Months before anyone heard of Covid-19 coronavirus, Chris Moench, CEO of Directed Capital Resources, could see a recession coming.
Economic downturns offer opportunities for Directed Capital, a St. Petersburg company that specializes in working with borrowers to turn around troubled commercial real estate mortgage loans.
Moench started raising funding in the last half of 2019 for DCR Mortgage Partners X LP, a $100 million investment fund that will buy, manage and reposition underperforming commercial mortgages.
“We had been having that conversation pre-Covid 19 with our prospective investors. Then Covid happened, and we find ourselves in the midst of a recession that’s uniquely different than all those that have gone before,” Moench said.
Directed Capital is about two-thirds of the way through the capital raise, and now has received $60 million in two separate credit facilities from Goldman Sachs and Valley National Bank to help with acquisitions, Moench said.
“We are well positioned to be able to invest our partners’ capital and have the opportunity to make a good return for them, and also execute our role in the financial markets. We create liquidity for banks so they can move their problem assets off their balance sheets and be free to do new business,” Moench said.
Directed Capital provides solutions to borrowers when traditional lenders fail to meet their needs. “Being able to aid Main Street, while providing investors with superior, risk-adjusted returns typically uncorrelated with the market, is well in line with the longstanding tradition of this firm of doing good, while increasing investor returns,” Moench said.
Directed Capital was founded in 2001. Since then, it has sponsored 10 funds and acquired more than $1.5 billion in commercial real estate loan assets. The company also originates bridge loans in the $1 million to 20 million range.
The company has 40 professionals at its headquarters in Morgan Stanley Tower in downtown St. Petersburg and at an office in San Diego, California.
Neither Goldman Sachs (NYSE: GS), a Wall Street investment bank and financial services company, nor Wayne, New Jersey-based Valley National Bank (Nasdaq: VLY) is new to Directed Capital. Moench has worked with Goldman for at least a decade and had a relationship with USAmeriBank before the Clearwater-based bank was bought by Valley in 2018.
Directed Capital launches a new fund about every three years. When it started the DCR Mortgage Partners X fund, the economy was in good shape, but Moench expected to see a recession at some point during the buying cycle of the fund, likely around the 2020 election.
Then the pandemic hit. Troubled mortgages are likely to be more prevalent now, as many businesses closed or cut back operations amid efforts to slow the spread of Covid-19. Reduced operations means some tenants and owners are struggling to pay the bills, including their mortgage.
Hotels and restaurants have been have seen the most immediate distress. Directed Capital is very active in the hotel sector and also has a number of properties with restaurants as tenants.
The company has bid and won some assets since the pandemic hit, but the market is still somewhat “muted,” he said. Buyers have a lot of dry powder and sellers have been able to get attractive prices.
But real estate is a lagging indicator of the economy by about six to nine months.
“It’s our thought we’ll see assets and loans transact in the third and fourth quarter that are reactive to what’s happened with Covid-19. It’s still a little soon for banks to bring something to market that is having issues because of the decline in business as a result of the pandemic,” Moench said. “We expect the fourth quarter to be very busy – and much of 2021 there will be a lot of deal flow.”