February 22, 2024 • 39 mins
Buyers of distressed real estate debt stand to make significant gains over the next few years, according to Joshua Pack, co-CEO at Fortress Investment Group. “This is going to be a trillion-dollar opportunity,” he said. Pack discusses how Fortress is getting ready for “a massive restructuring” in the sector with Bloomberg News’ Lisa Lee and James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. The impact on banks will be long-lasting and not limited to smaller financial institutions, says Pack, who predicts more consolidation and liquidation. Also in this episode, Alamutu analyzes the real estate stress spreading through Europe that’s hurting banks, insurers and asset managers. Germany and Sweden are areas of concern, while Signa’s insolvency adds Austria to the list of hot spots, Alamutu says.
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Episode Transcript
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Speaker 1 (00:18):
Hello, Welcome to The Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Josh Pack, co
CEO and managing partner at Fortress Investment Group.
Speaker 2 (00:30):
How are you, Josh?
Speaker 1 (00:33):
Very good, Thank you, Thanks so much for joining us today.
We're excited to dig into your credit market views. We're
also delighted to welcome back Lisa Lee, who covers credit
markets from London for Bloomberg News. Thanks for coming on
the show.
Speaker 3 (00:44):
Delighted to be here, James.
Speaker 1 (00:45):
And from Bloomberg Intelligence. Excellent to see Tollu Ala Mutu,
also in London. Welcome back Tollu.
Speaker 4 (00:51):
Thank you, James. Great to be here.
Speaker 1 (00:53):
So let's start with you, Josh. Great to have you
on the Credit Edge. We're going to get into the
specifics of your portfolio and where you see the big
opportunities in global credit. But first let's get your macro view.
Inflation is back on the agenda. It hasn't yet gone away,
and that will determine how far and how fast central
banks can cut rates. Corporate debt rallied very strong at
(01:13):
the end of last year and as a significant amount
of twenty twenty four easing got priced in starting as
soon as March, which seems seemed very likely a done
deal until very very recently, that's all being hastily revised
and markets are selling off just as we're seeing corporate
supply really ramping up. So where do we go from here?
Josh guests on this show keep telling us this is
(01:35):
a great credit market, tons of opportunity out there. What's
your view?
Speaker 5 (01:38):
Well, I, you know, I'm not the greatest macroeconomist in
the world, but we've been right, I think so far
as we've been thinking about rates, and you know, basically
just listening to what the FED has been saying. The
Fed's been very clear that, you know, they were going
to raise rates and they were going to do it
quickly to stamp out inflation. And I think as long
(02:01):
as we saw the labor markets continue to hold together,
you know, we we kind of believe that they were
going to continue along that path. And at the beginning
of this year, when you know, we saw a lot
of optimism priced into the forward curve with all these
you know, rate reductions that people are expecting down the road.
I just don't think they're going to materialize.
Speaker 2 (02:22):
You know.
Speaker 5 (02:23):
I told one of my co workers that when we
got back to work after the holidays that and we
saw a four percent ten year, I said, that's the
that's the low tick for the year. We're going to
end up higher at the end of the year. Whether
that's four and a half or five percent.
Speaker 2 (02:36):
I don't know.
Speaker 5 (02:38):
But our view is we're we're going to be in
an elevated interest rate environment for a long period of time,
and that the you know, one percent free money environment
is a thing of the past and we're not going
to see that again.
Speaker 1 (02:53):
So you're definitely into in a minority that I just
wanted to get straight into one sector that everyone is
talking about quite worried about the moment. Real estate, Josh,
that seems to be a big worry, especially on the
commercial side. Loans are starting to trade, valuations of dropping,
banks are taking a hit.
Speaker 5 (03:09):
What happens next, Well, I mean, real estate is a
concern because it needs to be a concern, and there
is a there is an interconnectivity between real estate and banks.
And you know, frankly, you're seeing that kind of unwind.
You've been seeing that app that unwind over the past,
(03:31):
you know, twelve months with the mini bank crisis last spring,
and then of course we were reminded the banks aren't
in great shape from when we saw a New York
Community Bank you know, start.
Speaker 2 (03:41):
To fall apart as well.
Speaker 5 (03:43):
And that was actually one of the rescue banks that
you know, the fd I see, you know, put together
in a shotgun ready shotgun wedding with Signature Bank to
take over all of their troubled assets. So I think
it's really interesting that you know, they kind of mispriced
the assets that they were acquiring. The fdi C may
(04:03):
have mispriced the assets that they are acquiring. And you know,
the folks like us that we're also putting bids in
on those portfolios that we're you know, pricing that stuff
at fifty and sixty cents on the dollar, I think,
you know, are looking to be more correct in today's environment.
But when we think about real estate, it's kind of
it's kind of falling into kind of three main buckets
(04:25):
of opportunity, and it is a it is a massive opportunity.
I think for folks that are investors in troubled assets,
you know, this is going to be a trillion dollar opportunity.
That's going to exist over the next few years, and
it's going to take a lot of time and money
to work out. If you think about this asset class
(04:50):
as just a massive restructuring, you know, it's going to
take a lot of new capital and it's going to
take a lot of write downs of existing positions.
Speaker 2 (05:00):
So when we look.
Speaker 5 (05:01):
At it, on the one hand, we kind of have,
you know, buying existing debt, and we're typically buying that
debt from banks, and that could be whole loans, it
could be performing loans, it could be you know, portfolios
of office office loans that are you know, currently paying today,
but the banks you know, may not want to have
(05:21):
to deal with them when they hit their maturity date
because they think they're underwater, so they'll shed those assets
today at a discount to par. We're also very active
buyers of m p ls or non performing loans, which
are kind of all of the other types of non
non commercial real estate types of loans that banks might hold.
(05:43):
We're seeing opportunities as well in securities, though we haven't
really seen it manifest itself yet in the CNBS securities.
We have seen some opportunity in in what what's called Sasby's,
which are single assets, single borrow or securitization. And then
of course there's there's great opportunities in the market today
(06:05):
because you've had this massive retraction in lending from from
the primary sources of liquidity to real estate, which was
small and regional sized banks. There's this vacuum now and
we can provide new money, we can provide new loans,
we can recapitalize you know, good assets that have bad
(06:26):
balance sheets at the end of the day, because not
all you know, not all assets in the real estate
world at least today are on fire, but a good
chunk of them are.
Speaker 3 (06:35):
So Josh, CNBS is looking pretty wide as it is,
but you don't think it's correctly priced yet. When do
you think when will you dive into that MRK piece
of the market, And what is your take on why
things might be mispriced?
Speaker 5 (06:51):
Well, you know, the the CNBS market. Well, first of all,
there's been a pretty strong rally in credit just over
the past month, and I think I think CNBS prices
have been kind of bid up, uh And I think
that you in the CNBS market, it's really about the
(07:13):
haves and the have nots. You really have high quality
assets with good sponsors that are gonna, like, you know,
maintain their value, that are going to maintain their their payments.
Speaker 2 (07:24):
And then you have this kind of.
Speaker 5 (07:26):
Other, you know, grouping of of properties that don't fall
into that category, which are really at risk. I think
the market has identified those kind of two classes of
assets that exist within c nbs and are pricing it
based on on on that. Where I think you're going
(07:49):
to have a change of the mindset is when you
start seeing some of those quote unquote high quality assets
or people or or properties that folks thought they would
never get back, or that the special service ser would
never have to extend or do some you know, egregious
modification on When they start seeing those higher quality properties
(08:10):
get into trouble and they start seeing sponsors handback the
keys on them, that's when I think you'll see a
real kind of shift in how people are underwriting and
approaching the CNBS market.
Speaker 1 (08:21):
There's also an impact we're hearing Josh on collateralized loan
obligations clos, the floating rate bridge loans being repackaged into
what they're calling cre clos. It's a bit of a mouthful,
but with interest rates still very high borrowers who took
out these loans in twenty twenty one twenty two are struggling,
and so the lenders who package them into creclos. We've
(08:42):
heard from a lot of people that your firm is
among those providing rescue lines of credit to issuers of creclos,
especially with banks retreating and closing warehouse lines. Is that
the case? How bad are things for cre clos?
