January 2024
Pender emphasizes principle preservation first and yield generation second. They also focus on underwriting to refinance rather than to sale, which distinguishes them from other lenders. Finally, Cory discusses the opportunities emerging in the current market, especially in private credit, due to the liquidity issues in the banking sector.
Watch previous episodes here:
Ep. 66 A Year in Review & Looking Ahead
Ep. 65 Bond Alternatives: A Smarter Way to Lend to Corporate America
For those of you I haven't had a chance to meet, I'm Joe Seetoo, one of the partners at Morton. Gosh, I can't believe it's been 40 years that the firm has been around. I'm blessed to have been with the firm for the last 16 years. So I'm here with Cory Johnson of Pender. When you think about what we've heard over the last 18 months or so, rising interest rates, we've got a banking crisis we just went through. Commercial real estate is a ticking time bomb waiting to explode. Well, these are all the headlines we're reading. And I think a lot of that is very true. But there's a little more to the story, right? There's we're in we're a society of soundbites, tweets where our attention span is about 4/10 of a second.
And if we just fall into the trap where we just take the information at face value, I think we have to decipher that this is not actionable advice and it's certainly not wisdom. And how many times have we heard that alternative investments are risky, that they're only for the ultra wealthy, that their minimums are too high, that they're not accessible?
The pain is caused, as the average investor is that they may be led astray. They may just be willing to accept an inferior outcome. And they're missing out on groups like Pender. And so Morton, as you know, we are passionate about democratizing investments so that we can all have the benefit of more resilient portfolios so that we don't suffer from the downturn like we saw in 2022.
So with that, Cory, let's go and start off with a little bit of a high level overview of the strategy.
Hi everyone. I am Cory Johnson. I am the co-founder and CEO of Pindar Capital. I just want to first thank Morton and the team for having us here today and the long standing relationship that we've had over the years. We are a commercial real estate debt lender, primarily focused on the lower middle market in secondary and tertiary markets across the country.
So what does that really mean? We really like focusing on loans that are generally between the 10 to $30 million range. Really, if you make us smile from the kind of the bottom of the country up, that's really more of our focus. We like a lot of the communities in neighborhood and markets in Middle America. Flyover We don't do a lot of business in the Northeast, although I am based in California.
We do not do a lot of business in California. So I think probably a little different than some of the other exposure that you may have. We really like some of the business in other parts of the country. Our headquarters, we actually moved it about two years ago to Dallas, where we had an office there for the last seven years and really excited again to be here today.
So we hear this notion that the real estate market, the lending market, is truly compelling. And can you expand on what what does that specifically mean in the deals that you're seeing and why? We're excited about the opportunity, despite the fact, again, the economy is on the on the verge of recession, rates are dramatically higher than they were over the last 18 months.
There's a lot of concern about the commercial real estate environment.
Yeah, I think well, first you've got to take a look backwards, You know, where things were at, you know, even even in the pre-COVID world, you know, we're we're a group that were rather or used to be rather agnostic to what type of commercial real estate asset we were landing on. You know, whether it's multifamily was all the way down to hospitality and retail, that's a lot of business that we've done.
We have always from our from our initial kind of outset, our thesis has always been principle preservation, first yield generation. Second. And I think as we moved along and we got into COVID, we really had a situation that that was battle tested. We had a lot of exposure on the side of the barbell that did not recover very well being, you know, retail office, hospitality, health care.
As we work through those assets and, you know, never took any any principle losses, I think that was very much proved. And I think as we came back out of that on the other side, really, what were we comfortable lending on? We are one of the groups in our thesis. The way we look at assets, we're always underwriting to a refinance.
And I think that is a little different than kind of the other groups that we've come across, you know, whether they're the mega players or whether they're down to the small regional guys. What that means is we're always looking at we're making a 1 to 3 year bridge loan to a group that's, say, buying a, you know, 300 unit apartment building, you know, doing some value add to it and then ultimately refinancing it down the road.
We don't underwrite to a sale. And I think that is something that makes us rather unique. And so when we looked back and we started originating again in 2021, but what assets did we really feel comfortable with? Multifamily. We still have Fannie, we have Freddie, we have HUD, still industrials perform very well. Storage has performed well. So as we kind of move back out in early 2021 and started originating, you know, a significant amount of business, again, we were really focused on those areas of the market and where we really kind of come through today is, you know, we saw what happened in 2022 with interest rates and then, you know, the banking dislocation earlier this year. It's really this led us to be hyper focused on certain segments of the market. And ultimately, as a lot of our loans are now starting to roll off in 2021. This is where other lenders are having some challenges getting paid off. Re being able to reset their real estate exposure with new valuations because the valuations today are not what the valuations were in 2021 and you're seeing that all over the news.
