First Foundation plunges as 'unexpected' fund raise puts real estate loans in focus (updated)

First Foundation

03/07/2024 22:58

(Updates share price drop in paragraph 1, adds commentary in
paragraphs 7 and 8)
    By Niket  Nishant and Manya Saini
       July 3 (Reuters) - First Foundation  FFWM.N  shares
slumped roughly 24% on Wednesday to their lowest since November
after the Texas-based lender with a huge portfolio of
multifamily real estate loans disclosed a $228 million
"unexpected" capital raise.
    The announcement illustrated the struggles of banks with
large exposure to commercial real estate as the Federal
Reserve's aggressive interest rate hikes and lower occupancies
due to a shift in office work patterns trigger default fears.
    The deal also sparked concerns about excessive dilution of
current shareholders' ownership. It was struck at a 60% discount
to the bank's tangible book value per share and would cede 49%
of its stake to the new investors, according to media reports. 
    "We're surprised First Foundation sought this transaction
given there appeared to be a path to earnings recovery over the
next 2-3 years," Wedbush analyst David Chiaverini said, noting
its substantial capital and strong credit quality.
    Multifamily loans accounted for nearly 52% of the lender's
$10.1 billion portfolio as of March 31. 
    Worries about loans tied to multifamily properties -
apartment buildings with more than four units - have also
crushed New York Community Bancorp's  NYCB.N  shares this year,
down nearly 66% to last close.
    "(First Foundation's) loan book, while performing relatively
well currently given the low delinquency rate, has seen stress
increase slightly in the past few quarters," said Stephen
Buschbom, research director at industry data provider Trepp.
        "Importantly, the ratio of loan loss reserves to
non-performing loans has decreased dramatically over the past
few quarters, indicating that they may need to increase reserves
in the near term, especially if they anticipate more loan credit
problems in the coming months or quarters."
  
    The First Foundation capital injection was led by Fortress
Investment Group, with backing from Canyon Partners, Strategic
Value Bank Partners and North Reef Capital, among others. 
    Fortress is backed by Abu Dhabi's sovereign wealth fund
Mubadala, while Canyon specializes in credit investments.
Strategic Value has roots in distressed debt investing and is an
existing shareholder of First Foundation, while North Reef
focuses on the financial sector. 
    First Foundation was among lenders with the biggest CRE
footprints last year. It wants to offload some of its
multi-family loans, but is being cautious to avoid losses from
such sales, CEO Scott Kavanaugh said on a call on Wednesday.
    Though the low yields from multifamily loans were hurting
the bank's earnings, "there has been no degradation in our
credit whatsoever," he said.
    Some on Wall Street hailed the investment as a positive.
D.A. Davidson upgraded the bank's stock, saying the deal would
allow First Foundation to be flexible with its balance sheet.
    The capital would help increase its allowance for credit
losses and sharpen focus on commercial and industrial loans,
First Foundation said.
    Raymond James said "the worst case scenario has now been
taken off the table" because of the increased liquidity, but
conceded that the capital raise was "unexpected" and downgraded
the bank's stock.
    
   
    SHORTS GAIN
    Short sellers stand to make up to $10 million from the
plunge. Short interest was 11.4% of the bank's free float, up
from 8.5% at the end of last year, according to data from Ortex.
    At rivals such as Valley National Bancorp  VLY.O  and
Customers Bancorp  CUBI.N , the short interest was 8.1% and
10.0%, respectively, the data showed.
    The drop on Wednesday was set to wipe $81 million off First
Foundation's value, bringing its market value to about $290
million.    
    Its shares had already been hammered this year, losing
nearly 32% before the latest slide.  

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
First Foundation shares plunge in 2024    https://reut.rs/3LbmPhq
First Foundation's loan book by asset class    https://reut.rs/3XNOWKM
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Niket Nishant and Manya Saini in Bengaluru;
Additional reporting by Matt Tracy in Washington; Editing by
Shilpi Majumdar, Sriraj Kalluvila and Deepa Babington)
 ((Niket.Nishant@thomsonreuters.com;))