Speaker 5 (08:55):
I mean, it's it's definitely a tough market for them,
is you know?
Speaker 2 (09:02):
I think I think we've been looking at it kind.
Speaker 5 (09:04):
Of stepping in where banks have been stepping out of
certain situations, not only in the real estate space, but
we've seen kind of other forward flow opportunities. So these
might be consumer finance companies or mortgage originators where they
may have kind of originated product and then directly securitized
(09:25):
it into the market. Now, since that that exit isn't available,
we're able to kind of step in between and become
an aggregator of those assets and then you know, we'll
put on a little bit of livered leverage today, generate
a nice return, and then when the markets do return,
you know, to normal, whether that's two or three years
from now, we'll exit those those properties. But with respect
(09:47):
to the cre kind of COLO and CDO market, there's
definitely issues with the bridge lending that's occurred there, and
I think that it will provide opportunities for like us
to come in and recapitalize those underlying assets and end
up taking kind of more of the upside. At the
(10:07):
end of the day, you'll have the barrowers that will
ultimately end up hanging on for a hope note or
want to continue to operate the asset for some sort
of economic excentive, but the bulk of the kind of
upside that they may have had in a particular project
will be transferred to the lenders of the new new
capital partner that comes in.
Speaker 3 (10:29):
Josh. Moving over to Europe, the real estate mark is
not looking great here either, and especially lately Germany has
been making a lot of headlines. What is your take
on the situation in Europe, in particular Germany.
Speaker 5 (10:42):
We've just started, I think kind of seeing some one
off opportunities in Germany. What I can talk about is
is kind of the activity that we've seen in the
NPL space, the non performing loan space, especially around kind
of the mediterrane countries there, so Portugal, Spain, Italy, Greece,
(11:05):
those markets we've we've been in those markets as a
as a buyer of mpls for two decades. We have
a great team over there, headed by Francesco Colesanti that
that runs that business. And you know, to give you
a sense, last year or I think two years ago, sorry,
(11:25):
three years ago, we originated call it seventy five million
euro of product in mpls.
Speaker 2 (11:33):
The year before last we.
Speaker 5 (11:35):
Did kind of eighty eight million euros, and then last
year we did north of five hundred and fifty million euros.
For twenty twenty three, and for twenty twenty four, we're
already looking at kind of sourcing north of three hundred million.
So the the amount of mpls that banks are shedding
(11:58):
and the volume in that market has just you know,
picked up ten x and I think that's a sign
of kind of the underlying stress that many of them
are facing and need to get rid of these you know,
these bad assets as quickly as they can.
Speaker 4 (12:13):
Josh, earlier, you mentioned the sort of trillion dollar opportunity
in real estate, which I was ecstatic to hear, obviously
as a real estate analyst, but then you talked about
the massive restructuring and clearly not so happy to hear
that as in my position, But I just wanted to
ask whether you could maybe shed like on what sectors
you think within real estate are most stressed. You've already
(12:36):
talked a lot about officers. Are there other areas that
you think maybe we could see more pain?
Speaker 2 (12:42):
Yeah?
Speaker 5 (12:43):
I mean, so you know, when we look at kind
of real estate valuations overall, I mean since twenty twenty two,
I think overall real estate values have come down like
twenty twenty five percent. You know, when you look at
kind of blick markets, it's maybe come down thirty percent.
(13:03):
And then within there you have you know, you have
some good assets and you have bad assets. You know,
office is facing this, you know, this headwind of people
you know, officing less, you know, working remotely, working from
alternative spaces. So that's definitely going to put pressure on rent.
And we've seen you know, office assets priced down, you know,
(13:26):
as much as fifty percent, and some of the you know,
B and C class suburban might be worth land value
at this point.
Speaker 2 (13:34):
It's it's it's pretty bad in that sector.
Speaker 5 (13:37):
But you know, it won't stop us from investing in
it because there's a price for everything. And if I
can you know, buy a performing office loan that may
have three or four years of duration for fifty or
sixty or seventy cents on the dollar, collect a coupon,
you know, for the next three or four years, and
sink my basis and even further, you know, I might
(13:58):
be close to land value the time I actually have to,
you know, redo that loan. Now, the banks don't want
to do that. They don't necessarily have the the infrastructure,
or the asset management or just the experience of restructuring
you know, large amounts of real estate portfolios. But in Fortress,
you know, this is kind of what we do and
(14:19):
what we've been doing for the past you know, twenty
two years, and we have that infrastructure and know how
in place, and it's not rocket science, but it does
take a lot of you know, investing in personnel, and
it does take a lot of technology and and and
infrastructure and expense. At the end of the day, I
(14:40):
think when you look at when you look at real
estate securities in the CNBS market, you have like a
trillion dollars that's coming due by twenty twenty five we
think half of those are troubled. And when I say
they're troubled, it means that kind of you know, as
(15:00):
of a year ago, those loans may have been at
like eighty percent loan to value just by the decrease
in value that was already realized. And so now with
the additional passage of time, you might be looking at
loans that are one hundred or even one hundred and
ten percent of the value. So you know, those those
(15:20):
issues can be dealt with. They're just not going to
be dealt with the par It's going to require somebody else,
you know, like us, to come in and buy those
at a discount.
Speaker 4 (15:30):
You talked about this sort of being your bread and
butter business. You've looked at the working these things out
over three or four years, and maybe the banks are
not able to do that, and we I guess we'll
come to the banks in a minute. But one of
the other issues I guess we've been facing is the
difference between so called prime or Class A type assets
(15:50):
and the not so prime assets. So in your view,
is there enough of an opportunity within the prime subsect
for you to is that the subject that you're looking
at or do you think that you need to look
at some of the non prime stuff to really get
the returns that you would like.
Speaker 5 (16:12):
Well, in the security space, we're definitely looking more towards
the prime. So we're looking at you know, attractive yields
i'd say kind of mid teen yields. But in assets,
you know that are you know, it could be the
best office building in San Francisco. I mean, you know,
it's got a great sponsor, it has a great rent role.
Speaker 2 (16:31):
They've got you know a.
Speaker 5 (16:32):
Lot of tenants that have signed up for good term.
You can buy some of the junior tranches in that.
It's pretty attractive yields, especially if you're looking at a
yield to maturity. And then even if you get a
couple of extensions built in there from the servicer, it's
still it's still a relatively kind of attractive risk and reward.
(16:53):
So we're looking at that on the security side, and
again that's primarily through Sasby's we're doing that, and then
on the whole loan side it will get a little murkier.
You know, we're we're going to buy you know, we
we have bought you know, probably a billion and a
half of performing office loans from financial institutions, and these
(17:20):
have you know, ranged anywhere from kind of fifty cents
on the dollar to sixty nine cents on the dollar.
But as I mentioned before, these are all performing today,
so you're clipping coupons on them today and sinking your
basis even further.
Speaker 2 (17:36):
And then when we buy these, you know.
Speaker 5 (17:39):
You might have a portfolio of twenty five or thirty loans.
You're coming up with an asset management and workout plan
for each one. And some of them, you know, may
have a good sponsor attached to it, so you know
that they're going to protect the asset. Some of them
may just be a you know, a single shingle kind
of owner or a family office, and you might not
(18:02):
have that ability to tap in. And so you're pricing
each one of those assets differently. You know, we might
price one property at twenty five cent recovery and we
might price another property at eighty cent recovery.
Speaker 2 (18:16):
But blended together.
Speaker 5 (18:17):
You know, we're getting like fifty five cents on the
dollar and our bid. You know, before we weren't getting
any traction on having banks transact at these levels, but
now I think you know, reality has sent set in
and you're you're seeing those opportunities come forward because the
(18:37):
banks fear that they're going to decline further and just
want to kind of take the hit.
Speaker 2 (18:44):
They built up the reserves.
Speaker 5 (18:45):
They're not lending any more money, right, so any any
excess spread they're generating, they're putting towards their balance sheet,
and once they hit that point, they're able to dispose
of the assets. I think, as I mentioned before, I
think that the the interconnectivity between banks and the real
(19:05):
estate market is going to continue for the next couple
of years, and you're going to see more of you know,
this consolidation and or liquidation of US banks.
