Mission Peak’s Wit Solberg Talks Servicing and Investing in Mount Street
A little more than 12 years ago, Mission Peak Capital (MPC) Founder Wit Solberg’s team — then just a group of 12 — was a ragtag, scrappy group of “entrepreneurs in a basement trying to solve the financial crisis, staying up all night with Red Bulls and data, and making a go at it,” he joked.
Back then, NPR’s Planet Money described his team of traders’ tools as computer monitors, potato chips, Snapple and chewing tobacco. Now, Solberg, 46, quipped, “we’re a little bit more straitlaced than we were 12 years ago.”
He moved back to his hometown of Kansas City, Mo., to start Mission Peak in 2008, leaving a Wall Street life that took him to parts of Asia during his time working in structured finance and real estate at Fitch Ratings and Deutsche Bank (DB). Solberg described himself as having been a “traveling soldier” in real estate for many years.
He began his company with a handful of traders, buying and selling “toxic assets,” and advising area banks and other financiers, helping them unshackle themselves from bad investments.
“I solved problems for valuing complicated positions for banks and securities companies and pension funds,” Solberg said. “They needed it, because everything was rated CCC and nobody knew what they owned.”
A few years after MPC was founded, they dipped their toes into private equity — they bought a defaulted mobile home park in 2012.
“We immediately put it in a [commercial mortgage-backed securities] deal; and we almost defaulted,” Solberg said. “Today, we’re owners of maybe 8,000 units and we’re growing rapidly in private equity for manufactured and modular housing for rent; that’s a big aspect of our business.”
MPC has since grown to about 60 employees across its private equity housing and third-party servicing businesses, and it now has offices in Kansas City, Aspen, New York and Chicago.
In 2008, Solberg had moved home to take advantage of the writing on the wall, and now he’s identified the next fissure within the industry that presents opportunity. Just last month, MPC acquired a sizable interest in global third-party servicing firm Mount Street Group in a move to help bridge the gap between borrowers and lenders in today’s splintered market. Mount Street currently oversees about $95 billion in credit products globally and has about $12 billion in assets under management in the U.S; it is one of Europe’s largest and most influential servicers.
“There’s so much room for improvement in the administration, reporting and understanding of the loans that are made,” Solberg said. “As I looked at COVID, wondering what’s going to change or be an accelerating factor, I figured more complicated loans would need to be made because things are simply more complicated, which calls for more sophisticated administration, so we invested in a servicer to meet that demand.”
Solberg spoke to Commercial Observer last week to talk about his firm and the Mount Street joint venture, the heightened importance of communication between borrowers and lenders, and the growing role of third-party servicers in helping keep ships afloat.
Commercial Observer: How did Mission Peak come to be?
Wit Solberg: I started my career in 1997 in loan servicing, and I quickly realized that I had a thirst for the complicated, and how mortgages and real estate were intertwined with Wall Street. I took a trip through various companies in the U.S. and Asia. I managed Fitch [Ratings’] structured finance business in Asia and then went on to manage a large aspect of Deutsche Bank’s real estate business in Asia.
When the financial crisis occurred, I had two options: resolve problem loans for a bank or to start my own company. Going back to the U.S. to work at another company didn’t appeal to me. I started a business that was predicated on advisory, because I didn’t have any money to raise and I wasn’t really an investor.
I’ve got a window into potentially buying both loans and bonds and buying property, and some of the stuff we did was way too complicated — a ‘life’s too short’ kind of thing — but we eventually started to buy mobile home parks that were in default.
And you also do property management?
What we learned is we couldn’t rely on anybody else to manage mobile home parks and keep them safe, and to collect rents and have continuity of staff. So, begrudgingly, we started our own property management company to, frankly, have better service for our residents and ourselves. I don’t think anyone really wants to go into property management unless they have to, especially residential.
What drove the Mount Street partnership?
I met the founder [while] skiing last year, before COVID. I’ve always wanted to be an investor in a servicing business, because it’s a place where you can really grow a real estate finance company that solves all the gripes that [might come up during a deal]. Mount Street has a culture and a mission of providing customized services and servicing for lenders. It’s not a car wash sort of selection process — a ‘pick one.’
Situs [Holdings] and Trimont [Real Estate Advisors] were tapping into a trend for that need, and with COVID, that trend only accelerated. Having worked in servicing, and as a borrower and B-piece owner, [servicing] is of huge importance to the real estate economy, but it’s woefully unsophisticated and antiquated in terms of its technology. I wanted Mount Street because they’ve been serving European customers of U.S. real estate, holding them to a European standard, which is pretty high.
