Drive along U.S. 19 and you'll see hundreds of gas stations, restaurants and other small and mid-sized businesses — some of them financed with bank loans the borrowers are struggling to repay. That's where Directed Capital Resources comes in.
Founded in 2001 by Chris Moench, now its CEO, the St. Petersburg company with an office in San Diego uses money raised from investors to buy distressed commercial loans. It helps the borrowers resolve their financial problems so the businesses can produce enough cash flow to make the loan payments and repay the investors with interest.
Directed Capital's own business got a big vote of confidence last month when investment-banking giant Goldman Sachs gave it a credit line of nearly $100 million to be pooled with investor money to buy more loans. The 54-year-old Moench, who has an MBA from Emory University and is a licensed real estate and mortgage broker, recently spoke with the Tampa Bay Times.
With the economy recovering, are there still a lot of distressed loans out there?
The total amount of commercial mortgage debt in the continental U.S. is $3.5 trillion, probably a little higher. During the Great Recession and shortly thereafter in 2012 and 2013, there might have been as much as 12 percent of the total commercial debt that had problems. Now, it's probably in the 4 or 5 percent range but that's still an awful lot.
Since you're buying problem loans, are many going into foreclosure?
It is not our core business strategy to buy distressed loans to own property. We're really more of a finance lending organization that seeks to buy those loans at a discount. So, if the borrower owes $1 million, we might buy for $850,000. And over time, it's our goal to collect $1 million.
So, you're buying mostly smaller loans, right?
Ninety percent of what we purchase is in the million to $10 million range. That's a very specific strategy on our part. There are very large private equity funds and hedge funds that operate the same strategy, but they purchase very large instruments and obligations, and so we focus on this market because it's big enough that maybe some of the smaller participants get priced out but also so we're not competing directly with very large financial institutions. The other issue is that when you have much larger loans like $100 million, the loan might end up in a bankruptcy work-out scenario.
The loans you buy are for what kinds of businesses?
We're talking about small flex warehouse spaces, restaurant spaces, car washes, bowling alleys — really any kind of commercial real estate. We typically like there to be tenants because there's a possibility the deal can be turned around. We operate on a nationwide basis; we have assets from Portland (Ore.) to Key West to Portland, Maine. One of the things we stress to investors is that we have geographic diversity, so it's not like we're just in Florida and if the economy in Florida goes south, we're in trouble. And we don't do just one kind of asset. If things are really bad in the retail business, we're very diversified across all kinds of commercial properties.
How do you learn about these loans?
We have relationships going back to the 1990s (when the government liquidated assets of failed savings and loans). There are a number of Internet-based brokers. Then, a lot of big real estate companies like Cushman & Wakefield have sub-groups that handle these. So, we're connected to all these people, and when somebody wants to sell something, they send us an email.
Then what happens?
We look at the loan file, the collateral, the payment history, things like that. Once we've done an initial assessment and pricing, we make sure the seller is in the same kind of range because if we're willing to pay $850,000 and they want $950,000, we probably won't have a deal.
The thing about this business that makes it interesting is that it all happens in 30 to 40 days. It happens very quickly once the bank decides to sell a loan because they don't really want the borrower knowing they're going to sell. What it means in the context of Directed Capital is that you have to have your money set up and ready to go.
You raise money from both institutional and individual investors. What kind of individuals?
We only solicit money from qualified clients who have a high net worth and are sophisticated enough to understand the investment. We're starting our seventh investment partnership. It's a Reg D offering, meaning it's exempt from full registration (with the government), so we can only raise money from 100 investors at a time.
What's the typical return on investment?
We target 12 to 15 percent return to our investors. That's net of all fees. We've had historically very strong returns. The fund that existed during the recession didn't do great, but all the other funds have been very solid with over 8 percent to 20 percent (returns). The recession fund was down 10 percent in the peak of the trough, but to be down just 10 percent when a lot of people lost all of their money was a huge win. We actually came through that period of time in good shape.
Where do you see opportunities now for distressed loans?
We've had a big decline in gas prices, so all businesses and industries surrounding oil and gas have had a dramatic change and some were caught in a very expansionist mode. We see some opportunities in oil-patch regions that we actively go and look for assets in. In general, there's still a lot of overhang, if you will, from the Great Recession. There are real estate assets that will take a long time to work through the system. Those are good, sizable loans where the value (of the collateral) has recovered but hasn't recovered enough to refinance (through a bank). We'll get involved in situations like that.
What's the outlook for commercial real estate in Florida?
In Florida, what we've seen is a generally solid recovery, but it's taken a very long time. As residential markets have come back, builders started building, new shopping centers are being built, old ones are getting leased up. We've seen an extremely robust development market for apartments. I think there's a little bit of a bubble that exists driven by these extremely low long-term, fixed-rate loans. We probably have bought one apartment-securized loan in the last year because apartments are at such high pricing we just can't compete.
Susan Taylor Martin can be contacted at [email protected] or (727) 893-8642. Follow @susanskate.