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The Rise of Pref & Meridian Out of Agency Jail · The Promote Podcast

• Hiten Samtani (00:00.522) Listeners might have noticed that we've been rolling with new music the last couple episodes. This is now our permanent theme. I am obsessed with it. It kind of reminds me of a hybrid love child of Gone in 60 Seconds. I I learned of the core secret term at home. and Chinatown. If you think about it, both movies that are kind of like the Promote Podcast, I'll leave you to figure that out. You Will Krasne (00:25.742) I used to go out to bars and me and my friends would pick out names from Nicolas Cage movies and tell people that was your name and if you got Memphis Reigns that was tough. See, it's your destiny here. Spoiler alert, they've paralyzed everything. Donald Rumsfeld gets a mention. Let's do this. Hiten Samtani (01:13.27) Why don't you kick us off? This preff thing is really your nomination for this week. And I think it's absolutely very timely. So let's get into it. So traditionally, if you bought a multi-deal, you'd go to the country club, pass the hat around. You'd call up every private equity firm you knew and say, hey, give me some LAP equity. And these structures vary from acquisition fee of some sort, some sort of preferred return after which you get a promote. So afterwards, this podcast is named. higher split of the profits above once the investors receive a certain return. From all over the place, you can read. profiles of guys like Mitch Morgan where it was after returning capital, they split the profits. There's way more complicated structures. None of that really matters now because no one's going to give you LP equity. They're just going to say, how about some pref? Would you like that? And essentially what preferred equity is is a hybrid security. They'll tell you it has all of the downside protection debt with a higher upside. And I just sort of think it has all of the downside of equity with the upside. It seems like all the deals that we're talking about just are coming in that form, right? The one that I'm thinking of that was very much in the news was Scott Everett, S2 Capital. I think with a 60 million pref piece, he came in and took control of a nearly 1800 unit portfolio in the Sunbelt. This is obviously our old friend, Alan Stalcup of GVA, who we've talked about on this podcast. But I mean, you can come in at pretty attractive prices. As with everything though, they're shades of gray. The idea of essentially lending at a higher interest rate than a bank or senior debt to a basis that you feel really comfortable about owning the asset, I think is really attractive and makes a lot of sense. The problem is that the V in LTV can be very functional. And it's also not static. It can go down, which is what we've seen over the last couple of years. Hiten Samtani (03:05.12) And especially in these, in this asset class, right? Multi-family Sun Belt, where everyone was coming in at an insanely inflated valuation, and now things have kind of settled pretty dramatically downwards. Right, because the other thing that's dangerous about PREF is that you don't have to pay the full amount that it picks or accrues and pick payment guide. So if you have a PREF piece that's at 14%, you might only have to pay 3 % of that in cash, the rest accrues. And it's kind of forgotten about. And the way a sponsor would think about it is if we can generate higher than whatever the PREF is, it's a really creative tool, our equity. But That's not been the case now. And so you have a lot of deals that are hung out where this preface is just accruing and accruing and accruing and accruing. And if you're making the minimum payment, you're making them in payment right now, the outstanding balance of the press may be higher than the value of the asset. So yes, you are protected, but it's also, you got to know what you're doing when you issued the preface. So initially you talked about going around on the country club that's for regular equity. What kind of LPs are rolling into prep funds or what kind of professional is betting on prep? basically every big shop because it's also, you know, it's higher yield and you know, lot of people like that. So firms like Related Fund Management has a large pre-farm. Silverstein has a big pre-farm. Hiten Samtani (04:30.902) And how active were these arms? Like are we talking like a couple deals at a time right now or what? Well, right now, everything's slow, but the transaction volumes are down. But they've done tons of preff over the last handful of years. And you can look at just down the street from where I'm sitting where Silverstein took over an asset. How many deals are we talking right now? it a handful of deals for each of these big funds or is it more balls? There are lot more balls in the air. So it's been a really big way that these firms can put out equity capital in a way that LPs like. Because again, common hasn't been that interesting