Speaker 2 (19:22):
You know, in during the.
Speaker 5 (19:25):
Savings and loans crisis and the the RTC days, which
which I came into at the very beginning of my career,
you had almost seven hundred and fifty banks fail in
the US. During the Global Financial Crisis, you had four
hundred banks fail in the US. We've had five so
far with this one, and it was the quickest and
largest interest rate move that we've had in forty five years.
(19:50):
I just think a lot more eggs are going to
get broken at the end of the day, and I
think some of those situations are going to be resolved
by the FDIC by doing these shotgun weddings where they're
putting two institutions together and they're coming up with a
loss sharing structure, and others are going to be resolved
by fully just liquidating the banks.
Speaker 2 (20:12):
And you're starting to see that.
Speaker 5 (20:14):
I mean, there's you know, the FDIC is holding auctions
all the times of different loan pools that they've effectively
kind of repossessed, and and you know, if you were
to bid on those assets without underlying support or some
back end lost sharing agreement from the FDICE, I think
they would price much much cheaper than they have been.
Speaker 1 (20:34):
The banks that are affected, though, Josh, when we talked
to the optimists about this, they say, it's just this
very small community banks. It's nothing systemic, it's nothing that important,
and these things will all this will all blow over
without a widespread crisis. Do you think it's bigger than that.
Speaker 5 (20:48):
I mean, I don't think there's a systemic risk at
the end of the day. But to say it's just
going to be limited to small banks in today's world,
where you can have a run on a bank up
and kind of manifest itself over you know, over two
or three days, because people are taking money out with
(21:09):
their with their cell phones. I mean, that's just a
new dynamic and the stress that's involved with that on
these banks, I think can can produce outcomes that people
can't necessarily predict. But I mean, look at the banks
that have already gone down. I mean they were big,
mult you know, two hundred and fifty billion dollar institutions.
(21:30):
These are not small banks. Now, they had other issues,
you know, they they they went long, you know, on
the wrong side of a rate trade, and they were
exposed to you know, huge amounts of uninsured deposits. But
I think the underlying restructuring that's going to occur within
the real estate market is going to continually drag on
(21:53):
small and regional banks for many years, and it's going
to be a process.
Speaker 2 (21:57):
It's going to be a churning process.
Speaker 5 (21:59):
And every now and then you're going to have a
you know, New York community bank pop up where where
people were like, gosh, you know, we we took a
you know, a fifty million dollar reserve one quarter, and
now we're increasing that by ten x the next quarter.
Speaker 3 (22:15):
Josh Fortress is one of the few firms that have
tried to buy a bank out of liquidation through in
this new era the last few years, and the FDIC
and bank regulators don't seem too keen on private equity
hedge funds getting How have you found that process? What
is your thought on on non banks?
Speaker 5 (22:38):
Yeah, I mean, Lisa, I think I think you're exactly right.
I don't think the government regulators liked the idea of
private capital making profit off of you know, kind of
the woes of these these banks, especially when they were
supposed to be regulated very efficiently and closely by government entities.
Speaker 2 (23:02):
So I would say that.
Speaker 5 (23:05):
At least to date, there's been a lot of reticence
to to deal with folks like US and and other
private equity firms. And I think the the processes that
they've employed have been fairly schizophrenic as far as how
they've approached these situations.
Speaker 2 (23:23):
You know, you've you.
Speaker 5 (23:25):
Had them make announcements, you know, on a on a Friday,
that they were guaranteeing all the deposits, not just the minimums,
and you had you know, you know, these these these
mergers between different institutions occurring over a weekend. But I
think that the underlying stress here is just so big,
as I said, you know, a multi trillion dollar problem
(23:49):
that they'll eventually get to a point where where I
think they're just going to have to utilize private capital
to help clean up the mess and to help recapitalize
the system.
Speaker 3 (24:00):
What are you doing to get ready for that?
Speaker 5 (24:02):
I mean, you know, we we we are you know,
like like I said, we're kind of we're interacting with
those banks that have built up enough capital reserves that
they can start selling assets at distress prices. So you know,
we're going to continue to engage on those kind of
bilateral conversations, and we'll continue to buy assets, uh, directly
(24:23):
from financial institutions before they get you know, taken over
by the FD I see. But you know, the next
the next bank blow up or the next liquidation you
see out there will be one of the bidders again.
And you know, we might we might take on a
bank charter at some point and and uh and uh
you know, or team up with a bank. You know
(24:43):
that we could invest in on a minority basis to
help accomplish that.
Speaker 2 (24:49):
But you know, we'll just have to see how the
process works out.
Speaker 4 (24:53):
Given what you're saying about the risks in the banking
sector and the times that we will have many more
failures and so on. Is there are also then a
risk that we may not have seen the bottom in
terms of real estate prices, or that the workouts that
you talked about taking to three or four years might
actually take much much longer. And what would your appetite
then be if those workouts were to be extended or
(25:15):
if we haven't seen the bottom in terms of valuations.
Speaker 2 (25:19):
Well, that's that's how we're kind of approaching it.
Speaker 5 (25:21):
I mean, you know, going going back to the the FDA,
going back to the savings and loans crisis, in the
RTC days, you know, you had commercial real estate prices
not increase for five or six years. You know, they
didn't go down, and they crashed down, and then they
just stayed there and were stuck there for an extended
(25:42):
period of time.
Speaker 2 (25:43):
So I think, you know, I think.
Speaker 5 (25:45):
We need to assume that you could have a very
similar situation where, you know, when you do hit the
bottom and I'm not saying, you know, to your point
that we are at the bottom today, that you could have,
you know, this extended kind of dignated period of time
where you just don't see increases in values, which frankly
people have enjoyed for the last twenty years because interest
(26:07):
rates have been kept so low and you know, been
reduced from much more moderate levels. So you know, when
we're buying an asset and we're pricing an asset, we're
making those assumptions that there's not going to be an.
Speaker 2 (26:20):
Easy exit for us.
Speaker 5 (26:21):
You know, i'd say the last you know, two distress cycles,
you know, whether it's COVID or it's the global financial crisis,
for you know, for operators like US, it's it was
very unusual because we were underwriting and assessing assets assuming
you were going to have this long duration, you know,
five year recession and prices.
Speaker 2 (26:43):
Were going to crash.
Speaker 5 (26:44):
And then in both those cases, you know, they weren't
true distress cycles because the central bank, you know, blew
their horn and they came running to the rescue and
flooded the world with liquidity and low interest rates. You know,
they can't do that this time around. So I would
argue that what you're going to see for the next
couple of years is a traditional distress cycle, and those
(27:07):
are as we know our multi year cycles where it
takes a long time to work through. You know, you
might not have crashes, but you're certainly going to have
bumps along the way, and and it's going to take
time and and and a lot of capital and a
lot of kind of losses to be realized.
Speaker 4 (27:26):
There's one of the things that you mentioned was potentially
being a minority investor in a bank of some sort
at some point. But can I rather chiefly take liberty
to ask, could we see a Fortress bank in twelve
to twenty four months.
Speaker 2 (27:44):
No, I don't think so, we don't.
Speaker 5 (27:48):
I mean, there's there's there's I think other ways that
we can make great returns for investors on a risk
adjusted basis by investing in the underlying as it's then
having to take on the burden of you know, holding
deposits in a true regulatory system that it surrounds that.
You know, we're active lenders in the market through our
(28:11):
private credit business, in our direct lending business, and you
know that business has grown tremendously, just like the overall
market has. And you know it's it's not because you know,
everybody's just pushing dollars out the door. It's because there's
a need for it. There's the demand for it because
traditional sources of lending have closed up a shop.
Speaker 1 (28:33):
So when we look at Fortress on the terminal, Josh,
We've seen everywhere, you know, from the guided networks in
distress corporates to a twelve billion dollar high speed rail
project connecting Las Vegas to southern California. You're also in
a joint venture in Greece buying debt managed by the
country's credit servicing firms at a discount. There are all
(28:55):
sorts of things that are happening. What's the best relative
value for you? Where's the opportune TV you have to
pick one thing?
