Hunt CIO James Flynn Talks Multifamily Financing and the Fates of the GSEs
An investor-turned-lawyer-turned-lender, James Flynn has helped spearhead the expansion and growth of Hunt Real Estate Capital since taking over as its CIO nearly six years ago.
Since then, Hunt’s annual origination volume has climbed nearly 80 percent, as Flynn has added bridge and mezzanine lending platforms as well as preferred equity offerings to the company’s arsenal. And the company’s servicing portfolio has expanded to over $3 billion.
This year, Flynn, 42, estimates Hunt’s agency origination volume will weigh in at around $4 billion while its bridge, mezz and preferred equity products will come in at just under $1 billion.
“Seventy percent bridge, 20 percent mezz and pref, and 10 percent other,” he said. Combined, that would surpass the company’s overall volume for 2018, which was just under $4 billion.
Flynn, who was an undergraduate at Georgetown University, got his finance start at Lehman Brothers in the late 1990s. After a couple of years, he enrolled in the Columbia University School of Law, where he studied real estate, exiting with a Juris Doctor. He then switched coasts, practicing real estate law for a few years at Gibson, Dunn & Crutcher, based in Los Angeles where, he did “bi-coastal,” real estate transactional work, traveling between L.A. and New York.
Having always been attracted to the business and finance side of the industry, he veered off his legal track in 2007 and joined CharterMac Capital, which would rebrand as Centerline Capital that year.
“There was a lot of growth activity in 2007, and I joined the firm in the middle [of that year], which quickly turned dark for everyone,” Flynn said, alluding to the financial crisis. “I ended up spending a lot of time on the workout and restructuring side of things at the corporate level, the asset level and the fund and public company levels.”
Several years later, in June 2013, Centerline and Hunt Mortgage Group agreed to a merger. Shortly thereafter, in expressing his desire to expand the company’s business on the non-tax credit side of things, Flynn said the Hunt family asked him to enter the C-suite.
This “Jim-of-all-trades,” who is also the CEO of the firm’s publicly-traded REIT, Hunt Companies Finance Trust, chatted with Commercial Observer last week about Hunt’s growing debt, equity and management platforms, the state of multifamily lending and the fate of the GSEs.
Commercial Observer: Had you planned to stay in the legal field? What took you out of it and back into real estate investment?
Jim Flynn: I would say I was actually more focused on the business and investing side, even when I was in law school. But I wouldn’t say I completely shut the door on a long-term legal path. I went to law school in 2002. I had left Lehman Brothers in 2001 and I was out in San Francisco, doing tech banking. There were a lot of people my age who were looking to exit where they were and start new jobs and shift gears. Given that I had an undergraduate degree in finance and accounting and had been an investment banker for a couple years, I was looking for something that would be different than going down the MBA route. I figured with my finance background, getting the legal background to go with it would be helpful in providing some differentiation. Whether that worked or not, I don’t know — but here I sit.
Under your leadership, how has Hunt expanded its business and offerings?
When the company [merged], there was really just the agency lending business and the tax-credit, [low-income housing tax credit] business, and it also owned a bond portfolio that was all focused on affordable housing. Since I’ve gotten here, we’ve divested the tax credit and bond portfolios; we’ve grown the agency business from focusing on conventional and some affordable deals to include small balance, manufactured housing, seniors, and health care and also built our FHA business, which was relatively small at that time — that’s on the agency front. The non-agency front, which is the part that I directly helped to expand, includes commercial bridge lending on all asset classes. It includes mezzanine and preferred equity investing, it includes the management of a publicly-traded REIT, and it includes the more recent expansion into the opportunity zone equity investment management space. And then, in addition to that, the company has expanded by growing and acquiring its property management platform, the third-largest property manager in the country. We’ve expanded our infrastructure business and we’ve divested our general contracting business, although that divestiture was more of a merger, I should say, and we’re now a minority owner in that. The company has continued to broaden its array of products to somewhat scale back on the size of the balance sheet, starting to manage more capital that we put alongside ours. We’ve reacquired a tax credit syndication business, which was something that, for a period of three or four years, we had not been doing.
Tell us more about the bridge, mezz and preferred equity platforms and what the company likes to target through those offerings.
Geographically, we’re anywhere in the country. But, naturally, as many investors and lenders are, we’re population-center based, largely along the “smile” from San Francisco down through the Sun Belt and Southeast and up through the Northeast. That’s a significant portion of our business. Our bridge business has historically focused on light and moderate transitional assets and been less focused on the construction side, which we do elsewhere. We like multifamily; that’s the single majority for us in terms of asset type. But, we also like related asset types like retail shopping centers in suburban areas and grocery- and bank-anchored and self-storage and medical office — things you tend to see in the same markets where we do a lot of multifamily investing and developing. We’re focused on the middle market, so [our loan size is in the] $15 million to $35 million range; we’ve done smaller and larger [loans] than that, but that’s our bread and butter. In the mezz and pref space, we’re focused primarily on multifamily deals today. It’s traditional financing for existing product. A typical deal would be a refinance coming up and one partner buys out another not having the loan proceeds to be able to get there, so they use mezz financing; we like to do that where we can behind agency loans. But we’ll look at any multifamily deal. We also do some mezz financing in the construction space. We’ll take a stretch senior position in a construction loan, taking a loan up to 55 to 65 percent loan-to-value, where we’ll take that last slug and have a partner that will take the traditional 50 to 55 percent slug.
Do you see any vulnerabilities in those “smile” markets?
