What is Private Credit in Commercial Real estate? | Peachtree Point of View

Welcome listeners to another episode of Peachtree Point of View, where we delve into the latest insights and trends in the world of investments. Private Credit has been a growing force in the financial landscape, offering unique opportunities and challenges. In this podcast, we'll define what is private credit. And to shed light on this fascinating sector, we'll hear from an exceptional team of senior leaders at Peachtree Group. They'll use their wealth of experience and knowledge to share what they are seeing within private credit. In the dynamic landscape of commercial real estate, investors are searching for investments that can deliver reliable, competitive and consistent income throughout the market cycles. And asset class that is doing just that is private credit. But what exactly is private credit, and how does it shape the commercial real estate market? Private credit refers to loans provided by lenders other than traditional banks, primarily used to finance a commercial real estate project. These projects can range from the development of office buildings and shopping malls to industrial warehouses and residential complexes. This is referred to as asset-backed lending because the loans are secured against physical assets, like a hotel or an apartment building. Barrowers or private debt can include developers, large private companies, family offices, and high net worth individuals. For borrowers, private credit offers flexibility, shorter approval processes, and customized solutions that may not be available through traditional bank loans. Unlike bank loans, which are subject to strict regulations and underwriting standards, private credit transactions are often structured to meet the unique needs of each borrower. Because banks are often unable to underwrite these loans, private credit lenders tend to charge a higher interest rate than the banks. One of the primary risks of a private credit loan is the risk of default. To reduce this risk, Peach Tree Group reviews every loan we underwrite, conducting due diligence to assess the credit worthness of borrowers. Looking at factors such as asset type, location, demand drivers, loan term, and loan to value ratios. Private credit investors play a crucial role in the real estate market by providing capital at various stages of a project, from acquisitions and development to refinancing and recapitalization. A private credit fund operates by selling units to investors, such as family offices and private investors. Peach Tree Group, as an investment manager, allocates these funds to a portfolio of loans, choosing which projects to lend to and which projects to pass on. In an ever evolving market, private credit offers a solution for borrowers, and an opportunity for investors. Let's meet the Peach Tree Group team. First, let me introduce you to Greg Friedman, CEO of Peach Tree Group. With over 24 years of experience, he brings an extensive credit and equity investing expertise, particularly in hotels and other commercial real estate assets. Greg will share his thoughts on the current market trends in future prospects and private credit. I'm Greg Friedman, CEO of Peach Tree Group. We are vertically integrated private equity firm that invests across commercial real estate. We invest up and down the capital stacks. We invest both in debt positions, as well as equity positions across commercial real estate. As a firm, we've been investing across private credit going back almost 10 years now, so we've always been very heavily across private credit. We've been doing commercial real estate lending market, being banks, our break banks are unable to lend at the same level that they want for lending, just given regulatory pressures, as well as current challenges in the real estate market. This void has allowed for an incredible opportunity for us to take advantage of as a firm, and it's something that we're able to go in and lend at lower leverage points, so we're taking on less risk in getting higher returns. So in many cases, we're getting returns very similar to what we would get in an equity strategy, but we're only taking on credit risk. That's why we like the private current strategy today. We have Brian Waldman, the Chief Investment Officer for Peach Tree Group. Brian leads Peach Tree's asset management investments and portfolio management functions. We sat down with him to talk about his role in pricing risk in private credit. Good afternoon. My name is Brian Waldman, and I'm the Chief Investment Officer at Peach Tree Group. What are the risks involved in private credit? As CIO, I often get asked, "What are your responsibilities and what do you focus on?" Well, the reality is, I spend a lot of my time pricing risk. So what does that mean? Look, the Peach Tree Group ecosystem. We have different businesses that invest up and down the capital stack and across different classes of commercial real estate. So my job is to look at the opportunities that we're seeing in each of those businesses and help drive the strategy for where we're deploying capital. At different points in the market, we see opportunities or better opportunities within different asset classes or different investment strategies. Today, we're seeing the greatest opportunity on the private credit side. We love with the volatility in the market the ability to be in a debt position where we have a lower attachment point on our investments, yet we're getting paid equity-like returns for the investments that we're making. Today, we're seeing really three great opportunities. One is in hotel lending. We've been in that space for a long time and we continue to do it, but with the dislocation in the market, we're getting outsized returns for the investments that we're making. The second is in the commercial real estate space where we're similar to what we do in hotels, we're financing other asset classes, whether it be industrial, self-storage, multi-family, and even office, where we're making an investment and we believe that we're getting outsized returns based on the risk that we're taking on as a lender. And the third is in note purchases and buying paper that's already been originated by other lenders. If you look at the market