Sure. So maybe talk a little bit about the quality of the borrowers, the deal structure, what that looks like, because certainly there's I think from the average investors perspective, it's like very concerning.
Yeah. I mean, you look at every headline, commercial real estate is going to fall apart. You know, everything is getting taken down now when you really kind of peel back that onion, so to speak, without without a doubt, the office sector's massively challenged health care, massively challenged segments of retail starting to recover a little bit. Leisure, hospitality is looking a little bit better in our eyes.
But again, there's not any liquidity for that. And kind of on the back end with the regional banks dislocation, that was always a very regional banks represent the vast majority of kind of the lower end assets of what they're holding on their balance sheets. What we're seeing now is these banks are all but seized up. So on one hand, that does create a bit of, you know, concern and a significant amount of concern as you have a lot of real estate debt that it will be rolling off over the next three years.
But on the other hand, what it's done is it's all of a sudden opened everyone's eyes to where is the opportunity set going to be. I was on a panel three weeks ago. The CIO of CalPERS was on right before me talking about where is the most interesting opportunities right now that we're seeing in real estate, private credit, because we don't have any liquidity from the banking sectors.
So you're seeing this kind of push into where these opportunity sets live. Now when you've got some really good real estate sponsors on the other side, what you're going to hear from a few of them later today, a lot of these groups have a lot of dry powder. They're out actively negotiating deals, actively negotiating discounts in the space where it's getting really compelling for us is so much of that really high tier quality business would generally fall off to a bank.
You know, we're going to compete with banks for bridge loans. They're all but gone. I mean, we've got a banking relationship in Texas that they said we're not going to do a one off CRT loan until likely the end of 2024. Wow. Okay. So you're not doing anything that's going to you're already seeing a larger inflow into the private debt providers.
Again, we're staying more focused on multifamily for the time being because we still have a take out market for that. But really the nice thing, the borrowers, you know, and I'll just use some you know in a dual numbers borrower negotiating a deal and say a $50 million you know 2021 valuation they're picking it up right now and I'm talking about multifamily, which is still the darling picking up somewhere in the, you know, 38 to $40 million range and now they're coming back over to us on the debt side.
And instead of asking for like a 70% loan to value or in some cases a 75% loan to value, they're asking for a 55% loan to value off their new valuation. So what it's really done for us is we're seeing the highest quality sponsor, borrower on one side of the table asking for less leverage on new valuations, understanding that they're going to be paying more.
So when you really kind of pulled this all back, I believe we've got the the highest, highest, best rated risk, risk adjusted returns that we've ever seen.
So just to recap, you're saying essentially better borrowers paying more at a lower loan to value. So you're in a better position protecting us in terms of our capital. And they're again, they're paying at a higher rate.
That is absolutely what I'm saying. And that is and it's not just, you know, when you have billionaire family offices that are coming to a private debt provider asking to potentially provide them with debt, that is historically never happened. So this there is a huge opportunity set that is building here. And, you know, while transactional volume is very, very slow right now, this is why we love being on the debt side currently, because we're dealing with primarily small equity funds, large equity funds, large single family offices that have a real estate division and they are all out there actively renegotiating deals.
Hey, I was going to pay this and I'm not going to pay this anymore. I'm going to pay this -20% and then coming to over to us. So we're seeing this this massive amount of business that's coming across our desk that candidly, it's it's it's exciting for us on one end. Now, on the flip side to that, you are seeing other groups and I have some serious concerns with the the CLO market collateralized loan obligation market that you have a lot of lenders that more or less look like us on the surface, but they are highly leveraged internally.
So if they say how about this $100 million fund, they may be lending out 400 million plus worth of worth of loans. So any dislocation in that market could have some very negative impacts and that could happen very quickly.
And then to be clear, because they borrowed 300 million from a bank, from from other sources, they're paying leverage on that. But thinking they can lend it out at a higher rate to make the spread.
When the markets are good, they make more money, the returns are higher. But when any dislocation happens, which we're seeing right this moment, these groups are effectively underwater on their loans where we stand today. So you're seeing this going back to, you know, we've always taken a very conservative approach. The loans I was talking about, we wrote in 2021, a lot of those those assets are worth significantly less today than they were in 2021.
