The real estate capital markets continue to hum along. So, is it too early to think about opportunities to buy distressed debt? Broadshore Capital Partners doesn’t think so. The company recently added a Special Situations Debt Group to its Real Estate Finance Group that will target performing, subperforming and nonperforming individual loans in the $10-$30 million range. Broadshore Capital Partners Co-CEO Bleeker Seaman III spoke to CPE about SSDG’s debt and investment solutions as well as the group’s overall approach to lending in the current environment.
What makes the addition of the Special Situations Debt Group a timely move in the current competitive lending environment?
Seaman: We believe that SSDG is an excellent complement to our existing high-yield debt origination business. Broadly, our debt strategy looks to target attractive yields where we can leverage specific internal expertise to drive returns. SSDG is consistent with that strategy and helps differentiate the platform in the current environment.
What can you tell us about special situations debt in the broader context of real estate capital markets?
Seaman: The Special Situations strategy targets the acquisition of performing, sub-performing and non-performing debt at a discount with an integrated internal team that seeks repayment of the debt through loan payoff, loan restructure and payoff, or foreclosure and asset sale with assets more materially impaired. Even in periods of relative market calm, there are opportunities to purchase loans from lenders managing their balance sheet or specific lending situations where a borrower runs into trouble. Obviously, opportunities and returns increase in a market dislocation or slowdown.
How do the debt and investment solutions provided by SSDG respond to current market needs?
Seaman: The SSDG team leverages a proprietary sourcing network developed over multiple cycles to identify transactions. SSDG targets individual loans in the $10-$30 million range where there is a limited universe of competitive buyers, as most target larger-sized transactions or lack proprietary underwriting or an in-house resolution team.
Which property sector do you expect to be top performing in 2020 and why?
Seaman: We believe that debt continues to offer interesting investment opportunities while providing downside protection via equity subordination. As an equity investor, we believe multifamily fundamentals will remain strong in 2020 while being mindful of capital flows and supply in certain markets.
What should lenders and borrowers know about lending this late in the economic cycle?
Seaman: Both lenders and borrowers need to be realistic about future growth assumptions and have confidence that leverage amounts are set at levels that can withstand a market slowdown. We do believe that the market has continued to show good discipline relative to prior cycles as it relates to maximum LTV levels despite an abundance of debt capital.
Which lending products do you think are most likely to suffer in the event of a market slowdown?
Seaman: Lending products at risk include those targeting high LTV levels or those with complicated investment structures. In any cycle, sponsorship is critical as you want to have confidence in the person ‘sitting across the table’ in the event of problems due to a market slowdown.
What are some of the challenges expected to impact CRE lending this year?
Seaman: Challenges for this year include the heavy competition for transactions, which will continue to put pressure on spreads and terms for lenders, much to the benefit of borrowers. For existing portfolios, the retail sector continues to present challenges for certain retail formats as well as supply pressures in certain markets and property types.