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- Bank OZK Caps New Loans at $500M to Limit Construction Exposure
Bank OZK Caps New Loans at $500M to Limit Construction Exposure
Bank OZK is managing risk by capping new loan sizes to $500M.
Jordan B. & Han-Gwon Lung
October 22, 2024
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Good morning. Bank OZK is managing risk by capping new loan sizes at $500M to lower its current overexposure to large construction loans.
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Market Snapshot
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TIGHTENING BELTS
Bank OZK Caps New Loans at $500M to Lower CRE Exposure
Bank OZK (OZK), the largest construction lender in the U.S., is capping new loans as part of a risk management strategy tied to its significant CRE exposure.
Limiting risk: Bank OZK has decided to cap new loan sizes at $500M and diversify its assets to limit its current overexposure to large construction loans. This change follows a high-profile $915M loan for IQHQ’s 1.7M SF San Diego project that drew criticism, prompting the bank to avoid oversized loans that attract unwanted attention.
Shifting strategy: To complement the new cap, Bank OZK launched a loan syndication desk to share large loans with other lenders, minimizing single-loan risks. The bank reported another quarter of record earnings but expects this streak to break as rate cuts squeeze margins. Net interest margin (NIM) is projected to dip in Q4 and early 2025 before rebounding later in the year.
Navigating rate cuts: The anticipated wave of Federal Reserve rate cuts is expected to trigger refinancing activity, further pressuring profits. Bank OZK forecasts six consecutive 25-basis-point reductions, which could strain earnings in the near term as variable-rate loans hit their floors, driving lower interest income.
Focus on diversification: With CRE loans making up 64% of its total portfolio, Bank OZK aims to reduce this to 50% by the end of 2025. Recent loan growth has been driven by sectors like indirect RV, marine lending, and corporate banking, while commitments from its Real Estate Specialty Group (RESG) have slowed—a signal of broader market caution.
Rising credit risk: Amid these changes, Bank OZK has seen increased credit risk, with net charge-offs rising and allowances for credit losses nearly doubling over nine quarters. Notable problem loans include a non-accrual loan in LA's Arts District and a land loan in Chicago that faced a $20.8M write-down after stalled progress.
➥ THE TAKEAWAY
Bracing for impact: Bank OZK's cap on new loan sizes is a clear signal that the lender is shifting focus away from large, risky construction loans as it braces for rate cuts and refinancing pressures. By diversifying its portfolio, the bank hopes to better manage risk and stabilize earnings in a more uncertain market.
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✍️ Editor’s Picks
A monumental investment: Washington, D.C., plans to purchase Capital One Arena for $88M and lease it back to Monumental Sports through 2070, as part of a $515M agreement to keep its sports teams downtown.
REITs breaking records: Publicly traded REITs raised a record-breaking $64.9B through stock and debt offerings in the first three quarters of 2024, more than in the last two years combined.
Earnings momentum: The S&P 500 is on track to reach 6K by year-end, with investors prioritizing strong corporate earnings over the upcoming presidential election and Federal Reserve policy.
Commercial resurgence: After the Federal Reserve cut interest rates by 50 bps in September, there’s been renewed optimism for a significant CRE recovery at some point next year.
🏘️ MULTIFAMILY
Tax shuffle: Texas Developers are exploiting housing finance corporations (HFCs) for tax breaks on struggling projects, prompting state lawmakers to push for reforms in the upcoming legislative session.
Star turned fraudster: Former NFL linebacker Chris Harrison was charged with embezzling $22.2M from real estate projects, including for Rolex purchases and personal debts.
Homebuilder hustle: Builders are reporting 3% more starts for single-family homes amidst a 4.5M nationwide home shortage, and are now focusing on affordability.
State skyscraper: Forma Development is planning a controversial 26-story apartment tower in San Francisco with 36 units, including 6 affordable units.
Senior living innovation: Capital One (COF) just provided $90.5M for a 97-unit affordable senior housing project in Oakland developed by EBALDC.
Bronx building boom: The Bronx experienced a surge in development with $166.4M in transactions, at around $110 PSF, amidst growing affordability.
🏭 Industrial
Chipmaking: Hemlock Semiconductor is set to receive $325M in government grants to expand its Michigan facility, bolstering domestic production of semiconductor-grade polysilicon, a key material for chip manufacturing.
Demand decline: As sustained growth concerns emerge, industrial demand is slowing in several key US markets, including Sun Belt cities like Charleston and Atlanta.
Seattle bonanza.: Schnitzer Properties acquired 2 industrial properties near Seattle for $58.6M, expanding the firm’s holdings to 2.5MSF.
🏬 RETAIL
Retail shake-up: The broader US retail market is dealing with over 2K store closures, led by Walgreens (WBA), CVS (CVS), and Family Dollar in 2024, with 45K closures projected in the next 5 years.
Big plans for Staten Island: Brookfield Property Partners (BN) plans to expand the Staten Island Mall by 41 KSF, constructing one-story retail buildings by 2030.
End of an era: The last full-size Kmart in the mainland US is closing its doors in the Hamptons, marking the end of a discount shopping era cherished by locals and visitors alike for its rare affordability.
🏢 OFFICE
Office tower shuffle: In a strategic shift, the Irvine Company is selling two 40- and 50-year-old iconic office towers near Horton Plaza in San Diego.
Prime property plunge: ASB Real Estate Investments will list a San Francisco office building for $50M, or around 65% lower than its 2016 purchase price.
Mystery buyer strikes: Sagard Real Estate sold the 185 KSF Tustin Financial Plaza in an undisclosed deal for $27.5M, or around $149 PSF.
🏨 HOSPITALITY
Luxury revival: Developers are investing over $2.5B to transform six historic blocks along Collins Avenue in South Beach, creating a high-end destination dubbed Billionaires' Beach.
Data debacle: Marriott (MAR) and Starwood Hotels (STWD) faced 3 major breaches affecting a staggering 344M customers, leading to an FTC settlement over data security.
📈 CHART OF THE DAY
According to Jay Parsons, Austin's steep rent cuts are driven by an influx of new apartment supply, not weak demand, as rapid construction outpaces the city’s ability to absorb units, pushing rents down in the near term.
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