EP 647 - Future Opportunities In The Commercial Note Space With Juan Robayo From Stabilis Capital

Foreign.

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property. For panties on the dollar, get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now, here's your host, CEO of We Close Nodes, Scott Carson.

Good morning, good afternoon, and good evening, everybody. Welcome to this episode of the Nook Closure show. As always, Scott Carson. Excited to be here with the day. I'm really excited for our special guests today. You know, we all get hit with so many different emails and advertisements and things like that that are going on in the industry. And I probably get a little bit more than most do because we're in both the residential and the commercial space. But every once in a while I get something that makes me have to go, wait a second, let me look at that again. And so was the case just a few days ago. I was really excited to get an email from a company talking about bridge financing and commercial loans and stuff like that. And one thing really caught my attention. It's the financing of note purchases. And so we're honored to have a star from Stablest Loans here for you. The Stablest team here. We got our buddy Juan Rebello. Correct? Is that pronounced correct?

Juan?

All right, good. I got that right, Rebio. And this Guy's got over 22 years of experience in the financial sectors team, but prior to joining the Stablest team, he was a director of fixed income group at Barclays and Lehman for seven years. I wanted to talk about that. And then prior to that, he actually worked with Stables CEO at Goldman Sachs and at Silverpoint Capital in the US Middle market loan acquisition business. So this guy's got a wealth of experience on the distressed asset space. We had a great conversation on the phone and I'm honored to have him as a guest on the nuclear show. So, Juan, welcome. Today's podcast episode, man.

Thank you so much for the invite, Scott, and happy to be here and happy to share an interchange comments and ideas of what's going on in the markets on these very challenging and interesting times.

Yeah, definitely. Those two adjectives really spell out what 2020 has been. Let's talk a little bit about what Stablest is doing and what you guys are doing over there, first and foremost. And then we can kind of dive into some of the different products in the asset classes that you guys are financing.

Great. So look, just to frame the conversation, let me give you a little bit of background of who we are what we were doing, we're doing now. So we started stabilist. Salman started the phone in 2010. I joined three years later. We've raised 1.7 billion since inception. We're currently on our Fund 5 and Fund 5 was around $550 million in equity. We have around $200 million to invest between now and next year when we're going to be raising capital again. So when we started, we started in the aftermath of the Great Recession. We started buying non performing notes from the banks. So the banks had a lot of problems. They were cleaning up their balance sheet. We were players, small player on a huge trade that was buying non performing notes from the banks. And we invested a lot of money there during the initial funds. And that's actually our background. That's what we did in Goldman. That's within Silver Point before.

Was that more so on resident or is it a lot of commercial stuff? Residential?

Everything is commercial. We cannot do resi. We can do resi on a portfolio basis but actually only if it's. We don't for our mandate is not on the resi side. It's only commercial. So about four years ago, part of adjusting to the market dynamics, the economy was doing well. Banks clean up all the balance sheet. The distress and the distress theme in a way disappeared. So we saw a niche that a lot of players and similar companies to us saw that is this opportunity to invest on the private lending space. So we created an origination program. We increase the number of sources dedicated to cover brokers and these type of situations and we start covering the market and covering the market and to a point that especially about two years ago we started doing more bridge than note purchases. The banks were not selling but we're still active on the note purchasing space. We still have long relationship with banks and sellers. So we still saw that now everything is going to change. So we were very active in terms of the bridge program. We are very focused on cash flowing properties. Before COVID we were very active in hotels which is a very complex cash flowing property because it's not only the real estate, the operation on top of that. And you need to in a way from a credit perspective understand both. So we were big in hotels, we were big on healthcare offices and what we call special situations. We did a power plan, we did some industrial spaces in Canada, we did operations in a couple of transactions of industrial properties in Ireland, puerto rico, about 95% of our book in the U.S. but looking at different situations and trying to be creative and add value on the loan origination business, then I mean very active fast forward Covid happened and we took a breather and tried to understand what's going to happen. So first we have the reference of our own book. What we saw in our own book is for instance, hotels that we had ready for sale. We saw on our hotels and generally across the board, 20 to 30% correction on good hotels. And then who knows what the value correction is going to be on hotels that are not viable anymore.

