Steve Katz 0:09
Hello again, and welcome to the Hilco Global Smarter Perspective Podcast Series. I’m your host, Steve Katz. Today we’re speaking with Ron Lubin, Executive Vice President at Hilco Real Estate about how unstable market conditions created by the COVID-19 crisis are leading up to a very challenging moment for lenders. Many of whom unfortunately now find themselves managing portfolios of increasingly non-performing commercial real estate loans. Just a bit of quick background before we start, Hilco Real Estate is one of the industry’s most respected and accomplished authorities on real estate, repositioning, restructuring and sales, and advising and executing strategies that deliver exceptional returns for clients during both favorable and challenging economic climates. Ron, welcome to the podcast.
Ron Lubin 0:53
Thanks for having me, Steve.
Steve Katz 0:55
Yeah, glad you can join us today. Ron, I’d first like to focus on what you and the team at Hilco Real Estate are observing in the market right now. And then get into the steps that you advise for achieving maximum value for the abundance of non-performing loans that are out there.
Ron Lubin 1:10
Sure, it’s a unique time in the real estate cycle for sure. There’s a tremendous amount of dislocation in particularly a number of asset classes, retail and hospitality come most of mind, but as it relates to a ripple effect into things like multifamily, and office space, having a lot to do with the pandemic, and expectation that there’ll be a lot of disruption in the office space market. Having a lot to do with people working from home versus working in their office space, there’s a lot of anxiety is a lot of uncertainty. There’s a lot of valuation disruption, a lot of valuation concern. And from a factual basis, we know that firms like Wells Fargo have already stated that they’re seeing somewhere between a 20 and 25% discount or reduction in valuations on appraisals that they’re seeing. So for us, you know, that really tells us that the lending community, the clients that we have, that are banks, or clients that we don’t have that are yet that are banks, are also seeing those kinds of dramatic results, and are starting to worry about the way in which their clients will react and whether or not it’ll result in missed payments, whether it result in asset quality deterioration, so we are witnessing that we’re hearing it from our clients, we’re hearing it from our customers and we’re actually starting to see the results of some of that occurring. A big part of that is observing a big addition to a loan loss reserves and a lot of banking clients that we talk to. So we’re positioned well, to kind of respond to that. One of the things that we’re doing to try to respond to that is to expand our business more significantly into the note sale arena to help our clients more expeditiously move away from assets that are either non-performing or in the process of deteriorating so much that there’s expectation that they might be not performing.
Steve Katz 3:08
Got it. Good perspective. Good perspective. Thanks. All right. I know also that you and the team have been in constant contact with stakeholders across the industry during the crisis. What can you share with our listeners today about what you’re hearing from banks regarding asset quality and collateral valuation right now?
Ron Lubin 3:26
Yeah. So just to continue the thought process, and I come at this from a really unique perspective. I spent a significant amount of my career in working for a bank, and the majority of the time in working for banks, I spent in workout or troubled debt restructuring or disposition of assets. So I’ve sat in the shoes of the lenders that are out there, the workout officers, the special asset people that are going to be confronted with the same kind of problems that I saw back in the late 1980s, early 1990s, and then again in 2006, and 2009. So we have that perspective, we can kind of bring that experience to bear when we are speaking to our clients, and help them sort through the issues that we know that they’re dealing with right now. So as we sit here today, because of the cycle of real estate and the timeline of these real estate issues, the timeline would suggest that over the last several months banks have been consumed with the PPP issuances in dealing with the COVID response and dealing with the stimulus that the federal government made available to help prop up our economy. That period of time is ongoing. It’s not as intense as it was perhaps back in March when this all started. So it’s really starting to get to the point in time where the lending community is starting to confront in a more dramatic way, the asset quality issues that might be within their portfolio. So some of the things that we know that banks will be doing is really looking deep into their portfolios and, you know, doing it’s kind of standardized stress testing of their portfolios to determine whether or not there is asset valuation deterioration, there’s going to be appraisal issues, banks are regulated institutions, for the most part. So they’re going to be dealing with the regulators who are going to come in and look to their asset quality, particularly as it relates to the real estate valuations and make determinations about things like mark to market and looking at the loans and putting the bank in a position where they’re going to have to set reserves, potentially take charge offs, potentially start foreclosures, and potentially have to actually take the asset back and try to sell the asset. From our role in all of that is really as an advisory, to help banks understand what asset valuations are, we are at our core, a company that specializes in asset valuation and monetization. And we have a solid track record of helping those that are dealing with inflection in the market and disruption in the market help them deal with those asset issues, those asset disposition issues.
Steve Katz 5:59
Well, guess what, Ron, you actually anticipated one of my next questions. So I’ll go on to go on to another one that I had. And that is, can you break down for listeners, the universe of non-bank buyers, who they are, what they’re looking for, and how they’re each likely approaching the debt markets during the pandemic period?