over the last couple of years, just because valuations have come down, which is ironically like the time you should be leaning in. But human nature is as old as the hills. And these firms have put out scores of deals. So related fund management's in a lot of multi-deals. Silverstein is in a lot of deals. famously they just took JDS's tower up the street by a Prefmez piece. Hiten Samtani (05:28.492) He says he's still in that, he insists that he's still in that, there's some kind of hope note situation. It's also probably a tax situation too, because it's for debt forgiveness. So you have to stay in for a little bit. But it's been very, very active because it's also, again, as I said, yield based. So there's an optically higher cash yield than there would be on the common. And you have this, I don't want to say facade, because it's actual protection, but you have this facade of being lower in the cap stack than common. you're like, OK, values can come in and we're still protected. Are institutional investors also just as active in these deals? They're not doing it directly as much, it's through one of their... a related fund management or one of those vehicles. Will Krasne (06:08.046) And it's been a way to raise a lot of capital because that's, right now, if you're an office person, know, Silverstein's not raising a ton of money to do office right now. So you have to figure out ways to create product market fit with your LPs. And this has been a big way to do it. And so you see it on one off basis, B.C.'s a lot. And even if you just go on LinkedIn and you're in the real estate space, you'll see every single equity broker across, the entire landscape just talking about preff. There's not a single one saying, yeah, we've placed a lot of the LP equity this year. One imperfect kind of gauge in all this is like which one is more interesting at any given moment, real estate alert or commercial mortgage alert. Right now it's all about CMA. There's nothing happening in REA. That's a really good metric. I like that a lot. You know, you were talking about some of these highbrow players related, Silverstein, cetera. But even if you kind of go down the prestige pile, pref is everywhere. My favorite deal right now is Rise 48. You'd recognize that syndicator big, you know, in the tides GBA category. Will Krasne (07:07.022) Of course, I see them on LinkedIn all the time. They're raising a prep fund for seven of their own distress deals. I think that's real chutzpah, man. That takes something. One of the things I love about real estate is that there's no rules. You can do whatever you want as long as you get the other guy to agree to it, and this is a pretty good example of that. And there's no shame either, obviously, right? I hopped into their feeder fund presentation and it was glorious. They were talking about exponential net worth and skin in the game. Zach Haptonstahl popped in, the principal of Rise 48, to tell these masses of, you know, country bumpkins about this new great opportunity. will say this, that some of the best transactions that have ever been done in private equity were people buying back their own debt and essentially raising rescue capital behind it. Famously, Blackstone's LBO of Hilton, they bought back all their debt. You could sort of squint and say, this is a little bit similar. I would argue that the quality of the assets slightly different with like Class C multi and Arizona. Hiten Samtani (08:00.194) Just a tiny bit, but I like, this is gonna turn into, we compare Jonathan Gray to Zach Haptonstall down the road. You'll just see how it goes. Where do we go from here? mean, is there like a breaking point for this kind of thing? Is this just the standard transaction that you expect to see, give it the next six, 12 months or what? It's hard to tell because there's been bunch of false starts. mean, at the first rate cut, people are saying, yeah, then LP equity is going to be interested in common equity and multifamily deals. The big one was Blackstone taking error private. This was a $10 billion multifamily mega deal. Pretty nice apartments. We have really nice product, really good locations. And I can't even tell you the number of conversations. I remember that week, you know, because I was out raising for deal and the amount of people that said, oh yeah, now we've got the cover to go put out common equity in the LP deals. And it just hasn't happened. Tell me a little more about that. mean, why does a $10 billion deal in that space, you know, with respect, come down to where a lot of these average joes are playing? What am I missing here? Will Krasne (09:01.184) The number one risk in private equity investing or institutional investing is career risk, more so than any deal risk. And if you can go point to Blackstone putting out a massive check into a space and you're behind it, then that makes a lot of sense and gives you again, that air cover that I was talking about. So this is similar to what we talked about