We've recently noticed more than one phone number or name associated with your registered email address.

To ensure we have the most up to date contact information for you,please visit the My Profile page.


Small-Balance NPL Portfolio Pipeline Expanding

The proliferation of online auctions over the past couple of years demonstrates the considerable demand among local real estate owner-operators for small-cap CRE assets facing financial distress and related issues. And the fact that private investors have had the winning bids for so many assets also illustrates the relative paucity of small-balance portfolios that are truly attractive to larger players looking to buy in bulk.

But more such opportunities have been arising in recent months - and it appears the portfolio pipeline is set to expand in coming months.

There seems to be little doubt demand for non-performing small-balance loan portfolios remains strong among select large-scale buyer teams boasting asset resolution expertise and patient capital. And with the FDIC still awash with distressed assets it inherited via receiverships - and healthy banks also looking to divest non-performers - it appears portfolio players can plan on vetting more product.

And all indications are that small-balance credits comprise a significant chunk of the assets to be traded en masse.

While many investors remain frustrated by heavy competition as portfolios come to market, the distressed-asset marketplace is in fact generating more closings of portfolio transactions than has been the case over the last couple years, according Ernst & Young's latest survey of distressed commercial real estate investors.

Survey respondents expect regional banks to be particularly active in divesting NPL portfolios over the balance of the year, with the FDIC and other federal agencies likewise remaining busy.

A key factor in this deal flow is that regional and community banks, striving towards renewed financial health, are encouraged by strong demand (and in turn pricing) for NPL portfolios, observes veteran distressed real estate veteran R. Patterson "Pat" Jackson, CEO of the specialty advisor Sabal Financial Group, formerly known as Milestone Asset Resolution Co.

Sabal was just recapitalized via a non-controlling equity investment from an affiliate of global investment manager Oaktree Capital Management. The transaction will help Sabal continue pursuing portfolios of small-balance NPLs as well as other investments and activities.

Many healthy banks today are actually in solid position to satisfy regulators by shedding distressed real estate loans at decent pricing - and re-focusing on prudent new lending and other banking activities, Jackson stresses. He adds that many of these banks are reluctantly accepting that property values of troubled small-balance assets in some secondary and tertiary markets aren't about to rebound to the extent seen with higher-quality assets in leading markets - and hence are divesting NPLs secured by those collateral profiles.

Not surprisingly, banks in the Southeast region have been the most aggressive about shedding non-accrual assets. Indeed, money-losing (but reasonably well-capitalized) regional banking company Synovus Financial alone has sold well over $1 billion in real estate credits over the past year.

Bank sales of non-accrual assets hit their quarterly peak for the cycle in the fourth quarter - although they did fall back somewhat in the traditionally slow first quarter, SNL Financial reports. But U.S. banks collectively still hold somewhere in the neighborhood of $175 billion in non-accrual assets on their balance sheets - including nearly $50 billion held by institutions potentially bound for FDIC takeovers.

Meanwhile, the FDIC continues executing its multiple NPL disposition strategies including variously structured portfolio sales - and is currently holding an estimated $50 billion in distressed assets. And some of the conduit loan special servicers are demonstrating more willingness to offer distressed assets in bulk.

In fact, the nation's busy loan sale advisors are charged with disposing of small-balance NPL portfolios ranging from a dozen or so assets to combined unpaid balances in the billions.

On the smaller end, for instance, the federal Department of Housing & Urban Development has been regularly auctioning off modest-sized portfolios of distressed Federal Housing Administration loans secured by apartment and health care properties. Working with financial advisor KDX Ventures, HUD was recently able to recover $66.4 million in selling 16 loans, representing 53 percent of the unpaid balance.

An affiliate of active investor Lenox Mortgage in West Springfield, Mass. won the bidding on four of the 16 loans, including its bid of $4.23 million (or 78 percent of UPB) for the loan secured by Bandera Pointe Apartments in San Antonio; and $3 million (41 percent) for the loan secured by Swan Creek Four Seasons in Toledo.

More to larger players' liking, Colony Capital just closed another good-sized transaction, acquiring a mixed-quality portfolio of 631 assets from the parent of Chicago's MB Financial Bank at just under 51 cents on the UPB dollar, or roughly a total of $195 million in this case.

But hardly 40 percent of the portfolio by balance was classified as non-performing - suggesting exceptional discounts for those assets. The fact that nearly $130 million of the outstanding balance represents construction credits presumably kept the bidding down.

Having observed Colony and a few other well-heeled players win bidding on multiple small-balance-heavy portfolios, Oaktree and other investment managers with in-house real estate expertise are aiming to become more aggressive competitors.

The highly active Behringer Harvard family of companies just launched a unit dubbed BH Capital, specifically charged with forming vehicles targeting mostly small-balance NPL and mixed-quality loan portfolios.

As Sabal's Jackson observes, any team taking down large portfolios better have the long-term resources to outbid the competition and effectively manage distressed assets that aren't likely to be resolved any time soon - and in many cases may take a half-decade or more.

Especially in tertiary markets - and with construction credits in particular - "the values of these assets will improve when these markets get better - but no one know show long that's going to take."