today and you look at what's happening with the banks, the banks render increased regulatory pressure. There's a wave of maturities that's hitting over the next couple of years and the banks are being forced to move some of that paper when they can't get payoffs. We see an opportunity to go into buy that paper. As a private lender, we have more flexibility to restructure that with the borrower. So where a bank may not have been able to work with the borrower, we have the ability to restructure that paper and give them a light at the end of the tunnel, give them a path to get to the other side. And since we're buying that paper, typically at a discount from the originating lender, we're able to restructure that loan with the borrower and get significantly outsized returns for the risk that we're taking on. If you have any questions, would like more information, feel free to reach out. Next, we have Jared Schlosser, EVP of Hotel Lunding and Head of C-Pace. Jared is responsible for running Peach Tree's Hotel Origination Platform and its Commercial Property Assessed Clean Energy Program, also known as C-Pace. We sat down with Jared to talk about private credit in Hotel Lunding. And this is what he had to say. I'm Jared Schlosser. I'm the head of C-Pace and Hotel Originations for Peach Tree. Why are hotel developers looking to private credit? There's no banks. Bank lending is very scarce. I think that everything that's happened since the bank failures early last year. And the various banks that have not had a lot of payoffs has caused bouchy distress for them. And so if you get a bank loan, it requires a lot of deposits. And it's usually a lower leverage today than it was back in 2021 and early 22. And that's created a gap in the market that has been filled by private lenders. It started to be filled from 19 to 2021. And as banking has decreased, it's been increased by private credit. What does the hotel lending market look like today? It's volatile. I think there's a lot of lenders out there if you have a good project that has a lot of cash flow. CNBS is active. There's a lot of private credit and even some insurance companies that are willing to finance double digit debt yield deals or even high single digit debt yield deals. As your cash flow decreased and the way that lenders look at it, it's your NOI over your loan amount that you're requesting, not your debt yield. As that decreases, the list starts to go down. And so we do both deals, right? We've done deals where, you know, there's a 10 plus debt yield and we've done deals where there's no cash flow at all. And that's, you know, but I think as you go down that list in terms of cash flow, that's really where, you know, you have a lot of lenders at the top and you have very few lenders at the bottom. Finally, let me introduce you to Michael Ritz. Michael is the EVP of Investments at Petri Group. He is currently responsible for strategy, capital allocation, and credit for Petri's debt and equity investments. We sat down with Michael and asked him questions related to private credit and no purchases. Let's hear what he had to say. I'm Michael Ritz. I'm the executive vice president of Investments at Petri Group. I handle capital allocation, investment strategy, and execution across our core businesses. Can you tell us what are NOI purchases? A NOI purchase is when we buy a loan from another lender that currently owns that loan. So as opposed to originating a new loan within our credit business, we're purchasing it from someone else who had previously originated it. What is the opportunity with NOI purchases? The opportunity stems from any motivation of a current lender and why they would need to sell a loan. And there's a number of reasons as to why they would need to sell a loan. One is capital allocation, so banks being federally regulated and/or having outsized risks to a product type of which pose more risks than it otherwise should or they're misallocated from a risk perspective. We move to sell a loan to reallocate their exposure to that product type. Outside of that, timing, so from a risk perspective, maturities are often a driver of note sales. If a maturity is upcoming, the borrower doesn't look like they're moving to refinance the loan or potentially has challenges in doing so. That lender will lose faith in their ability to and move to potentially sell it to a private market, which is where we play a macro perspective with heightened interest rate environment, liquidity has been strained on the financial markets and with that, lenders are looking to create liquidity as well. And so we feel that near term, no purchases are going to be a much larger opportunity than they have in the previous cycle. Probably the biggest since '08, '09. How is Peachtree Group uniquely positioned to capitalize on this trend? Peachtree has been purchasing debt from other lenders since '08, '09. We have a servicing and asset management department internally and are an active lender and when talking to potential sellers of loans in these larger banks, they gain comfort and our ability to asset manage the loans, service it, take care of borrowers. We've already got a system in place internally and we've shown a deep track record of being able to buy these loans, asset manage them, potentially modify them and see them through to a successful payoff. When we purchase a loan, it's our first goal to meet with the borrower, understand the current status of the borrower, the asset, and then move toward a capital solution that bridges a gap between their current ability to execute on their business plan and what they ultimately need and typically that's time. The other benefit too is just it gives us a unique opportunity to scale and so from an investment's perspective when we're purchasing debt, we can purchase 24 loans in a month but it's hard to go originate 24 loans. Learning about private credit through the perspective of season professionals is the best way to understand its potential. If you want to learn more about Peachtree Group and private credit, visit us online at peachtreegroup.com/private-credit. Stay connected with us on LinkedIn to get more updates on upcoming episodes, more content on private credit and so much more. Thank you for listening to Peachtree Point of View.