before no one gets fired for buying IBM, right? That kind of thing. Well, not really, because you're not allocating it with Blackstone. It's more like, well, they did it. Yeah. I mean, it's like, if your friends jumped off a bridge, would you do that too? When your mom said that when you were 10 and you're like, well, if your friend was Blackstone, probably because there's alpha at the bottom of the bridge. For the time being, preff is really going to be the only type of equity that we're seeing going in at least at scale. And it's something that we've seen previously, but there's also the rise of this hybrid preff structure or structure. The Smart Money. Hiten Samtani (09:50.231) Structured Press. Yeah. Structured pref, which actually quite like as a sponsor. like that product quite a bit, which is essentially lower cash pay interest. get some share of the upside above a certain hurdle, but it's not hard pay and you can get them out. One thing we didn't talk about, which I think is just for people maybe less savvy with the space, how the rise of pref, let's call it, the debt, the senior debt. Great point. Thanks for bringing that up. one of the great things about PREF is that a lot of it, especially if you're from a repeat provider or a big provider, is that it's compliant with Fannie and Freddie. So Fannie and Freddie, which are obviously the biggest multifamily lenders, they have certain provisions about change of control or major decision rights which they need the sponsor to have. And PREF is compliant with that. Freddie wouldn't let you go to your local loan shark and lend against you and have the same wean. Freddie will let you do this and they'll go up to 85 % of the cap stack. So bank debt is a little more hidden and this depends on who your lender is. But a lot of these firms that are providing the prefer very sophisticated and can make stuff compliant. Cause it's really all about changing control or like the warm body behind the loan. And as long as that's still you, then generally you can get done, but it's a really, it's a really good point. Hiten Samtani (11:06.734) broke eye contact with your handsome face for a minute because I was just trying to pull up the how important this is. Fannie and Freddie collectively, I think they guaranteed 40 % of the multifamily finance market. So this is a very big deal. It moves the needle quite a bit. Absolutely. it's really the way a lot of deals have been getting done now because with rates being higher, it means that most of time when you're going to Fannie or Freddie, you are now debt service coverage constrained, not LTV constrained, not value constrained. I'm so interested in like who is claiming the piece of the pie here because the pie has changed. Who are the brokers on this? It's going to be the capital markets groups, a lot of these shops. So they'll have their stable of a preff folks that they have at the ready and they'll show the deal to. mean, heck, Northmark just bought a Morrison Street capital. So that's one way to sort of bring that a little bit in house, but go to any of the capital markets, debt brokers, and they right now will absolutely be doing a lot of preff. So then your standard kind of cock of the walk investment sales broker is a little bit lower on the totem pole right now, given where the market's at. Will Krasne (12:08.782) Yeah, there's just not a lot of sales going on. Hiten Samtani (12:20.664) So big news dropped just a couple hours before Passover Shabbos, which means a lot in this world. Meridian Capital Group, which has been on ice with Fannie for over a year, has been cleared for takeoff. Now, Freddie took a similar decision in October, which means that Meridian's now good with both agencies. But the fine print's gonna tell us the tale. But at what cost? Meridian isn't really Meridian anymore. I think three years ago, they were probably one of the most influential firms in CRE finance, and now they've been gutted. It's such a strange world. I don't know if they're going to come. One of the dangers of being in human capital business is that your talent and your your resources all walk out the door every night. I mean, pretty much 90 % of the big guys at Meridian are somewhere else. And this may sound like in some cases, you know, you talk about when you know Keith O'Rourke isn't doing sports center anymore He doesn't he's not the draw the ESPN is the draw in some cases that's true in CRE finance as well but in a lot of cases it isn't because This type of product is pretty much a commodity I mean some firms have better relationships can push a little more can get you better terms this or that But it really is a commodity and it's a generally like who do you like working with? Who do you have a relationship with? Who are you? Hiten Samtani (13:31.822) scared off. And so if you have a guy and they leave and they go somewhere else, you're going to follow the guy. Especially when there's a massive taint of fraud here, right? The reason that