Ballast Acquires Veritas' $940M Mortgage Portfolio with 2,150 Units in San Francisco

A significant shift in San Francisco's real estate landscape is underway as Ballast Investments prepares to purchase a $940M mortgage portfolio from Veritas Investments, the city's top residential landlord.

Ballast breakthrough: Ballast Investments, a San Francisco-based real estate firm, is set to purchase the nearly billion portfolio of delinquent loans connected to 2,149 apartments overseen by Veritas Investments. The transaction was facilitated by New York's Eastdil Secured, who auctioned the debt. The exact price of the mortgages remains undisclosed.

What we know: If finalized, Veritas will forfeit 25% of its rental holdings. Their current holdings comprise more than 8,000 apartments, a significant increase from the 6,500 units they had last year. This pending sale, however, doesn’t encompass the entirety of Veritas' distressed portfolio.

Inside the auction: Back in May, Eastdil Secured attempted to offload Veritas' unpaid mortgage loans, split into two portfolios comprising 95 apartment buildings in San Francisco. Based on the information available, Ballast successfully bid for the larger portfolio consisting of 75 properties, while the other, holding a $140M debt linked to 20 San Francisco apartment properties, was excluded from Ballast's bid.

Veritas' mortgage struggles: Veritas Investments, San Francisco's largest residential landlord, encountered mortgage difficulties earlier this year, impacted by the pandemic's diminishing housing demand. This financial strain is reminiscent of its initial growth phase following the Great Recession when it expanded by purchasing 2,000 units from CitiApartments in 2011, a company burdened by debt. While Veritas has faced challenges in managing its mortgages, it remains optimistic about the city's real estate prospects.

Ballast buying spree: While the pandemic has heavily impacted San Francisco's economy, the demand for apartment buildings in the city persists. Veritas and Ballast have both been making significant deals in recent times. For example, Ballast, owner of Brick + Timber, partnered with the Carlyle Group on multiple acquisitions, including a $15.6M 38-unit property on Green St. and a $8.8M 12-unit property on Scott St. in 2022.

➥ THE TAKEAWAY

Evolving rental market: The San Francisco metro area experienced a 4.3% decline in median rent over the past year, among the steepest drops nationwide. This contrasts with a 1.2% decline on a national level. The changing rental landscape and Veritas' prior tenant-related controversies contribute to the evolving dynamics of San Fran real estate. Nevertheless, Ballast appears ready to capitalize on these complexities.

Connect with prospects on autopilot

The LinkedIn landscape is a gold mine, packed with potential clients and investors for brokers and syndicators. But navigating it can be time-consuming, and let's face it, a tad frustrating.

Enter AutoLinkGuru – your ultimate LinkedIn automation partner. They leverage the power of automation to pinpoint and connect you with your ideal prospects. You won't need to cast a wide net and hope for the best anymore. They put you right in front of the people who matter most to your business.

And cherry on cake, their team sets up and manages the campaigns, so all you need to do is engage in meaningful conversations that translate to business success. No more wasted time, no more generic messages.

Start growing your business today with AutoLinkGuru, and experience LinkedIn automation outreach done right.

*Disclosure: This post contains sponsored content.

Unpacking Signature Bank's $35B Loan Sale

Six months after Signature Bank's collapse, its $35B CRE loan book, including a significant portion of rent-stabilized loans, is set to finally kick off in September.

Valuation challenges: Newmark is gearing up to market these loans in September, according to updates from Trepp. This sale will provide a unique view into the value of rent-stabilized buildings, an asset class currently facing uncertainty. With Signature’s multifamily loan book having $11B of rent-stabilized loans, there's immense curiosity on its valuation, especially as brokers indicate that such properties have seen value drops between 20% to 45%.

Rent-stabilized roadblocks: A 2019 state law that curbed rent hikes for rent-stabilized units, coupled with rising interest rates and increased expenses for landlords, has brought this asset class under pressure. Despite the obvious challenges, real insights into the law’s effects on building valuations are hard to find. Public banks’ balance sheets don’t provide a complete understanding, given their hesitancy to recognize bad loans, especially in the wake of bank failures.

FDIC's playbook: The FDIC is likely to adopt strategies from the Great Recession, collaborating with third-party investors to acquire loans from Signature Bank. This approach would involve the FDIC retaining an equity stake and providing interest-free financing while private investors contribute capital to stabilize the situation.

➥ THE TAKEAWAY

Landlords on edge: Rent-stabilized landlords are bracing for the potential upheaval caused by the sale, as the fate of their loans and expected valuation adjustments remain uncertain. The lack of transparency surrounding the sale has generated anxiety among these landlords, especially those with impending loan maturity dates. Many loan holders feel left in the dark.

▶️ Watch: Billionaire investor Jeff Greene predicts that we are in the initial stages of a CRE correction and discusses various real estate and market-related topics on CNBC’s Squawk Box.

🎧 Listen: In this episode of WSJ’s The Journal, China's largest property developer, Country Garden, is facing collapse as it reports a $6.7B loss in 1H23, highlighting the instability of the country's real estate market.

$4B Surge in Loan Modifications During Q2

Collateralized loan obligation (CLO) modifications surged in Q2, with borrowers adjusting more than $4B worth of CLOs, a 4x increase from Q1.

Lending lifelines: Loan modifications and extensions provide borrowers a means to navigate the challenges of rising interest rates, helping them evade potential distress and defaults in a more challenging refinancing environment. The rise in loan modifications doesn't necessarily indicate increased financial distress, as the assets involved aren't explicitly troubled.

Selective lending: With a 79% drop in originations for CLOs and CMBS transactions since last year, lenders are adopting a more cautious approach, emphasizing quality over quantity in their deal selections. In the last quarter, the proportion of modified loans in CLOs grew from 6.5–11.8%, primarily affecting multifamily loans, which could become riskier as rents soften in markets like Austin and Phoenix.

➥ THE TAKEAWAY

Financing dynamics: A lack of diverse financing has the potential to sustain the trend of CLO modifications until the Fed concludes interest rate hikes. This underscores the importance of borrowing flexibility in managing loan portfolios. Modifications of CLOs saw a quicker increase each quarter compared to the growth in delinquency rates. Meanwhile, the proportion of loans monitored by Morningstar undergoing special servicing fell from 0.74% in Q1 to 0.66% in Q2.

Multifamily Rent Growth By Region And Between Time Periods

Multifamily rent growth is slowing down, especially in Midwest and Northeast markets, due to limited new supply and outmigration trends. Meanwhile, rents are going down in tech hubs like Northern CA and the Pacific Northwest, alongside challenges in the Sun Belt due to oversupply and weak job growth.

📣 HIT THE INBOX OF 65K+ CRE PROFESSIONALS
Advertise with CRE Daily to get your brand in front of the Who's Who of commercial real estate. Subscribers are high-income decision makers, investors, and C-suite executives. For more information, please email [email protected].