More and more opportunity-minded small-cap property investors have become familiar with the A10 Capital operation since it began lending directly to pros pursuing $10-million-and-under “transitional” ventures about three years ago.
A rare direct balance-sheet lender willing to finance opportunistic debt purchases on a non-recourse basis, Boise-based A10 has predictably been plenty busy since its founders strapped together about $100 million in financial backing and began looking at transactions across the country.
And much more is in store now that the company led by veteran bankers Jerry Dunn, Dale Conder and Ken Wilson has secured another $200 million in equal chunks of bonded debt financing and equity commitments.
Private-equity firm HIG Capital committed to investing $100 million into the company’s activities, and A10 near-simultaneously issued another $100 million in secured notes privately placed with several investors.
The growth capital will help A10 continue growing its core activities – and likewise expand its footprint and infrastructure. The unregulated lender handles multiple activities internally: origination, underwriting, closing and servicing, and retains loans on its balance sheet.
The operation is clearly fulfilling a need in the small-balance and middle-market space – as Dunn in particular envisioned way back amid the pre-recession bubble long before A10 became an active capital resource.
The small-balance note sale pipeline has become increasingly active as improving bottom lines – and recovering collateral values – allow banks to write down and dispose of assets less painfully than was the case a couple years back. Conduit loan special servicers have also stepped up disposition activity in the small-balance space in particular.
As Dunn put it: “We are seeing banks and special servicers capitulate after several years of extend and pretend.”
Predictably, however, lenders remain generally unwilling to finance debt sales for fear of seeing the assets return to balance-sheets. And as opportunists raising cash to buy smallish NPLs know all to well, few other capital sources are willing to finance note purchases on terms that pencil out attractively.
Accordingly, A10 targets an NPL marketplace starving for modest, reasonably-priced leverage. It’s just such a scenario Dunn and company had in mind when they launched A10 Capital five years back as the Great Recession and accompanying credit crunch were about to hit.
And Dunn today points to a couple of macroeconomic trends that should continue driving A10’s business in coming years. “First, the majority of the banks are significantly over-exposed to commercial real estate assets and are in a slow and painful process of de-leveraging.”
Indeed, many community banks tend to sell distressed assets on a controlled basis over several fiscal quarters, aiming to optimize battered balance-sheets while also satisfying regulators.
“Second,” Dunn continues, “more than $1 trillion in commercial mortgages are scheduled to mature, many of which will not be able to be refinanced given declines in property values.” And that should keep the A10 team hopping for quite a few more quarters, as lenders, borrowers and new investors look to work out recapitalizations.
In addition to the headquarters operations, A10 now has regional offices in Northern and Southern California, Chicago, Dallas and Atlanta.
As for the preferred structures, A10 considers financing note purchases generally priced at $1 million to $10 million – with leverage up to 65 percent. This can include smallish loan pools in some circumstances. The expectation is that loans convert to mini-perm mortgages as investors take clean title, allowing the real estate entrepreneurs to stabilize and otherwise add value – and ultimately qualify for permanent financing.
Terms can run to five years, but two to three is the preference. The rate structure is typically interest-only, with either fixed or floating rates available – and spreads reflecting risk, of course (Dunn declined to specify further).
A10 also manages a fund that can provide equity and mezzanine capital if needed to make deals work. These infusions are sized up to $5 million for as along as three years, with total leverage including mezzanine financing running up to 85 percent.
A10 appears to have found a deep-pocketed and logical partner in HIG, an internationally active investment manager with some $8.5 billion in equity under management. HIG classifies its A10 infusion as a “control growth investment.”
The nearly 20-year-old investment firm founded by former Blackstone Group and Bain & Co. operatives also has an opportunistic real estate investment advisory affiliate, HIG Realty Partners. The unit plays in distressed and transitional properties – but with transactions sized at $10 million and up.
While community banks are the most logical sources of small-balance NPLs, some of the bigger banks are looking to shed these assets as well – not to mention the FDIC’s various disposition programs including those targeted toward small-balance specialists.
To wit, just a couple of weeks ago Capital One Bank engaged Mission Capital Advisors to sell nearly 250 distressed commercial mortgages – carrying an average balance of hardly $400,000. These loans are secured by apartment, retail and mixed-use collateral concentrated in New York, California and New Jersey.
And conduit-loan special servicers are clearly in disposition mode as well. According to research firm Morningstar Inc., these servicers dumped 200 loans in the first quarter with collective unpaid balances of just over $2 billion – or roughly $10 million per loan on average.
And two of the seven most active among them disposed of loans with average balances in small-cap territory. Unpaid balances of CWCapital’s 32 dispositions during the quarter averaged a hair over $5 million, and Berkadia Commercial Mortgage’s 29 sales came in at $3.7 million per.
Even life companies occasionally offer distressed small-balance notes, such as the 19 sub-performers with a collective balance of $93 million that Sun Life Financial just put on the market through Eastdil Secured. Collateral includes office, medical, retail, industrial and mini-warehouse properties across the country.