Ready Capital, a key lender on the sinking syndicator ship, is selling distressed debt for cents on the dollar. The discount implies the properties many multifamily investors are struggling to buoy are already far underwater.
The New York-based lender reported it sold $20 million in loans so far this year and another $450 million are in contract to trade in the third quarter, executives detailed on a Thursday morning earnings call.
The loans that cleared sold at 70 cents on the dollars, Chief Financial Officer Andrew Ahlborn said.
It expects that the total debt it wants to offload by years’ end —- both the debt in contract and another $130 million in the works — will sell for 50 cents on the dollar.
Those loan pools awaiting sale contain both office and multifamily debt. Ahlborn said multifamily is driving the discount.
“Office has been marked down 25 percent,” Ahlborn said. “Multifamily is a little bit higher.”
That sale is a snapshot of the deteriorating multifamily market. Values of buildings bought during the frenzied market of late 2020 into early 2022 have plunged as interest rates rose and rent growth slowed.
Many Ready Capital borrowers tapped the lender for short-term floating-rate debt. As their loans have come due, delinquencies have spiked. The protective rate caps expire when loans mature, and the cost of replacements has ballooned as interest rates have.
Some borrowers, swept up by the boom, also overpaid for assets. A number have failed to finish their renovation plans.
Mashed together, the factors are driving late payments and defaults across the niche asset closet.
Ready Capital in the first quarter reported 10 percent of its $6.6 billion bridge loan book, the go-to product for multifamily syndicators, was delinquent.
The lender has whittled down that rate through a combination of loan sales and modifications for “extremely cooperative borrowers that really need more time to execute their business plan,” according to Chief Credit Officer Adam Zausmer.
In the second quarter, a little less than 6 percent of its bridge debt, which now totals $6.3 billion, was delinquent, according to an SEC filing.
On an earnings call for another top lender to syndicators, Arbor Realty Trust, analysts asked if the worst was over. Questions during Ready Capital’s call hit a similar note.
Ready Capital executives responded with cautious optimism.
“I think the worst is certainly behind us on the multifamily side,” said Zausmer, who was less willing to make a call on whether delinquencies had peaked.
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It’s not just Arbor: Syndicator lender Ready Capital chokes on past-due debt
“Delinquency levels — they will remain volatile through the next 12-18 months,” the CCO said.
Ahlborn, responding to an analyst question, added that the firm was not quite ready to cut its loss reserves.
“I don’t think what you’ll see is a reduction in CECL,” the CFO said, referring to money set aside for current expected credit losses. “There is some level of uncertainty.”