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The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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Faux Bear Raids on OZK and AX? But More Trouble Ahead for CRE Equity

June 7, 2024 | Premium Service | In this issue of The Institutional Risk Analyst, we take stock of the banking sector as Q2 2024 grinds to a conclusion in three weeks time. Bank OZK (OZK) fell off the table at the end of May, reflecting market worries about commercial real estate. Several Sell Side equity analysts downgraded OZK and the financial media are working the recession narrative into a frenzy. But we are more concerned about the equity in commercial real estate than the secured lenders.



“When a Citi analyst downgraded Bank OZK from a buy to a sell, sending the stock price tumbling 17 percent, the news shook the industry,” reports The Real Deal. “Normally, an analyst’s downgrade is not the center of real estate water cooler conversations. But OZK is arguably the most important bank in commercial real estate.” Really? The chart below from BankRegData shows the loan categories for OZK.


Bank OZK | Q1 2024

Source: FDIC


Reports from the world of commercial property are a mixed bag to put it optimistically. The financial media decided some time ago that OZK is involved in commercial real estate. A more accurate statement is that the bank is involved in new construction lending on CRE and multifamily. But given the tentative tenor of commercial real estate markets, facts may not matter as much as fear and media hype, especially when that media hype has a hedge fund behind it. Yet we remind readers that unrealized losses on securities are still a bigger problem for banks than CRE.



OZK ranked 25th in the WGA Bank Top 100 Index in Q2 2024. Another name that lost more than 10% at the end of May was Axos Financial (AX), which ranked 16th in the WGA Bank Top 100 Index in Q2 2024. AX is one of the better performing regional banks in the US, but a number of hedge funds have shorted the stock on the premise that the bank’s commercial real estate exposures are problematic and that disclosure regarding the same is lacking. Swarms of trial lawyers follow in their wake like flies. We are a seller of Hindenburg.



The public attack and short-selling strategy against AX launched by Hindenburg Research is well-prepared and compares with the class action lawsuit filed against United Wholesale Mortgage (UWMC) earlier this year. The hostile investment thesis advanced by Hindenburg Research regarding AX essentially accuses the bank of a massive fraud with respect to disclosure on its portfolio of commercial and multifamily loans, many located in New York. The colorful details of some of the loans are pretty typical of the uneven quality of New York City real estate.


The voluminous qualitative analysis in the Hindenburg report is fascinating but unconvincing. Most New York City lenders have similar tales of duplicity and fraud on their books. Every loan has a story. Even the folks at Hindenburg might be surprised how many CRE assets in New York are owned by one flavor of international organized crime gang or another. There is a reason that New York, the Internal Revenue Service and FinCEN have focused on commercial and multifamily real estate in recent years. That's where the money is.


The cute innuendo in the Hindenburg report detracts from the real argument, namely that the equity in these deals is gone. Does that mean that the bank will take a loss? Maybe. Hindenburg does not seem to have the data to make that case. Ultimately, the accusations made by Hindenburg cannot be proven or disproven except by the actual financial results of the bank and its borrowers. AX has called the report misleading, but banks don't generally disclose loan level detail about borrowers. But more significant than the AX accusations is the fact that the bank has a senior secured position in these credits.

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