Speaker 5 (29:02):
Well, you know, I think, I think what we what
we think is one of our strengths at the end
of the day is our ability to to listen to
what the market's ultimately telling us. You know, the the
opportunity sets that exist out there move around over time.
You know, if we ever get stuck in a lane
and we're just investing in you know, corporate distress debt
(29:25):
and all of a sudden, you know, you know, credit
rallies and and we have nothing to buy, it's not
a great business model for us. So we pick careful
attention to kind of listening to what the market's telling
us and trying to find those opportunities that do.
Speaker 2 (29:41):
Provide that best risk of reward.
Speaker 5 (29:43):
And sometimes those opportunities exist in the public markets. So
for example, you know, the three months after the COVID lockdown,
so like you know, March April, may you know June.
Speaker 2 (29:55):
I mean, we we didn't.
Speaker 5 (29:56):
Do one private investment over that period of time, and
we pushed billions of dollars out the door to buy
lots of great you know correct, you know, cheaply priced
liquid assets. And as the market's recovered, then we kind
of get more of a balance between private investing and
public investing, and then we move around between.
Speaker 2 (30:17):
Different asset classes.
Speaker 5 (30:19):
Some of those are are generated by the market, for example,
the real estate opportunity that exists out there, or the
lending opportunity through our private credit business, or you know,
certain may perhaps distress pe opportunities. And at the same time,
we have the ability to kind of generate non market
(30:41):
correlated returns through kind of businesses that we've that we've
put together and grown up within Fortress, and those might
be things like our legal assets business or our I
P business, which you know, for the most part aren't
affected by interest rates or the overall market. So you
kind of take all that together and bundle it together,
(31:02):
and you can come up with, you know, pretty resilient
funds at the end of the day that have terrific
downside protection, but also you know, can be very opportunistic
when the market you know, shows us that fat pitch.
Speaker 1 (31:15):
But at the beginning you mentioned that you kind of
got the rates call right when everyone else is wrong.
Are there any other big contrarian calls you've got right
now that you think everyone else is wrong on?
Speaker 5 (31:25):
Well, you know, making calls is always a bad idea,
at least I found that to be my experience. But
I you know, I think I think the FED has
done a pretty.
Speaker 2 (31:38):
Good job of managing.
Speaker 5 (31:41):
Managing this economy over the past eighteen months. I think
if you listen to them and the worst they were
coming out of their mouths, you knew exactly what was
going to happen and what was going on.
Speaker 2 (31:55):
You know, there were a lot.
Speaker 5 (31:57):
Of naysayers a year ago about you know, recession was coming,
and you know we're going to fall off a cliff
and we're going to have the greatest storm and the
century of of of financial conditions, and you know, all
these all these bad things. But when we when we
turned inside and we looked at our portfolios and we
looked at the companies that we were lending to, and
(32:17):
we looked at the things that we owned, you know,
we we didn't see that, you know, I mean, we
have thousands of borrowers that that existed Fortress and even
thousands more that we serviced through you know, other servicing
arrangements that we may have on a global basis, and
we just weren't seeing that that potential. So you know,
(32:39):
I've I hear the calls again for another recession, you know,
but again we're not necessarily seeing it and our our
underlying loans and businesses. I'm keeping a very close eye
on the labor market, and I think as long as
the labor market holds together, I think as long as
you have unemployment at this level, I think inflation is
(33:01):
going to be stubborn, and I think the chance of
you know, falling into a recession is going to be lower.
Now that said, you know, we underwrite every loan, we
underwrite every asset we we buy on a pretty draconian
set of assumptions.
Speaker 2 (33:20):
Like we were were geared to.
Speaker 5 (33:22):
Only assume the worst and if something good happens, then
that's gravy on top for us. So we uh, you know,
we we have a view towards the downside, but I
don't think things are, you know, necessarily as dire as
as perhaps folks say.
Speaker 1 (33:38):
It is great stuff. Josh pack Co, CEO and managing
partner at Fortress Investment Group. Many thanks for coming on
the credit edge.
Speaker 2 (33:45):
Cheers, thanks for having me.
Speaker 1 (33:47):
Also big thanks Lisa Leeve Bloomberg News in London. We'lliant
to see you again.
Speaker 2 (33:50):
Thanks.
Speaker 1 (33:51):
You read all of Lisa's great scoops on the Bloomberg
terminal and of course at Bloomberg dot com. So tolu
alamutu at Bloomberg Intelligence. There's a ton of worry right
now about commercial real estate, as we just discussed with Josh.
But where are the pain points? What are we most concerned?
How can we see this crisis on folding.
Speaker 2 (34:10):
I think that.
Speaker 4 (34:13):
We have in some ways seen the crisis unfolding in
some parts of the real estate bond market and also
the equity market. So if you look at where some
of the real estate securities trade now, they are the
highest yielding in the investment grade universe, and they have
been that way for some time now, which I guess
(34:35):
tells you that people are not yet as comfortable with
real estate issuer as they are with many of the
others within the investment grade universe. So in general, real
estate names trade quite wide, so I think there is
pain all around in terms of where securities are trading,
whether you're looking at debt or at equity, in terms
(34:56):
of the sectors. So the that always comes up, and
obviously also came up in the conversation with Fortress is
the office sector, which is under particular pressure because of
sustained work from home practices. So you know, vacancies in
some areas are still high, but there is definitely a
(35:18):
difference between you know, the so called prime and sort
of not prime sectors within office itself, but offices. I
think where the office sector is where people I think
are most worried still, and.
Speaker 1 (35:32):
That's obviously great for Fortress. I mean, Josh Pack was just,
you know, really very excited about the opportunity, but it's
going to hurt somebody. He mentions the banks as big
loser essentially from this. Are there any other potential casualties
when other investors involved. Are there other areas that you
know there might be some fallout in terms of losses.
Speaker 4 (35:50):
So I think we've already seen some losses in terms
of the holders of the office and other real estate
security like the and so on. And yes, he is
right that some banks will have to raise provisions, have
to take losses against the exposures that they have, but
it's all across the financial services sector. So whether that
(36:15):
ensurer as managed and so on, you might see pain there.
But I think the focus right now is really on
what is going on in the banking sector, primarily because
the regulators all around the world basically are taking a
closer look or seem to have been taking a closer
look at banks exposures to real estate, and in some
(36:36):
cases that's meaning that those lenders have to increase privinance
quite significantly against the exposures that they have, and that's
leading to losses and to the headlines that we have
been talking about.
Speaker 1 (36:48):
And the last time we spoke to we talked a
lot about Sweden and Germany is kind of hot spots.
Are those still the places that in Europe least things
are kicking off most definitely?
Speaker 4 (36:59):
So we we have continued to monitor what's going on
in both those countries, but also Austria has come up
because of a name called Signa, For Signa is a
very complex real estate group with multiple entities within it
that have cross shareholdings. In some cases they act as
(37:19):
land ords, some cases a developer, some cases even as tenants.
So that entity or various parts of that NC are
going through various types of restructuring right now. So that's
one that has received a lot of focus. But definitely
Germany still a focus for people. We had one issuer
(37:40):
recently say that they believe that residential real estate prices
could fall as much as thirty percent or could be
down as much as thirty percent from the peaks, which
is clearly a lot And there's still worries about the
office sector there. And definitely Sweden, but I'd say in
Sweden the focus is still on a few issuers, not
(38:02):
necessarily be the whole sector. So SBB is one that
always comes up and in some conversations on Sweden.
Speaker 1 (38:13):
Thank you Tolo Alama two at Bloomberg Intelligence, thank you
so much for joining us. Thank you James, and check
out all of Tolly's research on the Bloomberg Terminal. It's
great stuff. I'm just going to spell your name so
people can can absolutely find it. T O l U
A l A m U t U you must must
read it. It's really must read stuff. And also check
out her webinars. They're also great, and thanks thanks again
(38:36):
for coming on the show. Thank you, and thanks again
to Josh Peck at Fortress and Lisa Lee from Bloomberg News.
