening of the non-bank lending industry was good news for the wider real estate community. It’s helping property developers bounce back 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 “essential to maintaining the stock of well-maintained, desirable, income-generating real estate,” said JMP Securities analyst Steve DeLaney.

Ladder’s loans this year have included a total of $300 million to the new owner of the Citigroup Center in Miami, investors planning to upgrade office buildings in Manhattan’s Garment District, and developers who have completed construction projects. apartments in the New York area during the pandemic.

Despite the rise of remote work, which has reduced demand for office space, Harris thinks Manhattan office buildings are acceptable risks. Although their occupancy rate is lower than historical averages, the amount of the loans is well below the cost of replacing the buildings, he noted.

He also noted that apartment rents in New York City have rebounded after taking a nosedive at the start of the pandemic. Mr Harris expects demand for apartments to remain strong as colleges reopen and retirees move into the city.

The growth of non-bank lenders, such as

Blackstone Mortgage Trust Inc.


Starwood Realty Trust Inc.,

in commercial real estate started following the global financial crisis. They filled the void left by many smaller regional banks that stopped providing riskier bridge loans and redevelopment loans to developers.

Ladder Capital’s deals in 2021 included a $250 million loan backed by Citigroup Center in Miami.


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In 2019, these unregulated nontraditional firms issued $66.1 billion in loans, or about 9.8% of the total, according to data firm Trepp LLC.

Many ran into trouble when the Covid-19 pandemic hit because they funded their loans with money borrowed from banks under short-term renewable repurchase agreements. They used these “repo” loans in part to load commercial real estate securities, 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 company has increased in recent years because he was a friend and lender to the former chairman.

donald trump. In February, the Wall Street Journal reported that New York prosecutors were Survey of Loans as Ladder done to Mr. Trump supported by some of his buildings.

Mr. Harris declined to comment on the investigation.

When the pandemic hit,

TPG RE Funding Trust,

a subsidiary of private equity giant TPG, was one of the first commercial mortgage finance companies to begin to falter in part due to the sharp decline in the value of securities held by the company. The company eventually had to sell some $961 million worth of securities to meet margin calls and was recapitalized with $225 million from Starwood.

Concerns grew on Wall Street over Ladder, which had a much larger portfolio of $2 billion in real estate securities. The company’s financial situation was not as precarious as that of TPG because the ratings of its securities were higher, Mr Harris said.

But those three months have been difficult, he says. Ladder shares fell more than 80% and the company cut its dividend in the second quarter. Mr Harris paid off Ladder’s $100 margin call in full and spent weeks restructuring loans with property owners who owed the company money.

Ladder reduced its reliance on riskier repo funding and other sources of secured lending to less than 35% of total assets in the second quarter of this year, from more than 55% in the fourth quarter of 2019 , according to a report published earlier this month by

Moody’s Investors Service.

TPG RE Finance Trust, which provides loans at the same rate as before the pandemic, has also strengthened its balance sheet by relying less on repo financing than in the years before the pandemic, according to people familiar with the matter. . .

Other non-bank lenders have increased or maintained their use of secured financing. “The heavy reliance on secured funding continues to be a major credit challenge,” the Moody’s report said.

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Write to Peter Grant at [email protected]

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