But it's been very nice. And I think it goes back to the way we very conservatively underwrite these deals going in that our borrowers have been able to refinance, not just sell, refinance out without having to bring additional equity into the table. So more or less, what I'm trying to say is I think we did a very good job beating up our borrowers on the way in.
But what it allowed them, it allowed them to get out, you know, on the flip side without having to bring much else to the table.
I want to pivot the conversation because we're moving things along pretty quickly. You went through a huge conversion from a private fund to a publicly registered entity through the year. You see a ton of brain damage, but I think the audience really want to spend a few minutes digging into why what that was like, what the benefits are for investors and what the benefits are for Pandora also on a go forward.
Absolutely. When I when I heard Megan and Jeff talking about some of the very exciting things they have on the horizon, it just kind of brought me back to Etsy. my goodness. Many more gray hairs that were on the head post post-COVID and dealing with the SEC for about two years to get that all the way through.
Yeah. So ultimately we decided and we started this process back in, you know, middle of 2022, I take that back middle 2021 or blocked it all out of really understanding who our clients are and what what our type of alternative product can do for their portfolio. And, you know, we've had the luxury of working alongside groups. Groups like Morton through the years have done an extraordinary job of finding managers and really matching it up with the majority of their client base.
But ultimately, as Jeff alluded to earlier, you know, when you start talking about certain funds that have, you know, $5 million, you know, net worth requirements to get in it, there's a lot of clients that can come in, but then it really precludes the vast, vast majority of other clients that we believe alternatives is a very, very needed sleeve within a client's portfolio.
But unfortunately, the way the rules work and the way the accreditation standards work, it precluded so many people from getting access to this. So as we were really looking at our portfolio, what we did, we came up with the delivery system that allowed us to convert our private vehicle into a publicly registered vehicle that basically removed the accreditation standards altogether, lowered the minimums down considerably.
And for advisors, you know, we thought the benefit to two groups would be like, Hey, now we can open this up to our entire client mix and allow them access to a nice, steady risk adjusted return that otherwise they wouldn't have access to. So it has been it was quite the process. I mean, dealing with the dealing with the SEC, I mean, we we had many, many moons of, you know, 15, 20 person, all hands on deck zoom meetings.
I had one of them with the I'm not making this up on the Zoom meeting. The gentleman had a Captain America marble shield mounted to his wall. And needless to say, I was texting my lead attorney. I'm like, We're up against Captain America. This is not going to go well. But we won. But we were. We finally got through.
But then it was even dealing with, you know, from a tax reporting standpoint, making it simple. You know, we used to have no.
More K-1s, right?
No rewards. We were able to keep our qualified read taxation, but get it into a 1099 format and, you know, I know for many of you have any CPAs in the room, we would still get the phone calls. Can somebody answer the question on this one or, you know, when somebody is asking for it.
You know unfortunately in the private lending world, you know the taxation has always been a challenge. Generally taxes ordinary income But getting the qualified re taxation designation is a 20% discount on the federal return. So it is it is a meaningful savings. And now getting that coupled with the K one saving you all in this room from having to sign a long boring sub doc just where it's, you know, ticker symbol that your advisors can purchase on your behalf, you know, really was something that was just the ease of use for the clients, ease of use for the borrowers, allowing us to kind of expand the wings within the existing clients that we had because we've been getting asked about it for years and we finally figured out a way to actually make this work. And I will say it is not for the faint of heart, though. This was a process. We had to wait an additional 90 days because on the Charles Schwab and Fidelity platforms, we were the first registered investment company or inaugural fund that was taxed as a RYT. So that took us an extra 90 days to get through. So we were an early mover on this, but ultimately still doing the same exact business that we've done before.
And that's what's what's so exciting about it is being able to provide this and, you know, make it easier for all of you in this room, making it easy for the advisors to get access to something. It's ultimately getting the same, if not a better return profile with where we stand today. And we had a change of structure around a little bit.
So a lot of our fees get thrown down into the fund. So it's a little less expensive for all of you.
Maybe we can use the last couple of minutes to talk about where we're at in terms of yield number of loans in the portfolio. What about a high level of where Pender sits today?
Yeah, absolutely. So the yield has been steadily climbing back up. I mean, right now we're bouncing right between the low nines to the low double digits. We anticipate that to continue to steadily climb as long as we're still able to kind of, you know, originate new loans which which you were doing more so because the way our fee structures are now every fee that we charge, the borrower is down into the fund before it kind of goes back out.