Read all of Lisa's great scoops on The Terminal and
at Bloomberg dot com, and please do subscribe wherever you
get your podcasts. We're on Apple, Spotify and all good
podcast providers. Give us a review, tell your friends, or
email me directly at Jcrumby eight at Bloomberg dot net.
(38:57):
I'm James Crumby. It's been a pleasure having you join
us again next week on the Credit Edge.
Hello, Welcome to The Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Josh Pack, co
CEO and managing partner at Fortress Investment Group.
Speaker 2 (00:30):
How are you, Josh?
Speaker 1 (00:33):
Very good, Thank you, Thanks so much for joining us today.
We're excited to dig into your credit market views. We're
also delighted to welcome back Lisa Lee, who covers credit
markets from London for Bloomberg News. Thanks for coming on
the show.
Speaker 3 (00:44):
Delighted to be here, James.
Speaker 1 (00:45):
And from Bloomberg Intelligence. Excellent to see Tollu Ala Mutu,
also in London. Welcome back Tollu.
Speaker 4 (00:51):
Thank you, James. Great to be here.
Speaker 1 (00:53):
So let's start with you, Josh. Great to have you
on the Credit Edge. We're going to get into the
specifics of your portfolio and where you see the big
opportunities in global credit. But first let's get your macro view.
Inflation is back on the agenda. It hasn't yet gone away,
and that will determine how far and how fast central
banks can cut rates. Corporate debt rallied very strong at
(01:13):
the end of last year and as a significant amount
of twenty twenty four easing got priced in starting as
soon as March, which seems seemed very likely a done
deal until very very recently, that's all being hastily revised
and markets are selling off just as we're seeing corporate
supply really ramping up. So where do we go from here?
Josh guests on this show keep telling us this is
(01:35):
a great credit market, tons of opportunity out there. What's
your view?
Speaker 5 (01:38):
Well, I, you know, I'm not the greatest macroeconomist in
the world, but we've been right, I think so far
as we've been thinking about rates, and you know, basically
just listening to what the FED has been saying. The
Fed's been very clear that, you know, they were going
to raise rates and they were going to do it
quickly to stamp out inflation. And I think as long
(02:01):
as we saw the labor markets continue to hold together,
you know, we we kind of believe that they were
going to continue along that path. And at the beginning
of this year, when you know, we saw a lot
of optimism priced into the forward curve with all these
you know, rate reductions that people are expecting down the road.
I just don't think they're going to materialize.
Speaker 2 (02:22):
You know.
Speaker 5 (02:23):
I told one of my co workers that when we
got back to work after the holidays that and we
saw a four percent ten year, I said, that's the
that's the low tick for the year. We're going to
end up higher at the end of the year. Whether
that's four and a half or five percent.
Speaker 2 (02:36):
I don't know.
Speaker 5 (02:38):
But our view is we're we're going to be in
an elevated interest rate environment for a long period of time,
and that the you know, one percent free money environment
is a thing of the past and we're not going
to see that again.
Speaker 1 (02:53):
So you're definitely into in a minority that I just
wanted to get straight into one sector that everyone is
talking about quite worried about the moment. Real estate, Josh,
that seems to be a big worry, especially on the
commercial side. Loans are starting to trade, valuations of dropping,
banks are taking a hit.
Speaker 5 (03:09):
What happens next, Well, I mean, real estate is a
concern because it needs to be a concern, and there
is a there is an interconnectivity between real estate and banks.
And you know, frankly, you're seeing that kind of unwind.
You've been seeing that app that unwind over the past,
(03:31):
you know, twelve months with the mini bank crisis last spring,
and then of course we were reminded the banks aren't
in great shape from when we saw a New York
Community Bank you know, start.
Speaker 2 (03:41):
To fall apart as well.
Speaker 5 (03:43):
And that was actually one of the rescue banks that
you know, the fd I see, you know, put together
in a shotgun ready shotgun wedding with Signature Bank to
take over all of their troubled assets. So I think
it's really interesting that you know, they kind of mispriced
the assets that they were acquiring. The fdi C may
(04:03):
have mispriced the assets that they are acquiring. And you know,
the folks like us that we're also putting bids in
on those portfolios that we're you know, pricing that stuff
at fifty and sixty cents on the dollar, I think,
you know, are looking to be more correct in today's environment.
But when we think about real estate, it's kind of
it's kind of falling into kind of three main buckets
(04:25):
of opportunity, and it is a it is a massive opportunity.
I think for folks that are investors in troubled assets,
you know, this is going to be a trillion dollar opportunity.
That's going to exist over the next few years, and
it's going to take a lot of time and money
to work out. If you think about this asset class
(04:50):
as just a massive restructuring, you know, it's going to
take a lot of new capital and it's going to
take a lot of write downs of existing positions.
Speaker 2 (05:00):
So when we look.
Speaker 5 (05:01):
At it, on the one hand, we kind of have,
you know, buying existing debt, and we're typically buying that
debt from banks, and that could be whole loans, it
could be performing loans, it could be you know, portfolios
of office office loans that are you know, currently paying today,
but the banks you know, may not want to have
(05:21):
to deal with them when they hit their maturity date
because they think they're underwater, so they'll shed those assets
today at a discount to par. We're also very active
buyers of m p ls or non performing loans, which
are kind of all of the other types of non
non commercial real estate types of loans that banks might hold.
(05:43):
We're seeing opportunities as well in securities, though we haven't
really seen it manifest itself yet in the CNBS securities.
We have seen some opportunity in in what what's called Sasby's,
which are single assets, single borrow or securitization. And then
of course there's there's great opportunities in the market today
(06:05):
because you've had this massive retraction in lending from from
the primary sources of liquidity to real estate, which was
small and regional sized banks. There's this vacuum now and
we can provide new money, we can provide new loans,
we can recapitalize you know, good assets that have bad
(06:26):
balance sheets at the end of the day, because not
all you know, not all assets in the real estate
world at least today are on fire, but a good
chunk of them are.
Speaker 3 (06:35):
So Josh, CNBS is looking pretty wide as it is,
but you don't think it's correctly priced yet. When do
you think when will you dive into that MRK piece
of the market, And what is your take on why
things might be mispriced?
Speaker 5 (06:51):
Well, you know, the the CNBS market. Well, first of all,
there's been a pretty strong rally in credit just over
the past month, and I think I think CNBS prices
have been kind of bid up, uh And I think
that you in the CNBS market, it's really about the
(07:13):
haves and the have nots. You really have high quality
assets with good sponsors that are gonna, like, you know,
maintain their value, that are going to maintain their their payments.
Speaker 2 (07:24):
And then you have this kind of.
Speaker 5 (07:26):
Other, you know, grouping of of properties that don't fall
into that category, which are really at risk. I think
the market has identified those kind of two classes of
assets that exist within c nbs and are pricing it
based on on on that. Where I think you're going
(07:49):
to have a change of the mindset is when you
start seeing some of those quote unquote high quality assets
or people or or properties that folks thought they would
never get back, or that the special service ser would
never have to extend or do some you know, egregious
modification on When they start seeing those higher quality properties
(08:10):
get into trouble and they start seeing sponsors handback the
keys on them, that's when I think you'll see a
real kind of shift in how people are underwriting and
approaching the CNBS market.
Speaker 1 (08:21):
There's also an impact we're hearing Josh on collateralized loan
obligations clos, the floating rate bridge loans being repackaged into
what they're calling cre clos. It's a bit of a mouthful,
but with interest rates still very high borrowers who took
out these loans in twenty twenty one twenty two are struggling,
and so the lenders who package them into creclos. We've
(08:42):
heard from a lot of people that your firm is
among those providing rescue lines of credit to issuers of creclos,
especially with banks retreating and closing warehouse lines. Is that
the case? How bad are things for cre clos?
Speaker 5 (08:55):
I mean, it's it's definitely a tough market for them,
is you know?
Speaker 2 (09:02):
I think I think we've been looking at it kind.
