The real estate lending sector in the United States is once again causing fear, with some banks in the sector showing difficulties, after Fitch had already denounced the risks last March. First Foundation Bank was in the spotlight yesterday for its 24% drop after the unexpected announcement of a capital increase, but there are many other banks in trouble. Wall Street closed today for the Independence holiday. And the fear of insolvencies grows.
Yesterday the shares of FirstFoundation (FFWM.N) fell about 24%, hitting its lowest level since November: the Texas-based lender, with a huge portfolio of multifamily real estate loans, announced a “unexpected” capital increase of 228 million dollars, Reuters reports. The drop in the stock market would have wiped $81 million off First Foundation's value, bringing its market value to around $290 million. The stock has lost more than 45% in the last six months. As of March 31, the institution's multifamily loans accounted for nearly 52% of its $10,1 billion portfolio.
The increase in Fed rates among the reasons for the capital increase
In explaining the decision to increase capital, which is scheduled to close on July 8, First Foundation cited the difficulties of the banks, with a large exposure to the real estate sector, which emerged on the one hand from the aggressive increases in interest rates interest on the part of the Federal Reserve and on the other for the decline in employment due to the change in working models in offices. All this has triggered fears of insolvency.
Concerns about lending related to multifamily properties (buildings with more than four residential units) also put pressure on shares of New York Community Bancorp (NYCB.N) which yesterday closed with a decline of over 3%, accumulating a loss of 67% in the last six months: last February it recorded 2,7 billion dollars in losses and a provision of 552 million dollars for credit losses in the fourth quarter. Furthermore, analysts cite among other banks in the sector Customers bank corp (-2,4%) And Valley National Bancorp (-3,04%).
Fitch's concerns, 10 banks in the sector targeted
After all, the rating agency Fitch had shined a light on this type of banks already last March saying that “US banks with significant exposure to loans for certain multifamily properties and particularly for rent-controlled housing are vulnerable to recording losses this year due to the 'increase in costs that owners have to bear'. Banks' lending to multifamily borrowers grew 32% from 2020 to $613 billion at the end of 2023, according to a Fitch report in March.
The rating agency highlighted 10 banks with the greatest exposure to multifamily loans by year-end 2023. Flagstar Bank, which merged with New York Community Bancorp in 2022, tops the list with 43,6% of its loan portfolio in the multifamily sector. Other banks with a high percentage of multifamily lending include First Foundation Bank as well Dime Community Bank, Pacific Premier Bank and Apple Bank for Savings.
The situation at First Foundation worries analysts
The sudden decision to raise capital also raised concerns about theexcessive dilution of the ownership of the current shareholders. According to media reports, the operation was concluded with one 60% discount on book value the bank's tangible earnings per share and would sell 49% of its stake to new investors.
“We are surprised that FirstFoundation opted for this solution, given that there seemed to be a path to earnings recovery for the next 2-3 years,” said David Chiaverini, an analyst at Wedbush, highlighting the bank's substantial capital and strong credit quality. "The loan portfolio First Foundation, while performing relatively well given its low delinquency rate, has seen a slight increase in stress in recent quarters,” said Stephen Buschbom, research director at industry data provider Trepp. “It is important to note that the Ratio between loss reserves on credits and non-performing loans (i non performing loans) has declined sharply in recent quarters, indicating that reserves may need to be increased in the near term, especially if further credit problems are expected in the coming months or quarters.”
With the capital increase, the presence of Abu Dhabi's sovereign wealth fund Mubadala grows
THEcapital injection of the First Foundation was led by Fortress Investment Group, with the support of, among others, Canyon Partners, Strategic Value Bank Partners and North Reef Capital. Fortress is backed by Abu Dhabi sovereign wealth fund Mubadala, while Canyon specializes in credit investments. Strategic Value focuses on distressed debt investments and is already a shareholder in First Foundation, while North Reef focuses on the financial sector. In connection with this equity investment, Fortress Affiliates are expected to invest $115 million, Canyon Partners is expected to invest $46 million, Strategic Value Bank Partners is expected to invest $22 million, and North Reef Capital is expected to invest $22 million, while the rest would come from other investors.
First Foundation Bank will add four new directors to its Board of Directors upon closing of the equity investment, with the right of Fortress to add another member of the Board of Directors in the future. The new members of the Board of Directors include Simone Lagomarsino, who will also assume the role of President of the Bank, Henchy Enden, Sam Edelson and Ben Mackovak.
Last year, First Foundation was among the lenders with the largest multifamily lending (CRE) presence. The company would like to offload some of its loans but is cautious to avoid losses from such sales, Chief Executive Officer Scott Kavanaugh said in a call Wednesday. While low yields on multifamily loans have hurt the bank's earnings, "there has been no deterioration in our credit," he said.
Who benefits from the operation?
Some on Wall Street instead hailed the investment as a positive fact. DA Davidson updated the bank's stock, saying the deal would allow First Foundation to be flexible with its balance sheet. According to First Foundation, the capital will help increase the provision for credit losses and focus more on commercial and industrial loans.
I short sellers they will earn up to $10 million from the collapse. According to Ortex data, short interest stood at 11,4% of the bank's free float, up from 8,5% at the end of last year. For rivals such as Valley National Bancorp VLY.O and Customers Bancorp CUBI.N, the percentage of short interest was 8,1% and 10,0%, respectively, the data showed.