So we see a very clear path. And alongside with everything we alluded to earlier, with the risk adjusted yields we're getting from some of these borrowers, I mean, we just we just did a 53% loan to value multifamily deal that we've got a gross fee that we're going to charge the borrower plus the interest rate gross fee of 12% that just flat out did not exist, you know, a few years ago.
So we have a I see a very clear path to kind of continuing this kind of gradual climb upwards. And candidly, I think we're taking less risk within the portfolio. I do see a way that, you know, as we get into next year, candidly, we could probably be in the low double digits moving forward, which will be nice.
And in terms of sectors that you're favoring, we talked a little bit about it, but maybe give the audience a little bit more color on what you're what you're thinking. The future portends maybe.
Yeah, I think for a period of time, you know, again, we're still going to be probably a little overweight in multifamily. And again, just peak. You're talking about the liquidity on the secondary market. We're seeing again, it continued industrial. We're finally pricing ourselves into industrial that that was like a unicorn for us for a few years. We just couldn't price our way into it.
Because industrial was so hot for so long.
So hot that can put competition for that type of product was unbelievable. Stores has performed very well. I think we'll start dabbling, you know, at some point again in probably the next 12 months. If I feel comfortable that we've got a secondary market for maybe some retail assets, but it's going to be really still focused on multifamily Now, even with that multifamily, right, it's not all created equal.
We've historically done a lot of B and C, more affordable type multifamily. You're seeing that market still remain relatively stable. A lot of it's due to, you know, single family housing market every every first time home buyer with interest rates of what they've done, they are all remaining renters. So that market's been been strong. Anyone who bought a project in 2021, they're going to have some challenges without a doubt.
I think one thing that we're we are concerned with and we're keeping a very close eye on is what we're we're sitting in California, so we're probably all affected by this. But insurance we've seen insurance premiums skyrocket in some states. You know, we do a lot of business in Texas, California, Texas, Florida seem to be the three big offenders right now.
And that's one thing with attracts the vendor originally, right, because we had a lot of a lot of lending strategies predominant in California for years. And because you guys do nationwide loans, you're getting us exposure to loans outside of just California. Yeah.
Well we really again you know the fundamentals of of where we're looking at things were really looking kind of, you know, population trends, demographic trends. Texas has been a very strong market. Obviously, South Florida has been a huge market. Carolina is a big is a good market for us. You know, my partner, Zach Murphy, our CEO, when we started Bender, he had worked for a Goldman affiliate fund and he was going after distressed commercial real estate debt from regional banks, community banks and whatnot.
Not in, you know, the major money centers, but really more in flyover America. So we still get about 30% of our business from permanent sources of capital saying, hey, I've got this borrower, we can't bank them, or we currently bank them, but we can't do this alone for them. We don't want to lose that business. So that's kind of where our businesses really kind of come from and driven and really, you know, back in 717 and early 18, we opened up our Dallas office.
It was very strategic. You know, we knew we were going to do a lot of business in that area. But really, you know, if you put the triangle kind of up from that area, allowed us to really touch a lot of those areas.
Disclosure: Information presented isfor educational purposes only and is not intended as an offer or solicitationwith respect to the purchase of any security or asset class.The views andopinions expressed by the speakers are as of the date of the recording and aresubject to change. This information should not be relied on for investmentrecommendations, and Morton Wealth makes no representation that the strategiesdescribed are suitable or appropriate for any person.Consult with yourfinancial advisor before implementing any transactions and/or strategiesconcerning your finances.Although information contained in this report is fromsources deemed to be reliable, Morton makes no representation as to theadequacy, accuracy or completeness of such information and it has accepted theinformation without further verification.The investmentopportunities discussed may only be available to eligible clients and involve ahigh degree of risk. A Fund’s concentration in a certain sector and lack ofdiversification across other sectors present risks specific to its strategy andshould be carefully considered. Opportunities for withdrawal/redemption in suchinvestment will be limited, so investors may not have access to capital when itis needed. Additionally, the fees and expenses charged in connection with thisinvestment may be higher than other investment alternatives and may offsetprofits. Each investment opportunity is unique, and it is not known whether thesame or similar type of opportunity will be available in the future. It shouldnot be assumed that Morton Wealth will make investment recommendations in thefuture that are consistent with the views expressed herein.Past performance isnot indicative of future results. Future results could differ materially fromthose contemplated due to various factors, including general economic or marketconditions and risks associated with industries of the type in which the fundinvests.All investments involve risk, including the loss of principal.