Freddie and Fannie iced Meridian out is that they were concerned that the brokerage was a betting fraud. there's been, Brian Brooks has come in, former regulator. He came into Meridian as chairman. He cleaned house, unquote. Ralph Hertzka, founder and chairman, is still there in some capacity. We just don't know how much, like, is he in the driver's seat? Is it Brian Brooks? Everyone's confused about that. And so... Even though they have been cleared here, there are some pretty major caveats. Yeah, I those are major. You have to purchase the loan back from them if a borrower defaults within 12 months for any reason. I mean, if they default for the building burning down, you have to buy the loan back. Hiten Samtani (14:21.186) Yeah, within 12 months you got to do that. And if there's fraud, you got to, there's no statute of limitations. You got to buy it back at any point. So lenders are never really off the hook when it comes to a Freddie loan broker through Meridian at this point, right? And that, that makes it not interesting to do the business through them. It's really scary. mean, even if it's a 1 % risk, your risk adjusted returns in our wound or just that adds a really, really bad right tail outcome for you. I should be clear though, like we don't know if similar strings are attached to the FANNY clearance. All Meridian said is there is an enhanced screening process of some sort. There's going to be a credit committee for all agency loans. And once a quarter, they're going to do some kind of check-in on deals looking for any screw-ups or irregularities. That's all we know right now. As I said, this dropped like right before Passover Shabbos. So anyone I needed to talk to about this isn't available. Plus that means I don't work. I don't drive a car, fucking ride in a car, I don't handle money, I don't turn on the oven, and I sure as shit don't fucking roll! Yeah, but it's a huge deal because if you're one of these lenders, why would you ever want to go through them? I mean, why would you want a loan broker through them? It's just an added risk that unless you're getting it, you're not really gonna get paid for. And I should also add that even though it sounds like the firm has cleared, a couple of their key deal makers have been tagged very recently. So the promote reported a couple of weeks ago that Abe Hirsch, who's a, how do I say this? And you've probably come across people like this. He's not a rainmaker as such. He was the point person for other rainmakers. Like here's the football, go run with it. And so he was the point person for two very important people at Meridian. One is Ralph Hertzka, kind of founder, main rainmaker, Alpha Dog. Hiten Samtani (16:00.558) And the other guy was a guy called Yaki Katz, Jacob Katz, who is no longer there and apparently he's no longer there for very good reasons. I don't know if other individual deal makers have been tagged this time, but Meridian as a company has been cleared. Now we'll see to what extent they've been cleared. Wow. Will Krasne (16:16.59) could be like a pretty tectonic shift because they did a ton of work in this sector. And if they're no longer there, then that means a lot more of the pie, which is a very lucrative pie for Margaret Dunlop, CBRE, JLL, those groups. So I think everyone's going to be watching with interest. And I think this is a good time to touch upon something that's been happening over the past, let's call it six to eight months, which is a lot of the direct, the lenders you mentioned, the Walker and Dunlaps, a lot of the agency lenders, et cetera, have been building brokerage-like capabilities in-house. So obviously you need someone to do the stuff that Meridian and others do, but instead of using like an external brokerage, they've been figuring out whatever that brokerage function is within the company itself. So there's less need for people like Meridian. Yeah, you've got &T, you've got MRCC, you've got Wells Fargo Multifamily Capital, like those people bring them in-house and then they can offer us a variety of products to help get people in so they can rent their balance sheet a little bit. They can give you some sort of like British Superm product, which Meridian obviously couldn't do. Well, they had Newpoint and that actually turned out pretty well for them with that agency lender. Well, I think they're going to do great on the actual Newpoint deal. think the question becomes like to me more broadly zooming out, even talk about residential, brokerage is such a crazy business to me. I don't quite get it. The margins are not necessarily there. And when you lose like a big deal maker, you can lose half your business in a month. It's crazy. It's such a high level of risk. Well, not anymore. Will Krasne (17:49.932) I know, I think I might disagree on whether it's low margin or not, because I think your cogs at scale are pretty low. Why do so many brokerages lose so much money? I mean, because they have investment sales or they have tons