Right.

So probably more than that in hotels. The idea is we're going to be very selective in it takes us to the. No, no, no financing in a couple of the transactions that we've done. But that's one other thing, then another multifamily, we see it very strong still. It varies obviously, I think I know your multifamily is different than other places or probably closer to San Fran, but generally it's very different. But multifamily is a solid asset class. So we see opportunities there and we see like the consequences of a distressed market or a recession market. So we see maturities coming up. We see acquisition opportunity and we're trying to play and provide financing on those industrial, very strong asset class, especially right now with logistics needs. And so we also did a couple of industrial transactions in Phoenix, in Chicago, during COVID So still looking for those. And then very negative on retail. I think this season is going to be like a big test because a lot of the, I mean, let's see how this December plays out in terms of closures and business and social distancing. But we see that this is going to be like the biggest transaction in terms of buying all the presents from the Internet not going out. So very negative on retail. And these are general trends.

Right, right.

Obviously we do see on a case by case scenario, but negative on retail. Very negative on office too. We were negative on suburban office. I think actually suburban office getting somehow a pickup because people are moving back to the suburbs. But still dynamics are not that strong. Cities are going to make sense, but you're going to have a lot of supply and a lot of reconfiguration and a lot of readjustments and especially on the large cities and on the large markets. And that is going to take a while. What we've seen the biggest impacts, obviously San Fran is one of those Chicago and New York and then you have different impacts to or lesser extent, I think on other metro areas. And then healthcare is an asset class that we like, we like to work with operators that again are facing Maturities or the opportunity to refi. But healthcare is a complex asset class. You need to have licensing issues. We've done a couple of relatively large transactions that actually we exited during COVID a $50 million transaction or so. So it's not for everyone. And we feel that there is an opportunity. So we are actually actively pursuing that. And then other asset classes, we did a couple of franchise. We like the franchise. I think also some franchises have shown strong performance, some not so much. I think casual dining is the challenging space, but actually the transaction that we did around the casual dining space. And we did it in two forms. One, during a bankruptcy scenario. We're very comfortable with bankruptcy and bankruptcy negotiations and the process that it entails that it requires legal knowledge. So we've done it. We've done it so many times. So we started doing a lot of dips or more dips actually this year we lost one to a retail operation. And we lost it because actually the competition got really, really aggressive in pricing. Deep in bankruptcy is also like somehow a limited market, I would say, but very active in bankruptcy and bankruptcies and restaurants. And we'll see what the franchise of and what the future of those are. But we're providing liquidity and helping situations on the restaurant. So I think those are the general like asset classes that we like in terms of how we operate or how we originate our loans. We're very focused on, as I said, cash flowing assets. We can lend up to 75% LTV and we provide liquidity. As I said on acquisitions maturing and debt restructuring and bankruptcies, our starting rate is I would say eight and then some points we've done lower. But then we compensate in our end because we are really. The way that we want to see our deals is really provide liquidity to a stabilization situation. So relatively short term loans, one year with two six months extensions when we see light at the end of the tunnel. And then the other asset, which is like a combination of both of the note purchase and the origination business. And there is one transaction actually that we've been and we've seen a lot now, but it's an auto note purchase. So we had a situation in which there was a debt, it's about to mature, somebody bought it, needed to sell the original lender needed to sell the note for risk or for liquidity issues. They sold some of discount the original collateral. We got comfortable working with the group on getting a value that they were lending. The note that they bought there was about 75% LTV. And we were comfortable financing about 75% of the acquisition. So from our perspective, we are 50 LTV. We're providing liquidity to the buyer and we can work with them on the worst case scenario if that materializes. And from our risk perspective, we are facilitating, we understand the asset class and we have somebody that is willing to operate and capable of operating the asset if anything happen. And those are the key considerations that we're going to be looking at. On the note on no financing, I think that you want to be, in a way, you're taking a step back from getting to the asset. So you need to make sure that the new note holder is going to be able to operate the asset and has the ability to do it because they're putting equity on it and on top of that you have the equity of the original asset. So we're trying to be protected, be conservative. I think that in general our approach post Covid is yeah, some liquidity dried up. Some funds like ours and similar in size got some lines pulled. I mean, we were comfortable with our strategy and executing strategy. So we took advantage of some situation which some other funds were not able to deliver. But at the end of the day, we are conscious that whatever happened during this period is how we're going to be judged in the future when we raise more capital and how we interact with clients as well. Like look, we cannot be issuing and committing to things which I've seen committing to a lot of loans that actually some funds are not able to execute. So actually we're very careful where we actually execute and we're being selective. And in general, I think that, I mean, I'm long term optimistic about what the economy is going to bring. I think that this is going to be. But our sector got hit really, really bad during all this time. So we'll see. I mean, I think there is going to be a lot of needs, but the economy is strong, the consumer has been strong. I think the stimulus work fine and I think we're going to have another round. We'll see what the size of the stimulus is. But it's basically to give support to the consumer, the American consumer, which is the main component of the gdp and then give time to everybody to catch up later. But on real estate, it's hard to catch up. If you own a hotel and you didn't have any revenues for a year, you're behind and it's hard to catch up. So there's going to be a correction. Same thing on rents and multifamily. It's hard to know exactly what that effect is going to be today. But we're going to see it when we start. And we're executing and providing liquidity on relatively conservative terms, but to properties and situations that we believe fit our profile.

