As we head into Spring, we’re also heading into conference season. As you know, recently our Investor Relations team gave some updates on the Best Ever Conference which covered what we’re hearing and seeing from others in the multifamily market, but I wanted to take the time to discuss our most recent NPL-focused event with a quick report on the NPL, Notes & Default Servicing Forum (East).
As the name suggests, this is a conference centered around the overall NPL market; but more specifically it covered quite a few areas within that including the current economic conditions and how they’re impacting the mortgage industry, raising capital to acquire assets, and asset management/loss mitigation techniques and best practices. As the overwhelming majority of attendees were smaller investors and one-off note buyers, as PPR’s Director of NPL Investments, I probably wasn’t the target audience for many of the panels and sessions, but I did gain some valuable insight into the industry.
One big theme from some of the breakout sessions was the bifurcation of residential vs. commercial real estate. The prevailing feeling is that at some point the commercial real estate market is going to “break from significant property valuation reduction (the question is when) and/or the effects of floating rate debt now becoming too expensive for the original deal underwriting. Once the loans that originated pre-2022 start to come to maturity and if loan extensions are no longer an option, they will be unable to refinance or sell the property. Should this happen, there will be the potential for banking failures (with it, the rise in private credit) and even an economic recession. This should open the door for significant opportunities in distressed deals in the commercial space as well as start the trickledown effect on the residential side of things.
The most insightful panel for me was monitored by Alex Goldovsky, the founder and CEO of ProTitleUSA, DocSolutionUSA, and One Diligence (and longtime friend of PPR). His firms are due diligence companies used by almost everyone in the industry one way or another when acquiring new loans. In the talk, they broke down the general deal flow/activity they are seeing across the industry. Alex and the panelist expanded on the normal “churn” of NPLs, and how assets usually flow down from government sponsored enterprises (i.e. HUD/Fannie Mae/Freddie Mac) to large banks and funds, onto to smaller funds, and eventually all the way down to the individual note buyers. As new product remains scarce, this “churn” tends to slow down. In fact, it was a common theme from the speakers on many panel that while they believe new deal flow will be picking up at some point, right now it is just too early to tell when that is going to be.
With rates remaining higher for longer than originally expected, consumer debt still increasing, and a potential commercial real estate crisis emerging, it’s likely we could start to see the increase in supply of non-performing opportunities in the second half of 2024. Some think that it will take longer for things to “shake loose” on the residential side of the marketplace, but most attendees were optimistic that good buying opportunities will eventually come and are trying to keep some cash on hand (aka “dry powder”) to be able to jump on those opportunities when they do.
One of the main takeaways of the conference was the difference in perspective between the larger funds and institutions vs. the smaller funds and individual note buyers. The large players in the industry are still finding deals, through government auctions and negotiated trades. In some cases, they’re even potentially expanding their buy box. The smaller players in the industry, however, are struggling to find significant or consistent deal flow.
However, at PPR, we are active in both the large/institutional investors as well as going down market into the one-off note buyer spaces. To continue to deploy significant amounts of capital, we have only had to expand our buy box slightly. We have been seeing a lot of defaulted DSCR loans or defaulted bridge loans (1-4 unit bridge loans, STBLs, residential fix & flip, etc.), on top of traditional NPLs that we’ve been buying as well. We are confident that our underwriting/analysis, our diligence process and expertise, and our high touch/hands-on asset management processes will be able to achieve our return targets on these somewhat new-to-us asset classes, whereas I could see a smaller shop being much more reluctant to go into this new space without the proven resources and experience that we have available to us.
So overall, it was a worthwhile trip. Not only did I gain new perspective and feel reassured in our buying strategy, I was also able to reconnect with some colleagues that I hadn’t seen in a while, meet some people face-to-face that I’ve previously only met virtually (on calls or just emails), as well as make some new connections that could prove beneficial down the road.
On a final note, I just so happened to meet someone who learned the note business from our founders Dave, John, and Bob back in the early days of PPR. Our former student was able to take what he learned from them way back when and build a portfolio of over 100 notes himself. It was a great reminder of the strong foundation that PPR has built over 17 years and about how far we’ve come since the early days, even well before I started here 7 years ago! I hope to learn more and engage with the community again in just a few weeks at the MBA Secondary and Capital Markets conference in New York City, and will be sure to report back if there is any pertinent updates for the PPR community.