of headcount. Like if you're doing Burbush correctly, like you should be very profitable. Yeah, that's that's fair. I just think I've seen too many brokerages lose too much money to feel that way. So yeah, Meridian Capital Groups back in the saddle. But are they still riding in the big leagues? We shall see. Hiten Samtani (18:26.114) Look, we can't spend too much time on this, but this is freaking glorious. We talked about Albert Baylor, Paramount Group. Remember that conversation about the Office Read and the aviation company? How could I forget my wife is designing my office as we speak? So we had this major scandal in the REIT world where Albert Baylor, the CEO of Paramount Group, ended up collecting about 4 million odd in previously undisclosed payments from the REIT for a variety of things, consulting, aviation, even German wines, which is very questionable. And so this is all happening when you Google Paramount Group for Albert Baylor, that's the first thing that's coming up. However, what I love about this is there's like this fragmentary media landscape and you can kind of take advantage of it. The General Council of Paramount went to Narine recently and you know what he spoke about? Corporate governance. He was speaking about good governance. mean, it's like nothing ever happened in the last couple of months. like a naked gun when Leslie Nielsen's like, nothing to see here, or while there's like fireworks and bombs going on behind him. Hiten Samtani (19:28.718) Kind of, but it's also, speaks to, if you have a very specific audience you're getting at, you can kind of hope that the mainstream noise around your company or your product or whatever doesn't impact them. So Nayreed has a very specific audience. This dude can go and talk to them about governance and hope that they don't end up Googling anything. I think that's just a glorious situation. So good. Hiten Samtani (19:54.446) So I recently rewatched Mrs. Doubtfire. Is that the one with the pool with Pierce Brosnan? Which by the way she should have just left for Pierce Brosnan. Like I don't know why that's even- And he was so nice too. He's like a nice guy. He's like, I love these kids. Do you remember the birthday party scene? Hiten Samtani (20:06.786) That is the movie. Hiten Samtani (20:11.668) incredible diving form. know. What a guy. So anyway, this is at the beginning of the movie. Robin Williams and his kids are tearing it up on the kitchen table. They're partying. And then the wife comes in, the missus comes in, and very quickly the entire party just dies with a whimper. And the reason I thought of that movie this week is what I read something in CMA about the CNBS market. It's been rip roaring. Q1 was one of the best quarters since the financial crisis. And then suddenly the tariffs come along and boom, silence. Brookfield, they were going to price it 2.4 billion, SASB deal. They held back on it. Hold on, I just want to double click on that for a second because that is maybe the best retail asset in America. Yeah, the Hell and Wine Mall. I haven't seen sales per square foot on it in a long time, but it is astronomical. I mean, it was part of the GGP purchase. was considered one of the crown jewels of GGP. yeah. It's as good a retail asset as there is in America. And so the fact that they pulled it, I mean, says a lot. The Hawaii Mall. Say something about it. Hiten Samtani (21:13.858) Yeah, it's a 2.4 billion SASB they were looking for. I wonder if they're just going to be like, hold on. We got to wait to get some certainty. And this kind of rhymes with, we were talking last week, about the tariffs bringing in massive uncertainty on the material side, right? When you're trying to get something built, you have no idea. I think the words you use are like cost or swag right now. You have no idea where to go. Similar things are playing out in CNBS. The underlying benchmark rates are moving 40 basis points, 50 basis points in two weeks. mean, how can you, you can't price anything because not only is the rate moving, but then the lenders are looking at it and saying, we have no idea which way rates are going to go. So we're going to gap out our spreads to give us a little bit of cover because there's just as much a likelihood that when we price something, the rates go down 30 bips in two days. To your point, Goldman was marketing a deal, they had to re-market it, and it ended up getting done but at much wider spread. It was, was Elliot and Sharfoyah Lagerger. Sharf. Sharf. I'm gonna share it in Dallas. nicely done. Yeah, so they came in and they ended up doing it at a much wider spread than they initially anticipated. I think this quote that was given to CMA by a ratings guy says a lot, quote, this has thrown a wet blanket on the enthusiasm and a euphoria about the new issue pipeline. And then he said, no one knows at a price any. Will Krasne (22:31.854) No one knows how to price anything, whether it's debt, construction, equity value. mean, this is everything. Like