Buyer of PacWest commercial real estate expects to double its $7 billion loan portfolio as rate shocks fuel more banking stress


A raft of credit rating actions against more than two dozen U.S. banks by Moody’s Investors Service late Monday didn’t shock one buyer of distressed commercial real estate.

This is “more evidence of what is already known,” said Matt Windisch, executive vice president at Kennedy-Wilson, of Moody’s decision to cut it debt ratings on several small and medium size banks.

Moody’s, citing “profitability pressures” at banks and asset quality that “looks set to decline,” also placed ratings on six major U.S. lenders on review for downgrade.

“At this point, it feels like it’s specifically rates driven,” Windisch said Tuesday of pain felt by landlords and at banks from stress at commercial buildings. “But over time, if a recession hits, we’ll have to see.”

Beverly Hills-based Kennedy-Wilson Holdings

made a splash in June with a private deal to buy a $5.7 billion construction loan portfolio from PacWest Bancorp
ahead of its sale to Banc of California

in July.

The firm paid about 95 cents on the dollar for the entire pool of construction loans and future funding commitments, mostly on multifamily properties and student housing. The average life of the loans in two years from purchase to maturity.

Kennedy-Wilson sees an opportunity to double the size of its roughly $7 billion commercial loan portfolio in the next few years, as rate shocks continue to reverberate through the commercial real-estate industry.

“We are obviously looking for other opportunities,” Windisch said, adding that the discount likely would have been greater if the loan book was backed by office or retail properties.

Unlike banks and lenders tethered to the U.S. banking industry, Kennedy-Wilson relies mostly on sovereign wealth and insurance company funding.

Still, Windisch said Kennedy-Wilson mostly plans to stick to multifamily and student housing in future loan acquisitions. That business also adds to the firm’s related lending platform, now with a national footprint since its purchase of the PacWest assets.

“These properties, themselves, don’t feel distressed,” Windisch said of a recent wave of landlords defaulting on or handing back keys to lenders on underwater multifamily properties. “It’s the capital structure that’s out of whack.”

The collapse of Silicon Valley Bank and Signature Bank in March sparked fears of broader stress at small and medium sized U.S. banks. The Federal Reserve has raised interest rates from nearly zero in the past 16 months, creating rate shocks at lenders with low coupon loans and bonds on their books, but also a flight of deposits from banks to other higher-yielding opportunities

PacWest in recent months had been subject to speculation that the bank might be vulnerable to collapse, before its sale to Banc of California.

Moody’s said on Monday that its slate of rating actions against banks comes as asset risks have been “rising, in particular for small and midsize banks with large CRE exposures.”

Small and medium size banks significantly expanded their commercial real estate lending in recent years, at ultralow rates when property values were sky-high, but many were caught off guard by the Fed’s fastest pace of rate hikes in decades.

Read: Bank asset quality, weaker profits spark Moody’s reviews and downgrades as it weighs potential 2024 recession

Shares of the SPDR S&P Regional Banking ETF
were off 1.7% on Tuesday, following the rating actions by Moody’s. The S&P 500 index was 0.7% lower, while the Nasdaq Composite Index was off 0.7% and the Nasdaq Composite Index
was down 1%, according to FactSet.

Read next: Don’t wait for Fed rate cuts, says debt buyer to banks holding distressed commercial real estate

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