David Loo, Managing Partner at Hudson Realty Capital, joined the Real Estate Daily Beat for an interview. We discussed the firm’s new lending platform with RXR, market trends, and the rise in CMBS issuances.
Daily Beat: Congratulations on the new joint venture with RXR. Did you merge lending operations or is this a completely new vehicle?
David Loo: It’s a joint venture where we are both putting in our respective credit and operations. expertise. RXR and Hudson are still separate entities, but from a functional perspective we’re working as one organization. In the future, all Hudson debt deals will be done through this vehicle and the same thing is true with RXR.
Daily Beat: Perhaps you can speak to some of the synergies that you see?
David Loo: RXR is obviously a best in class real estate owner and operator. They are a full services real estate firm and offer a lot of resources, including development management, leasing, property management, and ownership experience.
From our perspective, we are adding our credit expertise, which makes this a very strong lending platform. Our primary focus is going to be investing in construction loans or mezzanine / preferred equity investments.
Daily Beat: How did the deal come together?
David Loo: One of the things that made this lot easier is that the Principal of both companies have long standing personal relationships. I moved to New York in 1987 and one of the first people I met was Mike Maturo. Some of the senior people within RXR at the time like their acquisitions person Frank Patafio and their head of development Joanne Minieri are still at the firm. We’ve all known each other for a long time.
When my co-founder Rich Ortiz was a banker at First Boston, he worked with Scott Rechler on the Reckson IPO in 1995. From that perspective, it’s much easier to do business with people that you know and have long standing relationships. The tie-ins and the synergies makes this a great fit.
Daily Beat: I gather there’s going to be a major focus on housing?
David Loo: Yes. Within the area of housing, the focus is going to be multi-family. Hudson has an FHA lending capability for both multi-family and healthcare, so we’re looking for opportunities where we can do construction or bridge for the multi-family and then potentially find synergies with our FHA platform.
RXR is also looking to expand pretty rapidly across the country, particularly in the multi-family space. They recently acquired Phoenix properties and are also looking at deals in Tampa and Nashville. We plan on following them across the country, looking for interesting debt opportunities in those markets as well.
Daily Beat: How about e-commerce and logistics?
David Loo: Yes. We’ve lent on industrial assets in the past. RXR has also expanded pretty rapidly into the e-commerce and logistics space, so we’re hoping to work on transactions into that area too.
Daily Beat: Have you raised money yet for this venture or have you simply formed the JV?
David Loo: We formed the joint venture and are now in the process of raising capital. In our short history together, one of the things that we’re finding is that sponsors have found our participation to be attractive to other market participants and lenders.
We’ve actually been invited into transactions by other lenders who want somebody with real estate expertise to be in some of the subordinate mezzanine positions, because in case something does go wrong, they want somebody with a capability to assess the project and potentially finish it if necessary.
The place we find ourselves in the life of the real estate cycle makes us very excited about the opportunity.
Daily Beat: During the pandemic, everyone was raising distressed funds, but they were never really able to deploy it for those purposes.
David Loo: Good point. People have always looked for the distressed debt investing markets, but the reality is that we haven’t seen it in any kind of volume over the past number of years.
Daily Beat: Are you concerned that this lending environment has gotten too aggressive? What happens with the anticipated rise in rates?
David Loo: We’re trying to figure out how the rising interest rate environment is going to impact real estate lending. To your point, I think what we anticipate and what we’re already seeing is that senior lenders are starting to curtail their loan lending amounts. Some of the credit underwriting standards are tightening up a little bit. Borrowers are not getting sort of the robust loan proceeds that they were even three to six months ago.
That’s another reason why we think this is a good market for us because transactions will rely more on mezzanine / preferred equity type investors. Given the synergies between RXR and our platform, we think it puts us in a good spot strategically because we can handle both the credit and the real estate side.
Daily Beat: Will lenders start being a little more conservative?
David Loo: We could run into some volatility and we’re a firm believer that lenders with real estate capabilities are the ones that are going to survive and ultimately thrive.
That’s why we’re very excited about the opportunity because we’re not just a capital markets, execution type lender, but we actually have the real estate chops to understand projects from the beginning all the way to the end.
Daily Beat: Blackstone’s BREIT raised $7.9 billion in the last quarter, which was a record for them. I think it only requires a minimum investment of $10,000. Obviously the major capital of your fundraise will come from institutional investors, pension funds, and SWF funds, but do you think the fundraising game has changed?
David Loo: Yes. Real estate real estate credit has always appealed to institutional investors, particularly some of the large state pension plans and sovereign wealth funds. There’s now more of a concerted effort being made to open real estate investing on the credit side to individual investors. Blackstone is a very good example of a major player in the market that continues to take advantage of that shift.
Daily Beat: Would you guys on an office or retail deal in this environment?
David Loo: With RXR as a partner, there’s probably not an office deal in the land that they wouldn’t understand; however, there are headwinds against the retail and office sectors due to work-from-home and e-commerce trends. We don’t expect these sectors to be our main focus.
Daily Beat: It seems like there’s been an increase in lenders securitizing deals these days. What caused that shift?
David Loo: I am by no means a CMBS expert, but I’ve been in and around the mortgage business. CMBS provides a lot of liquidity – both for borrowers and lenders – and given where fixed income spreads have been, it can be a low cost provider of capital and that’s why it’s been attractive for a lot of people.
There are also borrowers that don’t like to use CMBS debt because if you get into some sort of an issue at a property or you need some additional time, the borrower discussions can be a little inflexible. It certainly is a low cost option, but not always the most flexible if you need someone to pick up the phone.
Daily Beat: Very good point. Thanks for joining us!
David Loo: Thank you, Joe. Congratulations on the job you’re doing with the Daily Beat!
*The interview has been edited and condensed for clarity.