Pender Capital CEO, Cory Johnson chats with us about their strategy and approach, with a deeper look into private real estate debt.
Q: Tell us a bit about Pender Capital.
A: Pender Capital is an alternative credit manager and industry leader, providing fixed income alternative solutions for Financial Advisors, University Endowments, Family Offices, and Pension Funds. Through Pender’s lending platform, focused on senior position Commercial Real Estate bridge loans within the lower mid-market and small balance sectors, Pender strategically plays in an underserved and highly fragmented market segment that allows us to capture attractive returns, and in many cases, what we perceive to be mispriced risk. We saw early on that the majority of lower market bridge lenders were geographically constrained and were able to capitalize on an opportunity to provide investors a more diversified portfolio of loans across the domestic United States, currently having loans in 24 states relatively evenly spread across the country.
Pender Capital has always prided itself on what we perceive as “Make Sense” lending, ensuring that our senior position loans, which are generally sub 65% LTV, and provide our investors' downside protection with 35% of equity dollars before our first dollar of debt. In fact, our company mantra since inception has been principal preservation first, yield generation second. We have built a very sizable origination platform within the markets we lend in, and that has allowed us to be extremely selective of what loans we decide to ultimately fund.
Q: Can you tell us why private real estate debt is an attractive investment opportunity at the moment?
A: Private real estate debt presents several compelling advantages as an investment opportunity:
1. Stable Source of Income Relative to Risk: Private real estate debt offers investors a stable and predictable income stream compared to other investment options. Debt investments in real estate provide regular interest payments, typically backed by tangible assets, such as properties or land.
2. Readjusted Values, Lower Leverage Points, Higher Yields: The recent market dynamics have led to readjusted values in the real estate sector, which has resulted in lower leverage points and higher yields for investors. These factors make private real estate debt an appealing diversification piece within a client's portfolio.
3. Lower Correlation to Markets: Private real estate debt has historically shown lower correlation to broader financial markets. This lower correlation can provide diversification benefits and help mitigate the impact of market volatility on investment returns.
4. Best Lending Opportunity Set in the Last 12 Years: The current market conditions have created favorable lending opportunities for private real estate debt investors. There is less competition, more favorable lending terms, and lower leverage on readjusted property values. This unique opportunity set makes private real estate debt an attractive option for investors seeking attractive risk-adjusted returns.
Overall, private real estate debt offers investors a stable income stream, diversification benefits, and an attractive opportunity set in the current market environment.
Q: Another interesting topic is the disruption in the regional bank sector. How is this disruption creating opportunities for private debt funds like Pender Capital?
A: The disruption in the regional bank sector has presented significant opportunities for private debt funds like Pender Capital. Here are some key factors contributing to these opportunities:
1. Unprecedented Number of High-Quality Submissions: With the dislocation of the regional banks in the commercial real estate (CRE) market, private debt funds are seeing an influx of high-quality submissions from strong sponsorship groups. Sponsors who would typically rely on bank debt are now seeking alternative financing options for expiring loans or new opportunistic purchases.
2. Favorable Lending Market: The lending market for risk-adjusted yields has never been better in our eight years of lending. Pender Capital is able to price deals with lower leverage, higher yields, and more favorable lending terms, providing attractive opportunities for both the fund and the borrowers.
3. Filling the Void for High-Quality Sponsorship Groups: In short, where banks have receded, well-capitalized debt providers like Pender Capital are filling the void for high-quality sponsorship groups. These groups, who may have previously relied on traditional bank financing, are now seeking debt partners who can offer competitive terms and reliable capital.
The disruption in the regional bank sector has led to a shift in the CRE lending landscape, creating a unique environment where private debt funds can provide flexible and attractive financing options for high-quality sponsors.
Q: Delving into the specific sectors within CRE (Commercial Real Estate) that are garnering attention and facing challenges. Let's start with the office sector. What challenges and opportunities do you see in this sector?
A: The office sector has faced and will continue to face significant challenges for years to come. While we believe that there will be interesting opportunities that arise as groups with available capital receive substantial discounts to previous valuations, we anticipate that these opportunities will likely take many years to realize. Currently, our deal terms generally have a duration of 12-24 months, which may preclude us from actively pursuing opportunities in the office sector.
Q: Thank you for providing insights into the challenges and opportunities in the office sector. How about the multifamily sector? What can you share about its current status and potential opportunities?
A: The multifamily sector continues to be an active sector in our portfolio. We primarily focus on class B and C properties, which we believe will be more stable compared to class A properties in the event of a recession. Additionally, the multifamily sector still offers an active takeout market, with financing options available through entities like Fannie Mae, Freddie Mac, and HUD for stabilized projects. These factors contribute to the ongoing opportunities we see in the multifamily sector.
Q: Finally, could you shed some light on the opportunities within CRE debt and how Pender Capital is capitalizing on them?
A: Some opportunities within CRE debt that we are currently observing:
1. Multifamily Lending: Multifamily lending remains strong and continues to have an active market for stabilized properties. Entities such as Freddie Mac, Fannie Mae, and HUD provide financing options for multifamily projects, making it an attractive sector for debt investments.
2. Outsized Yields in Other CRE Classes: Other commercial real estate (CRE) classes still offer outsized yields; however, the takeout market for these classes remains uncertain. While these opportunities present attractive risk-adjusted yields, careful evaluation is required due to the current market dynamics.
3. Discounts for Equity Sponsors: Sponsorship groups on the equity side have already begun to receive discounts relative to 2019 levels. As a debt provider, we have seen these discounts play out in real-time as our sponsors submit newly transacted deals. This presents an opportunity for us to provide debt financing for these discounted transactions.
4. Preferred Equity Opportunities: We are also seeing opportunities in the preferred equity space, particularly for sponsors looking to recapitalize vintage 2017-2018 transactions that have already experienced significant value increases. These transactions offer attractive risk-adjusted returns for debt providers like Pender Capital.
By strategically identifying and capitalizing on these opportunities within CRE debt, Pender Capital aims to deliver attractive risk-adjusted returns to our investors while supporting the growth and stability of high-quality sponsorship groups.
Q: Thank you, Cory, for sharing your expertise and providing valuable insights into the investment landscape, private real estate debt, and the opportunities within the commercial real estate sector. It has been a pleasure having you here for this Q&A session. Is there anything else you would like to add before we wrap up?
A: Thank you, Conor. It has been my pleasure to participate in this Q&A session. I would like to emphasize that while opportunities exist within the investment landscape, it's crucial for investors to carefully evaluate risks, conduct thorough due diligence, and work with experienced professionals to navigate the market. The dynamic nature of the investment landscape requires adaptability and continuous monitoring to maximize investment returns and mitigate potential risks.
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