Sure, it makes a lot of sense there and a lot of information. Let's dive in a little bit of that multifamily. So we're just talking about that. Are you seeing banks and other lending institutions, especially based on your background, your connections in your past, starting to see. Because you really have your traditional multifamily, but you also have a lot of student housing. I think that's probably been hit harder than your traditional multifamily. Are you seeing some of that student housing stuff kind of floating across your desk? Are people reaching out to finance stuff?

Yeah, good point. So look, and I forgot multifamily. We have student housing. We like student housing, but we like some. I mean under certain criteria, first of all, we don't do a smaller college and I think or student housing for less than 10,000 students or 20,000 students because then you have. But so on the ones that we like, yes, we've seen a lot of distress. But on the big campuses, I mean it's a good opportunity. So we're actively looking at that. I would say that, well, multifamily in general, as I said, is a very strong asset class. The banks, interestingly enough. But look, if you think about what happened in 2008, it took a couple of years for all this. We start seeing a lot of flow from the banks like a year, year and a half after the main event in. In 08 in September of 08 and banks were in a totally different position than they are right now. So what we expect and what we've seen is first of all, banks in general have not been selling Covid related assets. They've been the ones that we've seen. It's like the part of the regular process of risk management and they've been active to it, the ones that are and other ones are coming to the market. And then on the COVID related assets, the only big transactions or the only big trades out there have been on hotel portfolios. And some banks are being more proactive than others because in general, I think so far, and that's also part of the conversation with these players is that so far the regulators have been patient and the banks are in much better shape. So you don't need to push banks to start setting as if they are somehow we're going to see it and that is going to change. I expect that defaults are going to happen and obviously they need to start marking and they need to. And there's a carry cost for the banks to have these assets. So I expect that to happen. But so far it hasn't happened yet. But we expect to happen. And similar to 08, it takes some time and right now the banks are in better position than they were in 08.

Specifically when you look at the amount of money that's being saved right now, that's on deposits with them, it's obviously greatest amount of deposits and savings that we've seen in decades. That's obviously helping them with the reserves and holding money back to I guess you could say trickle down or kick the can down the road a few months to figure out where everything is at. Is that correct, Juan?

