AMERICAS NEWS: Silver lining

With competition mounting for a portfolio of hotel loans seized from a failed Georgia bank, one family office says the way to FDIC success is through single-asset sales. PERE magazine April issue 2010

After taking over 140 banks in 2009 alone, the US banking regulator – the Federal Deposit Insurance Corporation – is being eyed by real estate investors as one of the best sources of deals this year.

One need only look at the number of bidders currently vying for the hotel loan portfolio from Georgia’s failed Silverton Bank to see how intense competition is becoming. At the last count, more than 60 bidders had reportedly thrown their hat into the ring to take over the $416 million portfolio of hotel mortgages – which includes $254 million of loans in which Silverton sold participations.

For the FDIC, the large numbers of bidders on this and other portfolios is helping push prices higher. But for existing players in the FDIC arena, such an influx of equity capital is making business much more difficult.

One small family office in Georgia, which declined to be named as it is bidding on the Silverton hotel deal, said when it first started seriously bidding on FDIC assets in 2009 there was little competition. Winning approximately one in every four to five bids, the firm’s strategy was to resell the mortgages – backed by assets such as land, apartments and retail properties – within 60 to 90 days to retail investors and high-net-worth individuals unable to take part in the FDIC process. This “knowledge and access arbitrage”, as the firm called it, generated IRRs of more than 500 percent and a 2.2x multiple on its latest dispositions after it bid on more than $1 billion face value of loans.

However, things have changed as capital has surged into the sector. Now forced to bid on more loans, the family office accepts it can no longer find deals priced between 3 cents and 8 cents on the dollar, with the ability to resell them for 35 cents to 45 cents on the dollar. “A year ago when we were doing single-asset sales, it felt as though we were alone. The multiples were extreme. There is now far more competition so we have started trying to bid on more loans,” the executive vice chairman of the firm said.

Positioning itself below the radar of large-scale investors, such as Colony Capital and US homebuilder Lennar Corporation – both of which this year bought FDIC portfolios with face values of up to $3 billion – and above that of individual high-net-worth investors, the group said some of its best successes were now coming from FDIC single-asset sales rather than through structured sales, such as the Silverton hotel portfolio. In the Silverton hotel portfolio, as in the Colony and Lennar deals, the FDIC will retain a 60 percent stake in the resulting venture. Bids for the Silverton hotel portfolio are due on 12 April.

By targeting loan portfolios in the range of $5 million to $10 million, private investors could avoid the crowds chasing deals such as Silverton. However, the Georgia group admitted it was sometimes a “struggle” to stay out of the larger structured sales, where competition was greatest, and away from the really small single-asset loans, which could see profits “eaten alive” by the due diligence required. “There’s much more work required today.”