How do you feel COVID stacks up, maybe looking at it through a servicer’s lens, compared to the GFC?
COVID is the toughest thing I’ve ever encountered in my career. Period. Full stop. It was rough on our team. We’re a very large owner, operator and manager of affordable housing, and we have bills to pay. We were caught in the middle of navigating tenant financial issues, illnesses in our communities, fear, unemployment and safety. That put us all to the test.
Before COVID, we were more so pure finance people, and now I feel we’re much more balanced with operations. We also own some retail centers, and there were struggles with paying rent, forbearance, and talking with the lenders. It was hard. We were fortunate we kept our payroll and our people. Not to be a cliche, but you learn about yourself when you go through these circumstances, both as operators of real estate and as operators of a credit business.
With so many loans still unresolved in special servicing, and the dynamics between landlord and renter and borrower and lender having changed so quickly during COVID, how do you see it materializing?
The challenge and the benefit ahead is that the relationship between the real estate and the underlying cash flow is going to go through a traumatic time, and we’re going to see a lot of loans go into special servicing and, in many cases, the parties — especially in securitized special servicing — don’t have the tools available to them to solve the problem.
Loans are still castaway at sea, packaged in faceless trusts, managed by institutions with guys sitting at Bloombergs, and maybe with a servicer on the ground that doesn’t have the tools to bridge that problem. It’s both a challenge and an opportunity that will be there over the next five years.
Now, with Mount Street, you’re looking to tackle the challenge as an opportunity?
We are diving headfirst into recognizing the complicated communication problem between borrowers and lenders, and to do that, you can’t have clerks. One party has to have sophisticated people who understand resolution in a new time — it’s all communication. The lending party, if they’ve outsourced the servicing — and most have — needs to understand what the status is of the borrower. The way it’s set up right now, there’s not enough resources and people in that role to facilitate that communication.
So, we’re hiring like crazy to win assignments with that simple pledge. Our objective is attacking it with the best asset management people. Commoditized real estate is gone, or reduced.
What are some of the most common themes you’re seeing from borrowers and lenders in these situations, in terms of how they’re conducting themselves?
We’re seeing neglect on behalf of lenders, and the borrowers are running the show on the properties out of necessity, because there’s no lender involvement, but the borrower is essentially gambling with lender money to save their hide. So, with lender neglect, because they haven’t been able to travel or get into the courts to appoint receivership, borrowers are just managing property that’s long in default without retribution.
Some borrowers are doing it as a servicer, to help and work with their lender, but others are taking advantage of the situation against their lenders and running properties for their own self-interest for as long as they possibly can and to the detriment of their lenders. The inability to go to court has really tied up one of the key tools to be able to protect collateral. Some lenders and servicers have been creative in getting around and solving that, but others haven’t, basically waiting until the pandemic is over to resolve a situation.
Which types of lenders are really laboring under the weight of this?
A lot of them are foreign mezzanine lenders that don’t know how to, or can’t, enforce, so they surrender. [In some cases], properties don’t even have a receiver, and the borrower is still running the show. For [a defaulted] borrower to be the only representative to be able to bring in new leases and business is highly unusual. If it’s happening at [major] properties of scale and prominence, we see it happening at your garden-variety retail center. At hotels, we see borrowers trying to return the keys and the lenders are not taking them, while not appointing receivership and not taking any action at all. It’s fairly pronounced in a couple sectors. The regional banks have an ability to pretend a bit — because of the stimulus — until the end of the first quarter of 2022 because of loss or impairment recognition; that’s because they needed time. That oftentimes results in a waste of the collateral.
Seems like some folks might be in for real surprises once everything gets back to normal.
When a loan goes into default, there’s a process and protocol to understand what’s going on with the collateral. If people can’t travel or appoint receivership agents in nonrecourse loans, then they are blind. And if they’re blind, they can’t send reports through the channels you and I read, the CMBS reporting packages. Many of the numbers that are reflective of the property are still at 2019, so it’s hard to react. And if their bond prices are going up because they are buyers of high-yield products, then they are actually living in a superior version of 2019, where they can sell their loans for a profit, even if they’re distressed, without really knowing what the underlying fundamentals are on the ground.