everything prices off of these indexes and all the spreads are calculated off of how volatile they are. And when it's like this, it's hard to get anything done. So look at all the downstream effects. mean, there aren't going be as many sales, aren't going to be as many financings. And I mean, Are there going to be more defaults as you kind of wait for this to clear up? If you were hoping to get a refi done, I'm not even speaking about the downstream effects on the operations of these properties too, which are going to be really impacted. As in no CapEx and stuff that you need to No, not even that. Even if tariffs interrupt things for three months, think of all the small bay industrial tenants, which don't have the balance sheet to weather that or can't pass the cost through their customers. Think about if you own Inland Empire Industrial right now, which has been a little soft already. And if people are just like, yeah, we're just not going to ship. We're not getting stuff from China. We've to go to Europe or somewhere else. And those ports on the East Coast get more share, which had sort of been happening already anyway. All of these things which are coming down the pike, which we haven't really reckoned with yet. Will Krasne (23:39.694) Cause we just don't know. Is it just kind of a broad-based freeze for now or let's say a debt fund can move faster or move into the space? We talked a couple of weeks ago about Lifeco's, right? Is this a boost for Lifeco's in any way maybe? is based for someone who thinks they can price the risk. mean, I think, you know, like Tycho, which Elliot had back, they've come on the scene, they've been doing every single deal. They want to be like the biggest construction lender in Florida and New York. Yeah, and I think if you can, if you feel like you're getting paid for the risk or you have access to cheaper capital on your warehouse line or your back end, then yeah, like it's time to go get share. Hiten Samtani (24:13.302) If you're a CMAS underwriter right now, let's paint a picture, right? What does it look like? If you have your giant screen, your 15 screens is one CRE bro once told us. Like what's on those screens at the moment? either CNBC chart of the five, 10, and two in 30 year or the Bloomberg version of it because I've gotten texts three times last week being like, OMG, bond market. I'm like, which way? It could have gone anywhere. I don't know. you know, if you're not following minutes a minute. I think one one Crefsey board member summed it up perfectly. He channeled our guide Donald Rumsfeld of all people when he was framing the situation. He told CMA the following, these are the most astonishing set of unknown unknowns in my professional life. Like smile on Jack said, and a few good men, that's what you know, that for sure, that just ain't true. And that's sort of the situation that we're living in right now. If you're doing a CNBS, that's like essentially a mini IPO, which takes even longer because there's so many more parties involved. So if you're, if you're trying to close something right now, like I hope you rate locked or at the very least, I hope you have index index lock. But if you're trying, if you're thinking about being financing something in the next. three to six months, I think you need to be ready to go at a moment's notice. You need to be able to like apply, put up the money, put up the deposit in the X-Lock as soon as you can, negotiate as low a floor as you can on the benchmark rate, and just sort of be in the defensive position the whole time. Because the market, I mean, no one knows, a week ago was completely different, and a week from now it can be completely different. And so you just have to take advantage of these pockets. Hiten Samtani (25:53.646) There's too many unknown unknowns. And that's where we'll leave it this week. We dove into the rise of PrEP and all its pros and cons. We chopped it up on Meridian's Fanny Freedom and what it means for the firm's rehab journey. And finally, we talked CMBS, or more precisely, the lack of it. The tariffs have not been cut. And index rates haven't been kind either. rates have not been kind. We'll be back next week with more CRE markets and media. Please remember, like, share, subscribe, hire a skywriter below. Please write us with your feedback, leave comments. I read every single one of them, even the one that Hiten writes. I've evangelized. We need Hiten Samtani (26:33.502) Listen, I gotta confess up there people have been writing in but we've changed our you know, I bought the promote comm That was my greatest achievement this week. We now own the promote comm so that's right us at podcast at the promote comm and we'll be sure to read and respond Please share. mean this really matters. We're at a beautiful critical time in the podcast journey and we really appreciate your support Well, I'll see you next week, dude. Thank you you Alright, thank you and thank you for everyone who's listened this far. Ciao.