Correct. And look, I mean a lot of the savings is coming a big chunk also from the consumer because the stimulus, I think that actually was in general like good public policy to support the consumer and the saving rate of the consumer is at an all time high. But banks, when they see the falls and when the forbearance start expiring, the rules are not going to change, right? It's like they're going to start marking and it's right now like when is that going to happen? And again, as I said before, the damage on the real estate is done. I mean there are hotels that we're not able to support and are not going to be able to support the debt. So that asset needs to be either restructured or sold or DPOed to the borrower in some way and it's going to be a repricing of that. So again going back to your original question, I think on multifamily we haven't seen much banks in general I haven't seen much from COVID related. I expect that to happen and banks are in good shape I think to face all these crisis. So we're going to see probably, I mean also there is a memory of the crisis, right? It's not too far, it's far for instance for people that enter the industry but it's still a lot of people that have been through this, people with 20 plus or something that have been through this and know and especially on the bank side. So I think the challenge is going to be for the banks is basically to have the special asset groups resemble again resemble again and start working and because a lot of those, some of these special asset group would just couple of people because there was no need but the memory is there, the institutional memory is there and the banks are in better shape. And also there is a lot of capital. I think that here we're not feeling anytime close the panic and the liquidity panic that we felt in 08. Every crisis is different and this crisis is different in that sense. I don't see the financial market at risk today. And we see capital and a ton of capital also has been raised on the big funds for the stress opportunity. So that is going to be allocated. And actually that's one of the things like look on transaction that we saw, the transaction that I mentioned on a bankruptcy complex pricing people were willing to put it at relatively low yields because there is liquidity and there is some views. People are taking a longer view approach to the recovery and to some of the opportunities. So liquidity is there. A lot of smart capital is being raised and we'll see how it pans out.

Now, for those investors out there that are looking to pivot or looking to tap into the distressed asset space, I mean, you mentioned there's a lot of money out there that's been pulled off the sidelines for a couple years from a lot of funds waiting for some of the opportunities. But what kind of values do you think normal investor who's looking to tap into some of the stuff should be looking at and evaluate? Are we talking 5 million below? 2 million and below? Can you give any insight to what you're seeing, where you think the opportunities.

Are lying in terms of size is going to be, I mean in terms of size, hard to tell. I think that on the hotel side we've saw a lot of hotel financing. And then look, places like New York, San Francisco, Chicago is relative, is 20 to whatever to 300, $400 million. And then it's going to be a lot of that. And look, the CMBS market absorbed a lot of this risk. So that's another part that we see opportunity because the CMBS market is probably at half of what it used to originate and next year is going to be half of this year until it recovers. So it's going to take time. And then the need for capital we expect is going to come to guys like us at any size, right? It's going to be needs at the 5 to $50 million asset class. That's what our focus and it's going to be capital needs on 50 and above and that somebody else because the capital is there and is ready to be deployed. But again, the CNBC is not going to be able to absorb and There is going to be maturities, there are going to be restructurings that are going to be done. In terms of size, it's hard to tell, but I think we're going to see everything.

Have you seen anything already on people pivoting hotel or office space into something that makes more sense, where they're pivoting from office to self storage or trying to turn hotels into apartments or short term housing to get through the downturn?

Yes. So look, a lot of the like main themes is a lot of the hotels in the cities, they're not going to be viable for some period of time in the near term. Also there was an oversupply and over construction because of hotels. So both of these are going to make and we're seeing it on some of our assets that are not. People are bidding not to operate as a hotel but to turn into a multifamily. And then what is the cost associated with it? What is the operation associated with it? And it's not going to be a hotel anymore. I think that's the main change of use on that. I think that a lot of on the industrial side there's a big demand. So anything that you can reposition and then also like build to suit on the industrial and demand, that's not our game. So a lot of construction we saw a lot. And I've seen a lot of construction loans maturing on hotels but the hotels don't have any operational history. So what I've seen is like look, true bets on, okay, what was the cost to build this hotel? I'm buying it for a fraction. But what is the future of this? Is this really a need for this hotel or not? There is a strong need or there is a lot of demand and then you have to go like very asset by asset and then people are saying okay on that. Maybe without operational history, I'm buying at a deep discount. This hotel has a reason to exist, then they continue operating or people are saying, okay, this is not going to be a hotel anymore. How much it costs to turn into multifamily and just take the different pricing.

On that and depending on the saturation of that asset where it's located and stuff like that. I bring it up because I live on the north side of Austin and within half a mile of where I live there's probably a dozen smaller hotels, you know, 100 units like the Candlewood Suites or the Courtyard Bar marriotts, you know, 100 hotel rooms or less and several of them are brand new, built in the last 12 months. That have not operated at all. They're completely still vacant. They're done. You say still got gates up, not doing anything. So it's interesting to see because they still have the finance by Compass bank out in front of. And I think that's an opportunity because especially on our side of town, there's a big need for affordable housing. That's why I think the transition makes a lot of sense.

