First Foundation's Shocking Fund Raise Raises Red Flags on Multifamily Real Estate Loans
First Foundation's unexpected $228 million capital raise has sparked concerns about the lender's exposure to multifamily real estate loans, leading to a 24% drop in its share price.
Multifamily Real Estate LoansFirst FoundationCommercial Real EstateInterest Rate HikesFederal ReserveReal Estate NewsJul 03, 2024
First Foundation's shares slumped 24% on Wednesday, wiping off $81 million from its market value, which now stands at around $290 million. The lender's multifamily real estate loans account for nearly 52% of its $10.1 billion portfolio, making it one of the banks with the largest exposure to commercial real estate.
The announcement has triggered fears about default risks, particularly in the multifamily sector, where occupancies are dwindling due to the shift towards remote work. The deal has also raised concerns about the dilution of current shareholders' ownership, with the new investors set to acquire a 49% stake in the bank.
According to Wedbush analyst David Chiaverini, the decision to raise capital is surprising, given the bank's strong credit quality and substantial capital. 'We're surprised First Foundation sought this transaction given there appeared to be a path to earnings recovery over the next 2-3 years,' Chiaverini said.
The lender's loan book has performed relatively well, with low delinquency rates, but industry experts are worried about the potential for loan credit problems in the coming months. 'Importantly, the ratio of loan loss reserves to non-performing loans has decreased dramatically over the past few quarters, indicating that they may need to increase reserves in the near term,' said Stephen Buschbom, research director at Trepp.
First Foundation CEO Scott Kavanaugh has assured investors that there has been no degradation in the bank's credit, but the low yields from multifamily loans are hurting the bank's earnings. The lender is looking to offload some of its multifamily loans, but is being cautious to avoid losses from such sales.
The capital raise has elicited mixed reactions from analysts, with some hailing it as a positive move that will allow the bank to be flexible with its balance sheet. D.A. Davidson has upgraded the bank's stock, saying the deal will allow First Foundation to increase its allowance for credit losses and sharpen its focus on commercial and industrial loans.
On the other hand, Raymond James has downgraded the bank's stock, citing the unexpected nature of the capital raise. Short sellers, who have been betting against the bank, stand to make up to $10 million from the plunge.
Information
First Foundation is a Texas-based lender that specializes in multifamily real estate loans. It has a portfolio of $10.1 billion, with multifamily loans accounting for nearly 52% of its assets. The bank has been struggling to recover from the economic downturn, and its shares have been hammered this year, losing nearly 32% before the latest slide.
Fortress Investment Group is a leading global investment management firm that specializes in alternative assets. It is backed by Abu Dhabi's sovereign wealth fund Mubadala. Canyon Partners is a credit investment specialist, while Strategic Value Partners has roots in distressed debt investing. North Reef Capital focuses on the financial sector.
Frequently Asked Questions
What prompted First Foundation's sudden capital raise?
The Texas-based lender raised $228 million in capital, citing the need to boost its balance sheet in the face of economic uncertainty.
What is the composition of First Foundation's loan portfolio?
Multifamily real estate loans account for nearly 52% of First Foundation's $10.1 billion portfolio.
What are the concerns surrounding multifamily real estate loans?
The shift towards remote work has led to decreased occupancies in multifamily properties, sparking fears about default risks.
Who led the capital raise for First Foundation?
The capital raise was led by Fortress Investment Group, with backing from Canyon Partners, Strategic Value Partners, and North Reef Capital, among others.
How have analysts reacted to the capital raise?
Analysts have had mixed reactions, with some hailing it as a positive move that will allow the bank to be flexible with its balance sheet, while others have expressed concerns about the dilution of current shareholders' ownership.
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