Surviving economic downturns: A primer

Private lenders pounce as banks slow on borrowing

Surviving economic downturns: A primer

Amid high interest rates with inflation suffusing the economy, lenders have become more averse to risk than in better times. One lender that’s survived other cyclical downturns – from the Great Financial Crisis on – has developed something of a template in circumventing choppy waters.

Greg Friedman (pictured), founder and CEO of commercial real estate private equity investor and lender Peachtree Group, spoke to Mortgage Professional America. Along the way, he provided something of a primer in dealing with the ups and downs of economic forces.

“We’ve been very fortunate as an organization,” Friedman said during a telephone interview. “I started the company back in 2007, so we went through the Great Financial Crisis. The hotel business was extremely impacted during the Great Financial Crisis.”

Snapping up real estate during the Great Financial Crisis

While it may sound antithetical for the layman, snapping up properties during that period was a winning strategy for Peachtree Group, he suggested: “We actually made a lot of new investments,” he said. “Where there are periods of disruption, that’s usually when you can find your best new investments to make.”

The preferred real estate to acquire for Peachtree Group during those dark economic periods were primarily hotel properties. “We went out and bought a bunch of hotels,” he said. “We developed a bunch of hotels.”

The company also went on something of a shopping spree for distressed debt during the Great Financial Crisis. Owning the debt of a distressed company is often seen as more advantageous than owning the equity in the event of a bankruptcy, as explained by Investopedia. Debt takes precedence over equity in its claim on assets if the company is dissolved in a rule known as absolute priority or liquidation preference.

“We were also big buyers of distressed debt during the Great Financial Crisis,” Friedman said. “We bought about 50 first mortgage loans on hotel assets as well as other commercial real estate assets.”

Surviving the global pandemic

Emergence of the COVID-19 pandemic also took an economic toll on businesses. Peachtree Group was able to elude the most financially corrosive side effects of the pandemic in a strategy that closely mirrored the economic recovery that followed.

According to the board of governors of the Federal Reserve System, more than 700,000 establishments closed in the second quarter of 2020, accounting for nearly three million jobs out of 20 million gross job losses occurring in that quarter. Nevertheless, that surge in closures included numerous temporary measures and was followed by a surge in openings in the third quarter that remained elevated through the middle of 2021, the Fed found.

“Call it December 2019,” Friedman began. “We were at record occupancies, record revenue per available room across our portfolio. Obviously, by March 2020, we were at the lowest level of all time within our industry. Occupancies had dropped to near zero across our portfolio.”

It was Peachtree Group’s methodical market selection that saved the day: “Fortunately, because of the markets we invested primarily into, our hotels did rebound a lot quicker than we expected,” Friedman said. “By the summer of 2020, our portfolio of assets – both on the credit side as well as on the equity side – had recovered to a point where they were covering operating costs… by the end of 2020 we were able to cover not only operating costs but debt service. So we were able to, from an asset management perspective, make it through the pandemic pretty unscathed.”

Returning to its earlier playbook, the company also snapped up debt. “But also, on the flip side, we really took advantage of the pandemic,” Friedman said. “We were probably the biggest buyer of debt. We bought over 180 loans secured by different hotel assets across the US. So we were very active in buying debt in 2020 as well as in the first half of 2021.”

The upshot: “We made about 29 rescue capital pipe loans against different hotel assets, and we bought 19 hotel assets as well during that time period,” Friedman said. “So we were able to play offense during the pandemic as well as being successful in playing defense across our portfolio too.”

As for the markets in which Peachtree is focused, Friedman noted its lending is nationwide in scope but with some preferred locales in the mix. “So we’re focused across the US,” he began. “We’ll lend pretty much anywhere across the 50 states. We tend to choose the areas where there’s higher growth. But with that being said, we’re lending all across the US today. We’re lending in markets like California and New York as well as the southeast – Texas, Arizona and so forth and everywhere in between. On the lending side – we also make equity investments because we’re a private equity firm that invests on the credit side – we typically prefer making investments in the Southeast.”

Navigating around the credit crunch

As for the current credit crunch, he said lenders like Peachtree Group are poised to capitalize given banks’ inherent disadvantages. In this cycle, it’s the nature of the lender rather than any particular strategy that will help the industry propel.

“That has created a huge opportunity for private lenders like ourselves in light of the banks being unable to lend today because a lot of the banks are under regulatory pressure. Given what’s happening with interest rates rising affecting their bond investments and so forth, that’s the pressure on the ability for regional banks, community banks and national banks to make loans. In a normalized, functioning commercial real estate market, banks make up about 40% of the total market. With banks unable to lend today, there’s a huge void in the marketplace that’s allowing private lenders like us to step in and fill that void.”

While distressing to banks, Friedman said the current woes give private lenders an advantage: “Ultimately, we’re able to lend today at lower leverage points and we’re able to drive equity-type returns on the loans that we’re making just given that lack of debt supply. There’s not an efficient debt market, and we’re able to take advantage of that inefficiency by lending at lower leverage points and ultimately getting equity-like returns without losing our equity position.”

In this economic round, advantage private lenders.

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