Absolutely. And that is on every market, Right. Same thing with New York. We had a ton of supply of hotels that they don't have a reason to exist. Well, then you're going to have a bigger pressure on rents. I think that in many other places, at least in the near future, the multifamily underwriting is a whole other challenging. But then you have what are the needs and what are the markets, as you were saying in hosting. And there are stronger markets and a lot of people are also thinking about sellouts and condo sellouts. And then you have like low rates that are in favor. So again, there is a lot of product that is eventually going to be absorbed. It's going to be a matter of pricing, but it's going to be people selling it.

Exactly. Now you mentioned about financing up to 75% of the acquisition price of the value of the loan. When you're doing a loan set on your traditional brick and mortar, your actual funding on the asset versus a note sale is the same percentage or do you guys look at a different aspect of LTV and debt coverage ratios?

So if I use the transaction that we did recently as an example, I mean the collateral value is the collateral value, Right. So we both agreed on that ballpark amount. We want it to be on the noto node since it adds complexity. We want to be on a lower level versus the collateral value. We're at 75 of the node amount. By doing that 75% eventually we're more protected on a 50 LTV. We don't want to finance 100% LTV nodes.

Right.

We're not going to provide liquidity of those. So we want to provide liquidity nodes that we would have underwrite at 75% LTV. And by doing 75% of that, we naturally going to be on this 50% to the collateral. So one thing that we add value that I feel that we can add value is that where is the investor on the node. Our experience it's been on collecting and navigating the restructuring or the collection process. So if worse comes to worst, we can add value on the process by working with the group that owns at the end of the day like 25% of the note. But yeah, the answer to your question is yes, we adjust.

Okay, are you guys looking to finance say somebody's selling an asset class, it's not distressed and it's a cash flowing asset. What kind of LTV are you guys looking to fund on those or like to stay under anyway?

Again, 75 is our cap. I think that we recently did a transaction that it's a challenging asset class and it was a challenging transaction because it was several locations, a portfolio of assets, some closed and non operating and for sale and some and that we ended up being probably on a relatively conservative basis at 50 LTV or 60 LTV. But that's because of the risk. But on regular look, also we have to play with the fact that there is liquidity in the market and for the good assets that we want right now, the things that we have to help and to have values increase the leverage up to 75% and try to close quick. If we are able to close quick in two or three weeks and we'll figure out what the diligence are requirements. But we've done it and we do side BC we're very thorough in our due diligence and we execute question for you.

With raising over a billion dollars in capital, any insight to effective strategies for raising that amount of money?

Tough market out there. I mean I think that. And I was just talking to someone, I think look, a lot of the big funds raised capital and billions of dollars to be ready for this and they had also interesting strategies in which for some funds, if you wanted to invest in this fund, you also committed extra amount if an opportunity like this happened and then all of a sudden you have extra cash that was raised that way. So that I saw it on the big funds and also look, it's becoming like a story of if you have the investment history is going to be easier than if you're starting a fund right now this year. I think it was hard for new funds to find money because it's hard to develop this dialogue if you cannot travel, et cetera.

Right.

And that's what I was saying at the beginning. I think the key consideration is going to be how do you guys did during COVID And that's the first question that's going to happen if you're going to be raising capital later next year and we'll see where the market is. I think right now it's been a tough market for people that needed to raise capital. And so I saw it was a tough market to funds that had leverage and the lines were pooled because they needed to sell us.

Awesome. Juan, what's the best way for people to reach out to you? Maybe not everybody, because not everybody's going to qualify that. But those that are working on a project, what's the best type of projects for them to reach out to you to see if it's a fit for what you guys are looking to finance. Minimum dollar amount and asset class or specific cities, primary cities or secondary markets. What's dollar amount? I guess you say areas that you're looking to finance.

