How a little bank from Little Rock took over Miami real estate

When looking back at the great South Florida condo boom of the past decade, one financial institution is likely to stand out from the rest.

And it came from Little Rock, Ark.

Bank OZK, a once-sleepy regional bank miles from any beach and a century old, has become a behemoth in the South Florida lending market over the past several years.

“They understand the condominium market better than any bank I know,” said Ugo Colombo, the longtime Miami developer. Colombo’s most recent project, Brickell Flatiron, was financed with a $200 million loan backed in part by OZK.

That loan, in turn, came from the $23 billion in assets that OZK, formerly known as Bank of the Ozarks, has methodically accumulated over five decades, thanks mostly to its chairman and CEO George Gleason. In a recent interview from its new satellite office in Wynwood, Gleason said the Miami metropolitan market, from Brickell to West Palm, has proved resilient, especially given its track record during the Great Recession. The bank has financed 20 South Florida projects this decade, to the tune of $2.3 billion.

“If you stack up Miami’s results each quarter versus New York, Boston, Philadelphia, Chicago...Miami is always one of the top MSAs when you talk about job growth, population growth, GDP per capita, migration, GDP growth...it’s a very strong market, and I don’t think most people really appreciate that.”

“CHILD-PROOFED”

Bloomberg Businessweek described Bank OZK as the largest construction lender in the county in a profile of the company last summer.

In the Tampa Bay area, the bank has made major construction loans to the developers of Water Street Tampa. The $3 billion mixed-used project is being created by Strategic Property Partners, a joint venture between Tampa Bay Lightning owner Jeff Vinik and Cascade Investment, the private wealth fund of Microsoft co-founder Bill Gates.

In September, Water Street developers borrowed $664.1 million from Bank OZK in exchange for a mortgage on several pieces of property in the 56-acre development near Amalie Arena.

The simple answer to how OZK came to dominate the Miami market — and many others, including New York and Los Angeles — is that whereas most banks shored up construction lending as the smoke cleared from the financial crisis, the Little Rockers went all in.

“The other banks were happy to let them have” the condo construction market, at least at the outset of the decade, said Brock Vandervliet, executive director at UBS who covers the bank.

OZK’s financial position is bolstered by having never done a buyback, Vandervliet said. That’s allowed them to build up a high capital ratio — which in turn gives regulators comfort, he said.

OZK always has the first lien on the property securing its loan. It also requires developers to put a chunk of their own equity in first. On average, OZK covers about $49 of every $100 of a project’s costs; the developer must come up with the rest — in the form of cash equity, which may include buyer deposits on condo deals. These funds are typically expended prior to the bank funding the loan.

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Stephen Scouten, managing director at Sandler O’Neill who covers OZK, said the projects hitting the market backed with OZK loans would likely have been built regardless, given the strong demand for condos seen this decade. The difference, he said, is that whereas banks with household names would almost certainly syndicate its loans across a number of institutions, OZK does not.

That means their risk is much more concentrated, Scouten said. But it makes taking a loan from them much more appealing.

“From a developer’s perspective, it’s easier to deal with one bank,” Scouten said.

And there’s another big difference these days. In the previous cycle, condo buyers may have gotten away with as little as a $10,000 deposit on a $1 million condo. This time around, minimum deposits are now more substantial, Scouten said. Twenty percent has returned as the standard minimum.

“Compared to the last cycle, the market has been child-proofed,” said Vandervliet.

SUNNY ISLES

The 527 units at Brickell Flatiron, rising to 64 stories at the corner of South Miami Avenue and Southwest 10th Street, were said to be 87% sold as of this spring. Late Friday, Colombo announced OZK’s loan had been fully paid back.

“Our ability to retire these loans just four weeks after receiving our TCO underscores the sustained buyer demand we’re seeing at Brickell Flatiron and the strength of the Brickell brand, both internationally and domestically,” Colombo said in a statement.

The project was far from OZK’s largest deal of this cycle.

Drive up A1A in Sunny Isles Beach, and you’ll spot a massive construction site labeled Trump. It’s not the president’s, but rather another longtime local developer’s latest venture. Jules Trump’s Estates at Acqualina came with a $558 million loan from OZK. It’s believed to be the largest-ever loan of its kind for Miami-Dade.

“There were certain things about them I found extremely appealing,” Trump said. The principal one — and what sets them apart from other lenders playing in the space, Trump said — is the fact that they don’t syndicate.

“That’s something all developers find advantageous,” Trump said.