Speaker 5 (09:04):
Of stepping in where banks have been stepping out of
certain situations, not only in the real estate space, but
we've seen kind of other forward flow opportunities. So these
might be consumer finance companies or mortgage originators where they
may have kind of originated product and then directly securitized
(09:25):
it into the market. Now, since that that exit isn't available,
we're able to kind of step in between and become
an aggregator of those assets and then you know, we'll
put on a little bit of livered leverage today, generate
a nice return, and then when the markets do return,
you know, to normal, whether that's two or three years
from now, we'll exit those those properties. But with respect
(09:47):
to the cre kind of COLO and CDO market, there's
definitely issues with the bridge lending that's occurred there, and
I think that it will provide opportunities for like us
to come in and recapitalize those underlying assets and end
up taking kind of more of the upside. At the
(10:07):
end of the day, you'll have the barrowers that will
ultimately end up hanging on for a hope note or
want to continue to operate the asset for some sort
of economic excentive, but the bulk of the kind of
upside that they may have had in a particular project
will be transferred to the lenders of the new new
capital partner that comes in.
Speaker 3 (10:29):
Josh. Moving over to Europe, the real estate mark is
not looking great here either, and especially lately Germany has
been making a lot of headlines. What is your take
on the situation in Europe, in particular Germany.
Speaker 5 (10:42):
We've just started, I think kind of seeing some one
off opportunities in Germany. What I can talk about is
is kind of the activity that we've seen in the
NPL space, the non performing loan space, especially around kind
of the mediterrane countries there, so Portugal, Spain, Italy, Greece,
(11:05):
those markets we've we've been in those markets as a
as a buyer of mpls for two decades. We have
a great team over there, headed by Francesco Colesanti that
that runs that business. And you know, to give you
a sense, last year or I think two years ago, sorry,
(11:25):
three years ago, we originated call it seventy five million
euro of product in mpls.
Speaker 2 (11:33):
The year before last we.
Speaker 5 (11:35):
Did kind of eighty eight million euros, and then last
year we did north of five hundred and fifty million euros.
For twenty twenty three, and for twenty twenty four, we're
already looking at kind of sourcing north of three hundred million.
So the the amount of mpls that banks are shedding
(11:58):
and the volume in that market has just you know,
picked up ten x and I think that's a sign
of kind of the underlying stress that many of them
are facing and need to get rid of these you know,
these bad assets as quickly as they can.
Speaker 4 (12:13):
Josh, earlier, you mentioned the sort of trillion dollar opportunity
in real estate, which I was ecstatic to hear, obviously
as a real estate analyst, but then you talked about
the massive restructuring and clearly not so happy to hear
that as in my position, But I just wanted to
ask whether you could maybe shed like on what sectors
you think within real estate are most stressed. You've already
(12:36):
talked a lot about officers. Are there other areas that
you think maybe we could see more pain?
Speaker 2 (12:42):
Yeah?
Speaker 5 (12:43):
I mean, so you know, when we look at kind
of real estate valuations overall, I mean since twenty twenty two,
I think overall real estate values have come down like
twenty twenty five percent. You know, when you look at
kind of blick markets, it's maybe come down thirty percent.
(13:03):
And then within there you have you know, you have
some good assets and you have bad assets. You know,
office is facing this, you know, this headwind of people
you know, officing less, you know, working remotely, working from
alternative spaces. So that's definitely going to put pressure on rent.
And we've seen you know, office assets priced down, you know,
(13:26):
as much as fifty percent, and some of the you know,
B and C class suburban might be worth land value
at this point.
Speaker 2 (13:34):
It's it's it's pretty bad in that sector.
Speaker 5 (13:37):
But you know, it won't stop us from investing in
it because there's a price for everything. And if I
can you know, buy a performing office loan that may
have three or four years of duration for fifty or
sixty or seventy cents on the dollar, collect a coupon,
you know, for the next three or four years, and
sink my basis and even further, you know, I might
(13:58):
be close to land value the time I actually have to,
you know, redo that loan. Now, the banks don't want
to do that. They don't necessarily have the the infrastructure,
or the asset management or just the experience of restructuring
you know, large amounts of real estate portfolios. But in Fortress,
you know, this is kind of what we do and
(14:19):
what we've been doing for the past you know, twenty
two years, and we have that infrastructure and know how
in place, and it's not rocket science, but it does
take a lot of you know, investing in personnel, and
it does take a lot of technology and and and
infrastructure and expense. At the end of the day, I
(14:40):
think when you look at when you look at real
estate securities in the CNBS market, you have like a
trillion dollars that's coming due by twenty twenty five we
think half of those are troubled. And when I say
they're troubled, it means that kind of you know, as
(15:00):
of a year ago, those loans may have been at
like eighty percent loan to value just by the decrease
in value that was already realized. And so now with
the additional passage of time, you might be looking at
loans that are one hundred or even one hundred and
ten percent of the value. So you know, those those
(15:20):
issues can be dealt with. They're just not going to
be dealt with the par It's going to require somebody else,
you know, like us, to come in and buy those
at a discount.
Speaker 4 (15:30):
You talked about this sort of being your bread and
butter business. You've looked at the working these things out
over three or four years, and maybe the banks are
not able to do that, and we I guess we'll
come to the banks in a minute. But one of
the other issues I guess we've been facing is the
difference between so called prime or Class A type assets
(15:50):
and the not so prime assets. So in your view,
is there enough of an opportunity within the prime subsect
for you to is that the subject that you're looking
at or do you think that you need to look
at some of the non prime stuff to really get
the returns that you would like.
Speaker 5 (16:12):
Well, in the security space, we're definitely looking more towards
the prime. So we're looking at you know, attractive yields
i'd say kind of mid teen yields. But in assets,
you know that are you know, it could be the
best office building in San Francisco. I mean, you know,
it's got a great sponsor, it has a great rent role.
Speaker 2 (16:31):
They've got you know a.
Speaker 5 (16:32):
Lot of tenants that have signed up for good term.
You can buy some of the junior tranches in that.
It's pretty attractive yields, especially if you're looking at a
yield to maturity. And then even if you get a
couple of extensions built in there from the servicer, it's
still it's still a relatively kind of attractive risk and reward.
(16:53):
So we're looking at that on the security side, and
again that's primarily through Sasby's we're doing that, and then
on the whole loan side it will get a little murkier.
You know, we're we're going to buy you know, we
we have bought you know, probably a billion and a
half of performing office loans from financial institutions, and these
(17:20):
have you know, ranged anywhere from kind of fifty cents
on the dollar to sixty nine cents on the dollar.
But as I mentioned before, these are all performing today,
so you're clipping coupons on them today and sinking your
basis even further.
Speaker 2 (17:36):
And then when we buy these, you know.
Speaker 5 (17:39):
You might have a portfolio of twenty five or thirty loans.
You're coming up with an asset management and workout plan
for each one. And some of them, you know, may
have a good sponsor attached to it, so you know
that they're going to protect the asset. Some of them
may just be a you know, a single shingle kind
of owner or a family office, and you might not
(18:02):
have that ability to tap in. And so you're pricing
each one of those assets differently. You know, we might
price one property at twenty five cent recovery and we
might price another property at eighty cent recovery.
Speaker 2 (18:16):
But blended together.
Speaker 5 (18:17):
You know, we're getting like fifty five cents on the
dollar and our bid. You know, before we weren't getting
any traction on having banks transact at these levels, but
now I think you know, reality has sent set in
and you're you're seeing those opportunities come forward because the
(18:37):
banks fear that they're going to decline further and just
want to kind of take the hit.
Speaker 2 (18:44):
They built up the reserves.
Speaker 5 (18:45):
They're not lending any more money, right, so any any
excess spread they're generating, they're putting towards their balance sheet,
and once they hit that point, they're able to dispose
of the assets. I think, as I mentioned before, I
think that the the interconnectivity between banks and the real
(19:05):
estate market is going to continue for the next couple
of years, and you're going to see more of you know,
this consolidation and or liquidation of US banks.
Speaker 2 (19:22):
You know, in during the.
Speaker 5 (19:25):
Savings and loans crisis and the the RTC days, which
which I came into at the very beginning of my career,
you had almost seven hundred and fifty banks fail in
the US. During the Global Financial Crisis, you had four
hundred banks fail in the US. We've had five so
far with this one, and it was the quickest and
largest interest rate move that we've had in forty five years.
