Pat Jackson, ceo and founder of Sabal Capital Partners, answers SCI's questions

Q: How and when did Sabal Capital Partners become involved in the securitisation market?
A: I founded Sabal Capital Partners in February 2009, with the aim of focusing on the aftermath of the financial crisis and buying distressed commercial real estate debt. By 2014, we had purchased US$8.4bn of debt, representing approximately 5,000 loans. In the process, we’d built up a team of 240 employees that sources, bids on and boards CRE assets.

Along the way, we also became an adviser to the FDIC, assessing losses as a result of bank closures ahead of the FDIC becoming the receiver. As such, we’ve provided loss estimates for around 80 banks. The majority of the assets we provide loss assessments for are small balance loans originated by regional and community banks.

We began actively lending in the small balance CRE space in 2013 and participated in the pilot roll-out of a Freddie Mac lending programme, called the Small Balance Loan Program, involving multifamily properties slated for workforce housing. The programme took off in 2014 and we’ve originated over US$1bn per year through it.

These loans are typically securitised and we raised a fund to invest in the B-pieces from that programme. We became the most prolific buyer, recognising an opportunity where banks had withdrawn from the sub-US$10m space and it wasn’t efficient for CMBS conduits to fill the void.

Q: What are your key areas of focus today?
A: We continue to be a leader in agency-focused small balance commercial real estate lending. Concurrently, we are also expanding our debt offerings beyond agency programmes.

In February, we recruited Robert Restrick - most recently with Walker & Dunlop - to lead our CMBS team. Bringing him on coincided with the launch of our new CRE loan programme, a non-agency offering.

The idea behind the programme is to provide a nationwide single-source debt solution for small balance borrowers, combining origination, loan servicing, securitisation and B-piece retention. This is a model we feel is valuable yet lacking, particularly in the small balance commercial real estate debt arena.

The platform is a balance sheet solution using capital markets execution and benefiting from alignment of interest. We’ll lend in the range of US$2m-US$20m, but our sweet spot is US$10m and below.

Q: How do you differentiate yourself from your competitors?
A: There aren’t many options for small balance borrowers, but we’re trying to create a more holistic approach. Our CRE loan programme is unique in the small balance CRE space, with the aim of providing a better credit and loan experience for borrowers.

With traditional CMBS conduits, a borrower doesn’t know where their loan will end up for servicing or the B-piece. If it’s a borrower with a US$100m-plus loan, typically they don’t care. For sub-US$10m borrowers, they can be reassured that the servicing of their loan will remain with Sabal and the B-piece is already signed off, therefore all execution uncertainty is removed. Sabal is a rated primary and special servicer for CMBS.

Small balance CMBS have been issued in the past, but our ability to hold the risk retention piece makes a big difference.

All the infrastructure in a special servicing operation and the B-piece fund with the origination platform take time and investment. Such an undertaking may put other participants off.

We prepared to launch our CMBS platform for over a year. Others have tried bringing similar offerings in a piecemeal fashion, with varying degrees of success, and ultimately the borrowers are the ones that suffer.

Q: What is your strategy going forward?
A: Our CMBS programme is just beginning, but our pipeline is huge. Our first securitisation is likely to be sized in the US$200m-US$250m range. We envisage issuing super-senior triple-A rated notes to non-investment grade notes.

The advantage of small balance loans is the diversity they’ll bring to our securitisations – the fact that there are no lumpy assets should make for an attractive bond offering. Concentration risk is limited too, since it’s a nationwide platform.

We recognise that small balance is more hands-on by virtue of its size. Sabal creates a process with integrity and efficiency – we’re not looking to bring the most elegant deal. We see US$2bn of loans a month, so we don’t have the luxury of re-inventing the wheel.

As such, using streamlined documentation - without intercreditor agreements and cash-sweep scenarios - lowers the cost of the origination process. With most of the complexities removed from the process, it costs around US$20,000-US$25,000 all-in for borrowers – which is a very competitive rate.

Although the intent is always that the loan performs as it’s underwritten and we’ll only underwrite fundamentally sound real estate, if we have to take over a loan, we’re already set up for it as a special servicer. We’ll enforce lender rights, which may include foreclosing on and taking ownership of the real estate.

At present, we don’t have a single delinquency in our portfolio. But in the event that one occurs, we can achieve the best possible outcome for investors.

As the holder of the B-notes, our priority is to achieve full recovery and make a return on our investment. Timely responses to borrowers and fast resolutions make sense to us.

Many borrowers tried to engage with servicers in the last cycle and found the experience very frustrating. We’ll make quick decisions – for instance, in connection with lease renewals that the B-piece holder signs off on – to enable a borrower to run their business efficiently.

We’ve met with rating agencies and they’re currently reviewing the platform, so that when we issue, it’s a logical next step in the evolution of the CMBS market. We anticipate favourable treatment from the agencies, given that we’ll be holding around 8.5% of each deal, providing the economics work.

Q: Which challenges/opportunities do you anticipate in the future?
A: Sabal has a highly defendable niche in small balance commercial real estate loans and no plans to expand into large balance loans at the moment. There are plenty of other options in that space. Small balance is an underserved segment of the CRE market and we will continue to be the first-mover, meeting opportunity as it emerges.

Corinne Smith