Ron Lubin 6:20
Yeah, absolutely. So historically, what happens during these kinds of market inflections, market disruptions, is that funds become created to look for opportunities in the real estate market from any market for that matter. But in real estate, based on my history, in working for banks, something that’s always consistently emerged, is a liquid capital market for buying troubled assets, for buying distressed loans with buying properties from Oreo. And the proposition is pretty basic. It’s clients out there with capital in these environments, cash is always king. So to the extent that there are groups out there that have masked on the sidelines, waiting to invest in assets, that become available from the banking community, that cash is ready, it’s ready to invest, it can come in and solve problems very quickly. We see a lot of those funds starting to emerge, we see players in the market looking for opportunity. The one thing that has not occurred yet is that there hasn’t been the big rush, the big flood of assets that we thought might have already arrived at our doorstep is it’s still a period of time out there. If you look, for instance, at the bankruptcy filings, and what’s happening in the bankruptcy market, there’s a backlog of transactions that are cycling through the bankruptcy courts right now, that once they start moving through the system, it will open up a floodgate of transactions that will be there ready for disposition, and then ultimately, so to opportunistic buyers. So the opportunistic buyer side crowd is generally looking for a proposition where their cost of acquiring the asset, their cost of getting control of the asset, taking ownership of the asset, and reconstituting either the physical property by bringing in different tenants, or replacing a tenant with another or maybe even expanding space or adding to space, all of those factors are kind of calculated into the buy side proposition. And when that occurs, and the return is there, then transaction is made. But it’s really predicated all on buying the asset at a price that would generate the kind of returns that some of these funds are looking for. And I would say the buy side proposition is probably geared to a return that the equity is looking for of somewhere between 20 and 30%. Being an equity return somewhere between 20 and 30, you know, one would believe that there’s a perception that there is still some risk and actually getting the asset to the point where it could be ready for sale. But there having said all that there definitely is and has been a fluid, well capitalize market and again, get cash is king. The way that that really impacts a lender in a very positive way is many times lenders will get to a period of time on their balance sheets, whether they want to have capital available to them, but because of the reserving requirements and potentially because of some of the charge-offs that have incurred, that they don’t have the capital, they need to sell portfolios or need to sell loans in order to help recapitalize their balance sheets. So with ready capital on the sidelines, from opportunistic buyers potentially willing to bid and buy assets, it could be brought in very quickly. So near the end of the quarter, banks usually get to the point say we have to move something we want to transact before the end of the quarter. And that’s when a well capitalized buy-side market is something that’s important to the kind of the period that we’re in right now.
Steve Katz 9:56
Okay. Very, very informative. Thanks so much. In wrapping up, check to see if there’s anything else you wanted to add regarding what it all means for lenders right now. They’re obviously facing very tough decisions relative to these non-performing loans, part of the decisions that they have to make likely to impact their ability to make it through to the other side of this crisis. I guess that will be kind of the final thought for today.
Ron Lubin 10:23
Yeah, it’s always a difficult decision for a bank. The loans that are made, are made with presumably what they’re well underwritten; it wasn’t the result of a bad underwriting decision that is caused the current issues that we’re facing. If you look back at previous downturns like 2008, and before that the late 1980s, early 1990s, late 80s and 90s, the characteristics of the downturn of that market were as a result of really a regulatory credit crunch that occurred where the regulators came in and caused a revaluation based on a cash flow modeling of real estate values, versus what used to be a point in time Cap Rate valuation. So that disruption caused value to come out of real estate deals, and then put a lot of pressure on the banks that together with the SNL crisis of that period of time caused that disruption. The 2008, 2009 disruption was caused by the mortgage bubble burst that we all became very familiar with in 2008, 2009. And that led to liquidity issues in the market and led into a reaction of a bunch of non-performing loans, typically CMBS Loans. This downturn, you know, wasn’t based on a fundamental erosion, there wasn’t there’s not a fundamental real estate fundamentals issues here, like oversupply issue, or it’s not an over leveraging issue that a lot of times these are very well founded, well underwritten loans. But what’s taking place is the pandemic has really bared its weight on the asset classes that are sensitive to travel, like hotels and hospitality and retail. And retail is interesting, because retail, clearly, people aren’t going out to shop, they’re doing a lot more of their purchasing online with Amazon. But that have been said, there’s been a lot of disruption in the mall business even before the pandemic and this really exasperated the mall retailing issue. So having said all that, I mean, banks are sitting there today, and they’re looking at their portfolios, and they’re trying to make decisions. And that’s where we come in. I think one of the things that we’re doing is, we have real-time experience as a banker, so we understand what bankers are being confronted with. And we can help them strategically position their portfolios for sale. We have experience in having sold loans before, we sold a lot of assets for banks, sold a lot of assets out of Oreo. So we are a trusted advisor as it relates to this, we can do more than just be a platform. For instance, you know platforms are great, you can put a lot of loans up on a technological platform, but you don’t get the the kind of support and assistance and strategic counseling and advice that we tend to afford our clients, particularly in the area of bank dispositions. So we’re excited about where we sit in the marketplace right now. We’re anxious to help as many clients as possible, get through this really challenging time.
Steve Katz 13:23
Well, it’s clearly evident to me from your comments that you’ve sat in the shoes of those who are living through this right now. And I’m sure your clients really do appreciate that and it serves them well. So for those of you who joined us today, if your institution has portfolio exposure within any of the many sectors impacted by the COVID-19 crisis, and you’d like to gain some added perspective on the situation that you’re facing, and the potential for strategically monetizing your non-core commercial real estate assets, it sounds like a good first step would be to get in touch with Ron and the Hilco Real Estate team. So Ron’s email is RLubin@hilcoglobal.com. That’s RLubin@hilcoglobal.com. Ron, thanks again for joining us.
Ron Lubin 14:04
Thanks, Steve. I really appreciate the opportunity.
Steve Katz 14:07
Yeah, it was great having you on, and listeners, we hope that today’s Hilco Global Smarter Perspective Podcasts provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco Global, I’m Steve Katz.