(19:50):
I just think a lot more eggs are going to
get broken at the end of the day, and I
think some of those situations are going to be resolved
by the FDIC by doing these shotgun weddings where they're
putting two institutions together and they're coming up with a
loss sharing structure, and others are going to be resolved
by fully just liquidating the banks.
Speaker 2 (20:12):
And you're starting to see that.
Speaker 5 (20:14):
I mean, there's you know, the FDIC is holding auctions
all the times of different loan pools that they've effectively
kind of repossessed, and and you know, if you were
to bid on those assets without underlying support or some
back end lost sharing agreement from the FDICE, I think
they would price much much cheaper than they have been.
Speaker 1 (20:34):
The banks that are affected, though, Josh, when we talked
to the optimists about this, they say, it's just this
very small community banks. It's nothing systemic, it's nothing that important,
and these things will all this will all blow over
without a widespread crisis. Do you think it's bigger than that.
Speaker 5 (20:48):
I mean, I don't think there's a systemic risk at
the end of the day. But to say it's just
going to be limited to small banks in today's world,
where you can have a run on a bank up
and kind of manifest itself over you know, over two
or three days, because people are taking money out with
(21:09):
their with their cell phones. I mean, that's just a
new dynamic and the stress that's involved with that on
these banks, I think can can produce outcomes that people
can't necessarily predict. But I mean, look at the banks
that have already gone down. I mean they were big,
mult you know, two hundred and fifty billion dollar institutions.
(21:30):
These are not small banks. Now, they had other issues,
you know, they they they went long, you know, on
the wrong side of a rate trade, and they were
exposed to you know, huge amounts of uninsured deposits. But
I think the underlying restructuring that's going to occur within
the real estate market is going to continually drag on
(21:53):
small and regional banks for many years, and it's going
to be a process.
Speaker 2 (21:57):
It's going to be a churning process.
Speaker 5 (21:59):
And every now and then you're going to have a
you know, New York community bank pop up where where
people were like, gosh, you know, we we took a
you know, a fifty million dollar reserve one quarter, and
now we're increasing that by ten x the next quarter.
Speaker 3 (22:15):
Josh Fortress is one of the few firms that have
tried to buy a bank out of liquidation through in
this new era the last few years, and the FDIC
and bank regulators don't seem too keen on private equity
hedge funds getting How have you found that process? What
is your thought on on non banks?
Speaker 5 (22:38):
Yeah, I mean, Lisa, I think I think you're exactly right.
I don't think the government regulators liked the idea of
private capital making profit off of you know, kind of
the woes of these these banks, especially when they were
supposed to be regulated very efficiently and closely by government entities.
Speaker 2 (23:02):
So I would say that.
Speaker 5 (23:05):
At least to date, there's been a lot of reticence
to to deal with folks like US and and other
private equity firms. And I think the the processes that
they've employed have been fairly schizophrenic as far as how
they've approached these situations.
Speaker 2 (23:23):
You know, you've you.
Speaker 5 (23:25):
Had them make announcements, you know, on a on a Friday,
that they were guaranteeing all the deposits, not just the minimums,
and you had you know, you know, these these these
mergers between different institutions occurring over a weekend. But I
think that the underlying stress here is just so big,
as I said, you know, a multi trillion dollar problem
(23:49):
that they'll eventually get to a point where where I
think they're just going to have to utilize private capital
to help clean up the mess and to help recapitalize
the system.
Speaker 3 (24:00):
What are you doing to get ready for that?
Speaker 5 (24:02):
I mean, you know, we we we are you know,
like like I said, we're kind of we're interacting with
those banks that have built up enough capital reserves that
they can start selling assets at distress prices. So you know,
we're going to continue to engage on those kind of
bilateral conversations, and we'll continue to buy assets, uh, directly
(24:23):
from financial institutions before they get you know, taken over
by the FD I see. But you know, the next
the next bank blow up or the next liquidation you
see out there will be one of the bidders again.
And you know, we might we might take on a
bank charter at some point and and uh and uh
you know, or team up with a bank. You know
(24:43):
that we could invest in on a minority basis to
help accomplish that.
Speaker 2 (24:49):
But you know, we'll just have to see how the
process works out.
Speaker 4 (24:53):
Given what you're saying about the risks in the banking
sector and the times that we will have many more
failures and so on. Is there are also then a
risk that we may not have seen the bottom in
terms of real estate prices, or that the workouts that
you talked about taking to three or four years might
actually take much much longer. And what would your appetite
then be if those workouts were to be extended or
(25:15):
if we haven't seen the bottom in terms of valuations.
Speaker 2 (25:19):
Well, that's that's how we're kind of approaching it.
Speaker 5 (25:21):
I mean, you know, going going back to the the FDA,
going back to the savings and loans crisis, in the
RTC days, you know, you had commercial real estate prices
not increase for five or six years. You know, they
didn't go down, and they crashed down, and then they
just stayed there and were stuck there for an extended
(25:42):
period of time.
Speaker 2 (25:43):
So I think, you know, I think.
Speaker 5 (25:45):
We need to assume that you could have a very
similar situation where, you know, when you do hit the
bottom and I'm not saying, you know, to your point
that we are at the bottom today, that you could have,
you know, this extended kind of dignated period of time
where you just don't see increases in values, which frankly
people have enjoyed for the last twenty years because interest
(26:07):
rates have been kept so low and you know, been
reduced from much more moderate levels. So you know, when
we're buying an asset and we're pricing an asset, we're
making those assumptions that there's not going to be an.
Speaker 2 (26:20):
Easy exit for us.
Speaker 5 (26:21):
You know, i'd say the last you know, two distress cycles,
you know, whether it's COVID or it's the global financial crisis,
for you know, for operators like US, it's it was
very unusual because we were underwriting and assessing assets assuming
you were going to have this long duration, you know,
five year recession and prices.
Speaker 2 (26:43):
Were going to crash.
Speaker 5 (26:44):
And then in both those cases, you know, they weren't
true distress cycles because the central bank, you know, blew
their horn and they came running to the rescue and
flooded the world with liquidity and low interest rates. You know,
they can't do that this time around. So I would
argue that what you're going to see for the next
couple of years is a traditional distress cycle, and those
(27:07):
are as we know our multi year cycles where it
takes a long time to work through. You know, you
might not have crashes, but you're certainly going to have
bumps along the way, and and it's going to take
time and and and a lot of capital and a
lot of kind of losses to be realized.
Speaker 4 (27:26):
There's one of the things that you mentioned was potentially
being a minority investor in a bank of some sort
at some point. But can I rather chiefly take liberty
to ask, could we see a Fortress bank in twelve
to twenty four months.
Speaker 2 (27:44):
No, I don't think so, we don't.
Speaker 5 (27:48):
I mean, there's there's there's I think other ways that
we can make great returns for investors on a risk
adjusted basis by investing in the underlying as it's then
having to take on the burden of you know, holding
deposits in a true regulatory system that it surrounds that.
You know, we're active lenders in the market through our
(28:11):
private credit business, in our direct lending business, and you
know that business has grown tremendously, just like the overall
market has. And you know it's it's not because you know,
everybody's just pushing dollars out the door. It's because there's
a need for it. There's the demand for it because
traditional sources of lending have closed up a shop.
Speaker 1 (28:33):
So when we look at Fortress on the terminal, Josh,
We've seen everywhere, you know, from the guided networks in
distress corporates to a twelve billion dollar high speed rail
project connecting Las Vegas to southern California. You're also in
a joint venture in Greece buying debt managed by the
country's credit servicing firms at a discount. There are all
(28:55):
sorts of things that are happening. What's the best relative
value for you? Where's the opportune TV you have to
pick one thing?
Speaker 5 (29:02):
Well, you know, I think, I think what we what
we think is one of our strengths at the end
of the day is our ability to to listen to
what the market's ultimately telling us. You know, the the
opportunity sets that exist out there move around over time.