Well, there are clear tax implications in various state economies. You see it in New York and in Connecticut, in Chicago and Illinois. High-tax states pose a bigger challenge than low-tax states. It does tie to the economy. Attracting jobs is about where people want to go, and they generally want to pay fewer taxes, so jobs move to places with lower taxes and that creates a cascading effect. Tax policy is going to have a big impact on where people choose to live. Jobs will follow where people choose to live, more so than perhaps in the past, when people moved to where the jobs were.
Because of the mobile economy and the mobile office world that we live in, there isn’t much need for that. Jobs can move to where the people are, and that’s not true of all industries and jobs but it’s true of a lot of them. The younger generations are moving to new cities. The New Yorks of the world are fine, but many cities are following the Austin and Nashville track, where 20 years ago people didn’t talk much about them, but now there [are hot markets like] Charlotte [N.C.] and Jacksonville [Fla.]. That takes people away from other places where traditionally they would’ve gone. Those cities north of the smile that are not the major gateway cities may continue to struggle. We used to just talk about Detroit when we talked about shrinking cities in the north.
Particularly on the multifamily side, there are always good assets to buy or build but you have to be careful to pick and choose your markets and micro-markets.
What are some of the biggest challenges today in the multifamily lending space?
I think part of it depends on the asset. If we’re speaking to a stabilized asset where someone’s coming in looking for seven-, 10- or 12-year financing, probably through one of the agencies, the biggest challenges there are purely competition. The other is: With competition comes a stretch for older assets. With the vintage of the assets that are coming in for non-bridge permanent financing, there are some concerns around property conditions. Is there enough capital available, or in reserve, to maintain older assets that are going to need work over the next 10 years, when there’s a relatively high risk that you see some slowdown in rental growth or an increase in costs or some combination that puts pressure on the [NOI] the property can generate? The older the assets, the more challenging the capital issues you might see. Strong sponsors are key to those types of assets in getting people comfortable, outside of traditional reserves.
Weather is a big component, depending on the location; the vintages become more or less important, depending on what type of climate the asset is in. On the transitional, value-add side, I think the biggest challenge is pricing. We’ve got short-term rates above long-term rates; we’ve got spread compression from competition; we’ve got very liquid short-term markets, so there are some aggressive lenders out there taking some chances that lenders, including ourselves, aren’t willing to take — at least for the price. It’s not about taking the risk; it’s about getting paid for the risk.
With the number of lenders out there jockeying for deals, are there any new origination strategies cropping up?
I think the biggest trend that’s impacted the short-term value-add space is the liquidity in the short-term market, so people are using capital markets through CLOs [collateralized loan obligations] and securitizations to finance deals in a way that provides a reasonable return but creates a timing risk in terms of building a portfolio large enough to securitize while hoping that nothing happens along the way. I think that has been a trend for some time, where the CLO market was effectively closed from the crisis until 2015 and really didn’t ramp up until the end of 2016. Because of the duration of those loans and the corresponding duration of the bonds that are sold, that’s an attractive return profile for a lot of big asset managers and book runners that can place those bonds.
What it’s done is it’s created an opportunity for financial players to be more involved in the real estate lending space as opposed to real estate companies and experts. That’s been a challenge for us because we hang our hat on being a real estate company, not a finance company or a bank. So, if you’re competing against folks that are really focused on financial return of the structured finance trade and less focused on the risk and return profile of the real estate, that can be a difficult battle for someone focused on the real estate and the risk. It is what it is and it’s something to expect in the cycle. And, given the rate curve, there’s not a lot you can do about it. For the shops that are more financially focused, those guys are more likely to be discount sellers than workout resolution types, and that’s a natural event at the end of any cycle. [The end of the cycle and downturn] might not happen at all, and I don’t know when, if it is. I don’t think it’s a 2019 event, and frankly, I don’t think it’s a 2020 event.
What’s your take on the chatter around GSE reform and changes to the status of Fannie, Freddie and FHA? How may that impact your business and the multifamily space?
GSE [reform] is a broad topic. It’s impossible to de-link the multifamily from the single family, because it’s all housing-related. So, if you reduce the ability to build and finance one, it should naturally do the opposite for the other. They’re totally different business models, but they’re intrinsically linked in a way that’s hard to separate. We’re directly engaged with the folks at the federal level who are working on these things, and we’re trying to offer insights as to where we think it could go that would be beneficial.
One of the big benefits that Hunt has is we do have a fairly large focus on what would traditionally be called workforce and affordable housing, so a lot of our lending efforts are in areas that have received consistent support from both sides of the aisle and from the current administration and from the GSEs themselves. In that regard, we feel fairly well-positioned to help continue to serve those markets with whatever reform comes through or doesn’t.
In terms of the GSEs coming out of conservatorship, I think on its face that’s a positive thing. One of the biggest challenges faced during the crisis was the GSEs didn’t have enough capital to handle the downturn that could happen, or the devaluing that could happen in their assets. Right now, the structure in conservatorship doesn’t allow them to build any meaningful amount of capital. Coming out of [that], for the single- and multifamily markets, should be viewed as a positive. Of course, the devil is in the details of what that means for the individual players. But, I think putting a structure in place that provides explicit capital requirements and explicit costs of guarantees and et cetera that can provide some clarity and long-term stability for the market, and to the market, is a positive thing. The challenge is getting to an answer that serves the purpose that either Congress or the administration is trying to achieve without creating unforeseen or unplanned disruption. There is a lot of thought going into that to make sure it doesn’t happen, but the general dysfunction or inability for bipartisan consensus on really anything creates a big challenge.