So look to summarize and I appreciate the question because it really gives me the opportunity to put the box out there. So we're looking for to provide financing. We can do small loans which is something that not many people do and we happy to provide liquidity on loans not less than 2 million. So minimum loan is 2 million. We can go up to 50 million. We can go even further and we can bring partners if needed. But I think that 50 million is the mark where some of the larger funds they say look, it's too much. I need to do 50 and above in order to really justify all the capital that I raise and all the attention and all the work that it's needed. So we do anything between 2 to 50 cash flowing properties. Only our pricing which is starting rate at eight, maybe seven and a half and then we can adjust on the points. It's got to be a reason for it. It's got to be some either urgency to close which we can deliver in most of the cases. That's our commitment that we're going to put all the resources to close as soon as possible. So urgency to close either end of year event for banks or for funds that need to sell and they need to mark the assets or a bankruptcy or for any imminent foreclosure in states like Texas where you are or fast here. Yeah, exactly. So when there is urgency and you need the money and then you. But cash flowing properties and I think in terms of asset class, as I said multifamily we like industrial, healthcare, hotels selectively and on the hotels space we like to work. We're working a lot with a couple of groups that operate hotels and they're looking to expand that. They see these as an opportunity to expand the footprint that they've been successful in certain markets. They're very comfortable in certain markets they want to see. Look, I know how much exactly this hotel X and X is because I have another one three blocks And I understand I can do it and this is the price, but I don't have all the capital or I'm committing to a bunch of these. So we're working with groups like that. We're also working with groups that are bidding on portfolios of hotels or notes for sales. That's the one they note and note. And these portfolios are being sold by the big brokers. And yes, they have the capital to do one but eventually it's another one next month and they want to do it. So we're working with those. So any group that is buying notes and would like to have leverage, that's an opportunity for us. Any loan that have urgency or some complexity between the two and $50 million mark, cash flowing, happy to do. I get a lot of requests of land loans, development loans, construction loans. That's not for us unfortunately because I think there are opportunities, there are people doing it. We just don't have the long term capital to be there. Like probably four or five years. I mean I don't know how much when the new development is going to happen in Jersey or in New York for that matter. And the best way to contact us is our website Stably Scaffold. My name is there, my colleagues name are there. We pick up the phone. I mean some people may say that I that sometimes it takes, especially during COVID it took a couple of days to return the call but I try to do it the same day and to return every call because that's how you find the opportunities and that how we've been able to execute and to deploy capital on these very challenging times. Working with partners and working with and we work with brokers, we recognize the reciprocity. We pay brokers on the day of disbursement from loan proceeds. So it's transparent and we pay between 50 to a point and maybe more if the transaction supports the deal and their involvement. But look, I think that it's an opportunity like this require corporations and it goes both ways. It comes from the capital, but it comes also from the brokers that I see that are seeing a bunch of things that we don't see. And also the other area of focus for us is all the restructuring advisors. So any restructuring advisors right now that are working with companies looking for liquidity, that's a lot what I do. And we've been closing many acquisitions that they need leverage for the real estate in order to optimize the equity contribution. You name it, there are many opportunities there. So that's also an area that we would love to hear and work with whoever is listening about how we can help.

Awesome. Most important question of the night. What's being cooked? What's for dinner?

No, it's 7:47. It's 7:47 on the east Coast. So all these times it's been a blessing here because we have a newborn baby.

Congratulations.

So we're having dinner at 6pm or 5:45. So this it already happened.

Good stuff out there. Well, Juan, thank you so much for coming on and taking time on your busy schedule and stuff like, thanks for answering the phone, thanks for responding to emails. I really appreciate it and look forward to working with you on some deals that we get come across our desk as well.

All right, brother, I appreciate your time, your invitation and look forward to hearing from you guys.

Sounds good. All right. All right guys. And gap you. Thank you, Juan. All right guys, that's going to wrap it up for this episode of the Note Closure Show. A lot of great information from Juan there. Talk about different opt opportunities, where to look at and what they're looking to finance. And so keep your ears up, keep your nose the grindstone so you know what's going on out there so you can see opportunities. And hey, might just be a way for you to step in and make some either broken some deals or finding some financing for yourself or an owner operator or another investor out there first. So go out, take some action everybody and we'll see you all at the top.

Bye, Sam Sa.