You know, if we ever get stuck in a lane
and we're just investing in you know, corporate distress debt
(29:25):
and all of a sudden, you know, you know, credit
rallies and and we have nothing to buy, it's not
a great business model for us. So we pick careful
attention to kind of listening to what the market's telling
us and trying to find those opportunities that do.
Speaker 2 (29:41):
Provide that best risk of reward.
Speaker 5 (29:43):
And sometimes those opportunities exist in the public markets. So
for example, you know, the three months after the COVID lockdown,
so like you know, March April, may you know June.
Speaker 2 (29:55):
I mean, we we didn't.
Speaker 5 (29:56):
Do one private investment over that period of time, and
we pushed billions of dollars out the door to buy
lots of great you know correct, you know, cheaply priced
liquid assets. And as the market's recovered, then we kind
of get more of a balance between private investing and
public investing, and then we move around between.
Speaker 2 (30:17):
Different asset classes.
Speaker 5 (30:19):
Some of those are are generated by the market, for example,
the real estate opportunity that exists out there, or the
lending opportunity through our private credit business, or you know,
certain may perhaps distress pe opportunities. And at the same time,
we have the ability to kind of generate non market
(30:41):
correlated returns through kind of businesses that we've that we've
put together and grown up within Fortress, and those might
be things like our legal assets business or our I
P business, which you know, for the most part aren't
affected by interest rates or the overall market. So you
kind of take all that together and bundle it together,
(31:02):
and you can come up with, you know, pretty resilient
funds at the end of the day that have terrific
downside protection, but also you know, can be very opportunistic
when the market you know, shows us that fat pitch.
Speaker 1 (31:15):
But at the beginning you mentioned that you kind of
got the rates call right when everyone else is wrong.
Are there any other big contrarian calls you've got right
now that you think everyone else is wrong on?
Speaker 5 (31:25):
Well, you know, making calls is always a bad idea,
at least I found that to be my experience. But
I you know, I think I think the FED has
done a pretty.
Speaker 2 (31:38):
Good job of managing.
Speaker 5 (31:41):
Managing this economy over the past eighteen months. I think
if you listen to them and the worst they were
coming out of their mouths, you knew exactly what was
going to happen and what was going on.
Speaker 2 (31:55):
You know, there were a lot.
Speaker 5 (31:57):
Of naysayers a year ago about you know, recession was coming,
and you know we're going to fall off a cliff
and we're going to have the greatest storm and the
century of of of financial conditions, and you know, all
these all these bad things. But when we when we
turned inside and we looked at our portfolios and we
looked at the companies that we were lending to, and
(32:17):
we looked at the things that we owned, you know,
we we didn't see that, you know, I mean, we
have thousands of borrowers that that existed Fortress and even
thousands more that we serviced through you know, other servicing
arrangements that we may have on a global basis, and
we just weren't seeing that that potential. So you know,
(32:39):
I've I hear the calls again for another recession, you know,
but again we're not necessarily seeing it and our our
underlying loans and businesses. I'm keeping a very close eye
on the labor market, and I think as long as
the labor market holds together, I think as long as
you have unemployment at this level, I think inflation is
(33:01):
going to be stubborn, and I think the chance of
you know, falling into a recession is going to be lower.
Now that said, you know, we underwrite every loan, we
underwrite every asset we we buy on a pretty draconian
set of assumptions.
Speaker 2 (33:20):
Like we were were geared to.
Speaker 5 (33:22):
Only assume the worst and if something good happens, then
that's gravy on top for us. So we uh, you know,
we we have a view towards the downside, but I
don't think things are, you know, necessarily as dire as
as perhaps folks say.
Speaker 1 (33:38):
It is great stuff. Josh pack Co, CEO and managing
partner at Fortress Investment Group. Many thanks for coming on
the credit edge.
Speaker 2 (33:45):
Cheers, thanks for having me.
Speaker 1 (33:47):
Also big thanks Lisa Leeve Bloomberg News in London. We'lliant
to see you again.
Speaker 2 (33:50):
Thanks.
Speaker 1 (33:51):
You read all of Lisa's great scoops on the Bloomberg
terminal and of course at Bloomberg dot com. So tolu
alamutu at Bloomberg Intelligence. There's a ton of worry right
now about commercial real estate, as we just discussed with Josh.
But where are the pain points? What are we most concerned?
How can we see this crisis on folding.
Speaker 2 (34:10):
I think that.
Speaker 4 (34:13):
We have in some ways seen the crisis unfolding in
some parts of the real estate bond market and also
the equity market. So if you look at where some
of the real estate securities trade now, they are the
highest yielding in the investment grade universe, and they have
been that way for some time now, which I guess
(34:35):
tells you that people are not yet as comfortable with
real estate issuer as they are with many of the
others within the investment grade universe. So in general, real
estate names trade quite wide, so I think there is
pain all around in terms of where securities are trading,
whether you're looking at debt or at equity, in terms
(34:56):
of the sectors. So the that always comes up, and
obviously also came up in the conversation with Fortress is
the office sector, which is under particular pressure because of
sustained work from home practices. So you know, vacancies in
some areas are still high, but there is definitely a
(35:18):
difference between you know, the so called prime and sort
of not prime sectors within office itself, but offices. I
think where the office sector is where people I think
are most worried still, and.
Speaker 1 (35:32):
That's obviously great for Fortress. I mean, Josh Pack was just,
you know, really very excited about the opportunity, but it's
going to hurt somebody. He mentions the banks as big
loser essentially from this. Are there any other potential casualties
when other investors involved. Are there other areas that you
know there might be some fallout in terms of losses.
Speaker 4 (35:50):
So I think we've already seen some losses in terms
of the holders of the office and other real estate
security like the and so on. And yes, he is
right that some banks will have to raise provisions, have
to take losses against the exposures that they have, but
it's all across the financial services sector. So whether that
(36:15):
ensurer as managed and so on, you might see pain there.
But I think the focus right now is really on
what is going on in the banking sector, primarily because
the regulators all around the world basically are taking a
closer look or seem to have been taking a closer
look at banks exposures to real estate, and in some
(36:36):
cases that's meaning that those lenders have to increase privinance
quite significantly against the exposures that they have, and that's
leading to losses and to the headlines that we have
been talking about.
Speaker 1 (36:48):
And the last time we spoke to we talked a
lot about Sweden and Germany is kind of hot spots.
Are those still the places that in Europe least things
are kicking off most definitely?
Speaker 4 (36:59):
So we we have continued to monitor what's going on
in both those countries, but also Austria has come up
because of a name called Signa, For Signa is a
very complex real estate group with multiple entities within it
that have cross shareholdings. In some cases they act as
(37:19):
land ords, some cases a developer, some cases even as tenants.
So that entity or various parts of that NC are
going through various types of restructuring right now. So that's
one that has received a lot of focus. But definitely
Germany still a focus for people. We had one issuer
(37:40):
recently say that they believe that residential real estate prices
could fall as much as thirty percent or could be
down as much as thirty percent from the peaks, which
is clearly a lot And there's still worries about the
office sector there. And definitely Sweden, but I'd say in
Sweden the focus is still on a few issuers, not
(38:02):
necessarily be the whole sector. So SBB is one that
always comes up and in some conversations on Sweden.
Speaker 1 (38:13):
Thank you Tolo Alama two at Bloomberg Intelligence, thank you
so much for joining us. Thank you James, and check
out all of Tolly's research on the Bloomberg Terminal. It's
great stuff. I'm just going to spell your name so
people can can absolutely find it. T O l U
A l A m U t U you must must
read it. It's really must read stuff. And also check
out her webinars. They're also great, and thanks thanks again
(38:36):
for coming on the show. Thank you, and thanks again
to Josh Peck at Fortress and Lisa Lee from Bloomberg News.
Read all of Lisa's great scoops on The Terminal and
at Bloomberg dot com, and please do subscribe wherever you
get your podcasts. We're on Apple, Spotify and all good
podcast providers. Give us a review, tell your friends, or
email me directly at Jcrumby eight at Bloomberg dot net.
(38:57):
I'm James Crumby. It's been a pleasure having you join
us again next week on the Credit Edge.
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