Square Mile’s Jeffrey Fastov Talks Non-Bank Lending
Damian Ghigliotty Jan. 5, 2016, 6:28 p.m.
Jeffrey Fastov hasn’t taken a break from the business since he got his start more than 30 years ago. He launched Moody’s Investors Service’s real estate rating group, which he oversaw from the early 1980s to the early 1990s, and spent the next 17 years in various roles at Goldman Sachs. During his tenure at Goldman, Mr. Fastov took a managing director position in 1999 and later became co-head of the global financial giant’s real estate lending division before he parted ways with the company in 2009.
After a short stint at Credit Suisse Group—which he started right before the financial services firm shut its commercial mortgage-backed securities unit—Mr. Fastov joined Square Mile Capital Management as a senior principal in the summer of 2013. In that role, he oversees the company’s real estate lending business, which Square Mile launched with the San Antonio, Texas-based investment firm USAA Real Estate Company. USAA Real Estate took a 49 percent stake in Square Mile in 2012 and the two companies have since lent more than $1 billion for acquisitions, conversions and ground-up developments around the country. Mr. Fastov told Commercial Observer about that joint effort and where he and his partners see new opportunities going forward.
Commercial Observer: Where did you grow up and study after high school?
Mr. Fastov: I grew up outside of Boston in Newton, Mass., went to the University of Rochester, where I majored in economics, and subsequently got my M.B.A. at Columbia Business School.
How did you get started in commercial real estate finance?
I always liked the physical aspects of real estate and was lucky to get the opportunity to start and run Moody’s real estate rating business from 1983 to 1992. The first major downturn that ultimately led to downgrading financial institutions across the globe because of their real estate exposure was a great learning experience. Respect for risk is not something you learn from reading a book.
You joined Square Mile in July 2013. To what extent has the company grown since you came on board?
Since joining and helping to establish a lending business, the platform has become fairly balanced between credit and its traditional opportunistic investment focus. This is very important in reaching our goal to become an “all weather” investor.
You and your team have been moving up the capital stack and doing more senior debt deals. What are the main factors driving that
As we get later into the cycle together with offshore capital pushing up real estate prices, especially in gateway cities, we have skewed our investment focus toward the best risk and reward opportunities in more illiquid sectors—namely mezzanine lending that goes beyond the reach of banks, especially loans backed by value-add properties.
Where are you seeing the most opportunities in terms of geographic markets, property types and sponsorship?
Basically, we lend in markets and on property types where we have deep ownership experience because that’s the only way to make prudent mezzanine loans in the long run. Through eight regional offices we are plugged into all the major markets in the U.S. and have deep experience in hotels, in addition to the traditional property types. Our big footprint is what allows us to see a lot of transactions and quickly select investments that meet our criteria.
What are the two most interesting transactions you closed outside of New York in 2015?
A condominium construction loan on [the Arábella] in Houston and a loan on leased land used for intermodal logistics adjacent to the Miami airport demonstrate the range of where we invest.
Square Mile lent $58 million on Pfizer’s old headquarters in Brooklyn last September. What was the story behind that deal?
This deal is a perfect example of bringing our experience in ownership of buildings that are being repurposed from an industrial use to creative office. As a sponsor of similar projects, we are better positioned to recognize good value, excellent sponsorship and a solid business plan in order to make a high-quality mezzanine loan investment. Pfizer had their offices and manufacturing facilities in the building. Now Acumen, the building’s sponsor, is curating tenants that collectively make the building a special place to run a small business. Of course, my favorite is Roberta’s.
You and your colleagues have raised hundreds of millions of dollars in funding since you partnered with USAA Real Estate. What is the most recent round that you can discuss?
We have credit strategies that range from first mortgage lending to mezzanine loans backed by stabilized properties, value-add properties, ground-up speculative construction and fixed- and floating-rate coupons with terms ranging from one-year terms to 10-plus-year terms. It’s easier to describe what we don’t do. We’re not a bank, so we don’t make bank loans, and we’re not a trading shop, so we don’t aggregate for securitizations.
Are you seeing increased competition with more debt funds and other direct lenders entering the market?
There are a few significant players entering the market and by the time they get traction in our current business, we’ll be focused on opportunities with better risk and returns.
How do you avoid the herd?
Hear it, watch it and stay out of the way. Seriously, with a deeply skilled group of investment professionals that invest across all our strategies, we are able to more nimbly move to the best opportunities.
You worked at Goldman Sachs for 17 years and headed the firm’s real estate lending business. How was that experience different from your role at Square Mile?
At Square Mile, the debt and equity businesses are integrated and we truly make the most of that fact to source, underwrite, manage and harvest our investments. Prospective borrowers and partners find our flexible capital and consistent transaction teams to be strategically important to their businesses, so we’re able to transact with the strongest players.
What are your expectations for 2016 when it comes to new business opportunities, a new political environment, regulation and interest rates?
The volume of opportunities in the sectors we’re focused on will continue to outstrip new competition, and more regulation on already over-regulated financial institutions and even higher interest rates will provide a wind at our backs.