Firm that works with troubled real estate loans finds that a Golden Rule approach to working borrowers pays big dividends.
St. Petersburg-based real estate finance firm Directed Capital, for its first 20 years, has taken a don’t-fix-what-isn’t-broken approach to its business model.
The core of that model — buying and servicing troubled commercial real estate loans — has worked out well. The firm’s niche is working within loans from $1 million to $20 million. That could be a small office, a retail strip center, a medium size shopping center or an apartment complex, depending on the loan amount. The firm’s not particular about industry, as long as it’s within commercial real estate — it can be as diverse as restaurants, skating rinks, warehouses, self-storage and senior housing.
“We try to stay smaller than really gets the focus and attention of Wall Street money centers, but we’re bigger than the little mom-and-pop players,” CEO Christopher Moench says. “We occupy that middle ground and it’s been a great niche for us to operate within.”
At its start in 2001, the company had seven employees. Now it has a payroll of 35 people, and occupies a top floor of the Morgan Stanley Tower in downtown St. Petersburg, with an expansive view of the waterfront. The firm has an office in San Diego and senior acquisition personnel in Pittsburgh and Boston. It's acquired over $1.7 billion in assets, and overall assets under management have grown consistently since 2001; officials decline to disclose specific revenue figures.
“We’ve been through several market cycles,” Moench says. “What we’ve seen through the ups and downs is there’s a need for what we do in helping borrowers. People have problems with their commercial mortgage loans and the bank doesn’t perhaps want to be there when it matures. We then buy the loan at a discount and provide the borrowers some time and flexibility they need.”
Directed Capital lives up to its name — it has participated in 10 capital raises since it was founded. In a big one, announced in September, it raised $92 million from Goldman Sachs Bank USA, Pacific Western Bank and Valley Bank. The firm intends to acquire more than $500 million in commercial mortgage loans from the raise, then resolve the assets. The firm’s latest capital raise marks a steep incline from its first partnership with external partners, which was for nearly $16 million.
‘The first job is to not lose money. The second principle is never forget the first principle.’ Nick Griffin, Directed Capital
While the bulk of its business — more than 80% — is focused on buying loans, roughly 10 to 15% of the company’s transactions come from loans it originates. In that scenario, Directed Capital might have some sort of ownership in the company as well as being the lender.
And when it comes to investors, what is it that makes Directed Capital so appealing? Company leaders say it comes down, in part, to communication.
“What we hear from our investors that they like is that we communicate with them and regularly send out an investor report,” Moench says. “Generally, we do what we say we’re going to do.”
Moench, who grew up in St. Petersburg, previously worked for a municipal brokerage company. His experiences there, and learning from the secondary commercial mortgage debt market that came out of the 1990s and the S&L Crisis, informed his eventual start of Directed Capital. He learned that opportunistic companies ready to buy distressed or other loans could be in a potentially lucrative position.
From an investor standpoint, Directed Capital is a lower risk option, company executives say. Part of that can be attributed to the company’s approach — it wins roughly 10-15% of what it bids on, says the company’s managing director of capital formation, Nick Griffin.
While a low percentage of potential deals resulting in success is not a typical data point most companies would tout, there’s a reason Directed Capital’s leaders are proud. “It’s not that a lot of debt doesn’t sell,” says Griffin, 52. “We’re still quite particular about what we buy and how much we pay. Others may pay more and may not appreciate the risk.”
Risk assessment is a big element of the loan acquisition business. Companies that purchase loans are generally not able to sit down with the borrower before making a deal, so the buyer has access to a limited amount of information in advance. “Often, we have a not complete view of the world,” says Moench, 59. “That risk gets priced into our thought process. We adjust to the riskiness of the situation by adjusting the price that we’re willing to pay.”
Another Directed Capital differentiator? Rather than quickly move the interest rate to the maximum point, the firm raises borrowers’ rates slowly, maybe inching it from 4% to 5% to 6% over a period. That provides the borrower time to find the funds to continue payments. “The vast majority are really good people that have got some kind of problem and they are trying,” Griffin says.
As a smaller institution than a bank with different regulations, Directed Capital has more flexibility to make decisions quickly and adjust them to the borrower’s situation.
“In the real world, things change,” Moench says. “In a bank, you spend a month and a half trying to put together your workout plan. Something changes for the borrower, something happens, and then they have to restart it and do it all over again. We’ll pivot and move on that — we’ll make a decision in a day that it takes a bank a month and a half to make.”
When banks sell loans, it’s usually done in asset groups. It might be a $5.5 million loan on a warehouse, a $250,000 loan for equipment and a $300,000 loan for a condominium. “The bank sells the whole relationship,” Moench says. “They don’t just sell one of them.”
But unlike other commercial real estate finance companies, Directed Capital doesn’t want to own the properties the mortgages cover. It seeks to get borrowers to a point where they can move on — the firm doesn’t aim to be the borrower’s long-term lender.
That strategy lends itself to the small percentage of work it does as a loan originator, lending capital to commercial real estate ventures that need an extra boost. A good example lies in Steve Anderson, who runs a Tampa Bay area chain of three car washes, with locations in Largo, Seminole and St. Petersburg. When Anderson recently considered getting back in the industry after a time away, he did not have the capital to start a new endeavor alone.
Directed Capital filled that void, and Anderson says the two companies are a good fit. “In our deal, we pretty much run everything and they are in the background supporting us,” Anderson says.
Moench and his team initially believed the pandemic would bring big opportunities for the commercial real estate loan market. Instead, the officials found that government intervention during the pandemic led things to stall, and available loans haven’t been as widespread as they hoped.
“Our thought process is always to make sure we can get our money back from the investment,” Griffin says. “The first job is to not lose money. The second principle is never forget the first principle. We try to put ourselves in positions to make sure we can get our investors’ money back and then have a really good chance to earn the kind of returns that we’re looking to earn.”
There’s another principle the firm keeps front of mind: treat others as you want to be treated. Directed Capital’s leaders remember there are people behind every loan.
“We’re in this to make money,” Moench says. “But I know everybody who works here can look in the mirror and feel good about the role we play in the financial sector. We help unstick things both for the bank and the borrower.”