The true base of growth for OZK has been in New York City, where it is now that metro’s third-largest lender, according to Bloomberg, citing information from The Real Deal. As other banks pulled back in the wake of the Great Recession, OZK, fresh off the purchase of multiple failed banks, began lending to major players there, including the family of presidential son-in-law Jared Kushner. OZK helped finance the tallest residential tower in Brooklyn, and in total has parked more than $6 billion there.

The focus on growth markets has likewise made it the largest construction lender in South Florida over the past several years, according to The Real Deal. Other local OZK projects include:

▪ Turnberry Ocean Club in Sunny Isles Beach

▪ The Ritz-Carlton Residences in Miami Beach

▪ Gables Station in Coral Gables

▪ Landmark South in Doral

▪ Gran Paraiso Residences in Edgewater

WHAT GLUT?

Some real-estate watchers now worry about a South Florida condo glut. For Gleason, the problem is the reverse: There aren’t enough new units coming on line.

“You’re in a market where — look, 900 people a day are moving to Florida and about 45 percent are coming to the Miami MSA,” he said. “So you’ve got 400 people a day moving into the market...so the reality is, 100 units a month are going to come off the market. And we’ve only got 1,800 or 1,900 units of supply of new product. So eventually you’re going to run out of units.”

Experts say OZK’s position here has been buffeted by the change in state and local tax deduction law. As buyers from South America withdrew, ones from the Northeast, California and Chicago moved in.

“In the last 36 months, we’ve seen Northeast buyers emerge, which is a significant change to the market,” said Ezra Katz, founder and CEO of investment banking firm Aztec Group. “They’re leaving New York and Connecticut, some for tax reasons, others for the lifestyle, or cost of living.”

Combined with an influx of younger residents, “It all adds up” to a healthy market, Katz said.

The view from some on Wall Street has been more nuanced. In his most recent note to clients, analyst Vandervliet of UBS wrote in a recent note to investors, “OZK remains at a cross-roads of asset growth and profitability with investors continuing to hold their breath each quarter on credit quality.”

OZK’s publicly traded shares took a hit in Oct. 2018 after it had to write down two loans worth a total of $45.5 million in the Carolinas for projects developed just before the financial crisis. Shares have since recovered from recent lows of approximately $22 to approximately $30.

Brian Martin, analyst with Janney Montgomery Scott, has a $33 price target on the stock.

“In [the third quarter of 2019], OZK had its best origination quarter in [real estate] since 2017 while maintaining their disciplined credit standards,” he wrote in his most recent note to clients.

Ken Thomas, president of Community Development Fund Advisors and a longtime local banking analyst, said it is unusual for an out-of-state bank to be making loans this large here and all over the country.

“Capital can disappear very quickly with a few big bad loans,” he said.

Given how OZK has helped fuel Miami’s boom, Thomas said, all eyes would turn to them in a downturn.

“We’re in a rising tide market where everything looks good,” Thomas said. Should a recession come, he said, OZK may be among those hardest hit.

Scouten said the price at which OZK’s stock is trading may signal “a red flag” for some investors.

But that’s not necessarily the whole story.

“George [Gleason] would tell you [his process is] actually less risky,” Sandler’s Scouten said. “He’d say they have better customers, better credits. Without question their risk is more concentrated. But does that mean it’s truly more risky? That’s a matter of opinion.”

For Colombo, barring a “nuclear war,” there is no chance OZK would suffer the kinds of losses that would cause it to face the fate of some recession-era condo lenders. Gleason touts the multiple stress tests the bank has put itself through that showed its balance sheet remains healthy.

And for Miami’s Trump, sales continue to be steady. Even if the pace could be more swift, he said, the buyers this time are not coming in carrying heavy debt.

“We were the last significant project down here to break ground, and that was over a year ago,” he said. “It can be quite a long process for buying, from pre-sales on up, it can take six years. I don’t read it as a glut of availability. Sales may now not be strong for everybody, but over time we’ll sell out.”

OZK’s Gleason says it’s a simple formula.

“We’re selling a value equation,” he said. “It’s not dependent on us taking a credit risk or offering low price. We get paid well for what we do.”

Name: Bank OZK (formerly Bank of the Ozarks)

Headquarters: Little Rock, Ark.

Year founded: 1903

Chairman and CEO: George Gleason (since 1979)

Assets: $23.4 billion

Miami market presence: 20 condo loans totaling $2.3 billion since 2012