- What Brookfield is buying performing commercial real estate debt from a U.S. regional bank
- Why Valley National Bank is looking to reduce its exposure to commercial real estate
- What next The deal is expected to close by yearend
Brookfield is under contract to purchase US$823.1m (C$1.15bn) of performing commercial real estate debt from Morristown, N.J.-based Valley National Bank, Green Street News can reveal.
Valley National disclosed the sale last month but did not identify the buyer. The sale price represents a 1% discount to the loans’ face value, and the regional bank booked a US$5.8m loss tied to the transaction. Morgan Stanley brokered the deal, which is expected to close by yearend.
Sources said Valley’s initial offering totaled more than US$1bn of debt and included a mix of multifamily, retail and industrial loans that had few credit issues but carried low coupons. During an Oct. 24 earnings call, Valley’s management said the discount was driven by interest-rate considerations, not concerns about creditworthiness.
Banks have been eager to shed commercial real estate loan risk this year amid increased regulatory attention and new capital rules that could punish the asset class. Regulators focus on a metric that compares a bank’s commercial real estate debt holdings with its total risk-based capital, with banks over 300% receiving additional scrutiny if the amount of debt on their books is growing.
Valley set a goal to reduce its commercial real estate exposure to 400% of capital by yearend, compared with 474% at yearend 2023. The bank disclosed that the loan sale, combined with a common-stock issuance this month, would put its third-quarter concentration ratio at 380%. The bank is targeting a ratio under 375% by yearend 2025.
Valley already was cutting its commercial real estate exposure prior to the sale. Not including the portfolio acquired by Brookfield, the bank reported US$30.4bn of loans at the end of the third quarter, down 4.9% from a year ago.
Brookfield has been an active buyer of commercial mortgages. Last December, it joined Ballast Investments to pay US$615m for roughly US$915m of nonperforming loans backed by San Francisco apartments. Brookfield is one of several alternative-investment firms with access to low-cost funding via a captive insurance unit.
Valley management said the bank would stay focused on its commercial real estate risk, adding that an additional sizable loan sale was unlikely.
“We didn’t feel like we had a gun to our head from a CRE perspective,” chief executive Ira Robbins said during the bank’s earnings call. “We were patient and methodical and allowed it to play out. And we reached a point where I think the discount was extremely attractive for us.”
