Invesco Real Estate has a long-standing mantra for its US commercial real estate lending business: credit over yield.
It is a short phrase but one that helps the manager keep its goals and parameters front of mind when evaluating and executing on new loans for a primarily floating-rate lending platform, says Charlie Rose, managing director at Invesco Real Estate. “The mantra of ‘credit over yield’ has been ingrained into our entire team,” Rose says. “When any new opportunity comes in, we can provide a quick ‘no’ on the vast majority of the opportunities and then go really deep on the ones we like. This allows us to have a high capture ratio on the loans that fit our credit box.”
The philosophy is a deliberate one, formed when the firm relaunched its credit platform coming out of the global financial crisis with the aim of protecting the downside.
“We have taken and maintained a property-first approach to lending, where we really focus on the intrinsics of the real estate first and can make quick decisions to pursue the opportunities we like,” Rose says. “Given our equity platform, we know what it’s like to be a borrower. This allows us to focus on what is important, to be commercial and flexible. Business plans can be unpredictable, and it is important to have a lender who can be there with you throughout the lifecycle of an investment.”
Invesco Real Estate’s focus is on the floating-rate, light transitional space, with a real emphasis on relationship lending. The firm has closed or captured $3.3 billion of loans year to date, a level that puts it above full-year 2019 issuance – the last full year before the covid lockdowns.
“One of the things which has been helpful for us is knowing who we are and who we are not. We are not everyone’s lender. But we do focus on that broad swath of the market that makes up the institutional light transitional space, and that focus has allowed us to scale the business quickly,” Rose says, noting the firm’s focus on relationship lending is key to its growth. “We believe that as a relationship lender who is able to do repeat business, we can scale the business to make it a meaningful part of what is already a large business.”
Over the past 11 years, the firm has originated about $16 billion in loans, about $14 billion of which have been in North America. “Within that portfolio, you’re going to see a lot of homogeneity because we are focused on best-in-class sponsors with the kind of liquid institutional real estate we would buy on the equity side of the business,” Rose says.
He adds that the firm was very intentional in 2020, closing in 10 of the 12 months that year. “While we didn’t close as many loans in that period, the loans that we closed were for some of our best borrowers who really needed us at that time, and we had a great structure and pricing. By being present in the market at all stages, even if both parties have to lean in and get little bit uncomfortable to get a deal done, we believe that’s how we really show up as relationship lenders.”
Invesco by the numbers
Invesco Real Estate’s AUM
141m sq ft
Size of the firm’s owned US real estate portfolio
Loan volume since inception of Invesco Real Estate’s relaunched credit business
Invesco Real Estate’s year-to-date originations as of September 2022
Source: Invesco Real Estate
Scaling the platform
Invesco Real Estate sees substantial opportunity to grow its platform, with Rose noting that other debt funds and alternative lenders have been steadily increasing their market share in what is widely estimated to be a $5 trillion market. And in the US, New York-based data and analytics provider Trepp is projecting record maturities of around $500 billion a year for the next five years.
“Debt funds had 9 percent market share in the prior five-year period and that has increased to 14 percent market share today,” Rose says. “We’ve seen this in our business and believe that market share will continue to grow as borrowers have a better experience working with debt funds than with some conventional lenders who are more constrained in what they can do.”
Rose also sees opportunity in periods of disruption. “We have a firm belief that any period of disruption, while it is likely to look different than past periods of disruption, is an opportunity for us to gain market share,” he adds.
The firm is working to grow its real estate credit group, which has 27 dedicated individuals who work in a collaborative, ego-free environment that allows all members of the team an opportunity to speak, Rose says.
“We don’t want to bring egos to the table, and we want the team to achieve its goals as a collective group,” he continues. “One thing I’m particularly proud about is that our US credit team is 74 percent diverse and 58 percent women. We truly are better if we have a variety of perspectives, experiences and identities. It makes us better fiduciaries who are better able to look at investments from multiple angles to make the right decision.”
When Invesco Real Estate relaunched its debt business, it was viewed by the firm as a fundamental pillar of its broader real estate investment management business.
“From the outset, the intention was to develop an all-weather strategy that would succeed throughout all stages of both the macro environment and the credit cycle,” Rose says. “This is the market environment which we have always anticipated. We always say we are agnostic to rates in our strategy. We are a floating-rate lender, we have always had interest rate floors in place on all of our loans and we always require our borrowers to buy interest rate caps.”
The firm’s borrowers have many concerns around rising pricing on loans and uncertainty in the broader real estate market and economy.
“Fundamentally, our borrowers are worried about the same things Americans are worried about right now – inflation, macro-economic risk and potential downside,” Rose explains. “These things are affecting our businesses real-time to the extent that our borrowers are pursuing any business plan that involves an element of construction. Inflation has been impactful to them; they’ve seen pressure in their operating margins as a result of elevated staffing and costs. And our borrowers are keeping a very keen eye out for the ‘recession’ word.”
Borrowers are also navigating a very different world than they were a few years ago. “Our borrowers are highly focused on the all-in cost of financing right now and they’re being hit three ways with the cost of interest rate caps, base rates increasing and less liquidity in the system,” he says. “It has become more expensive to finance a transitional deal. This ultimately creates an opportunity for us to be that steady hand in the storm.”
As a credit investor focused on downside risk, Invesco Real Estate is not trying to get another couple of extra basis points of yield when it originates loans. “If we hit our target returns and exceed on the credit standards, then we are outperforming. And as we all know in the credit business, a single loss can be hugely impactful to the business because we don’t get the big wins on the upside that our equity colleagues may get in an opportunity fund. So, we always have to be thinking about worst-case scenarios and structuring accordingly.”
Scaling the Invesco Real Estate commercial real estate debt business is just one piece of the puzzle Rose is working on.
Another piece is shaping the next generation of lenders, with an emphasis on bringing individuals into the team or its summer analyst and associate programs based more on their potential than their specific experience. This ties directly into Invesco’s DE&I initiatives, and it is something Rose, as a co-chair of Invesco Real Estate’s task force in the area, is working on very closely. Entering the business in a time of turmoil can be a bit overwhelming, but it is also an excellent learning opportunity. Rose, who came out of both undergraduate and graduate school during times of volatility, knows this firsthand.
“For me, as an early professional, living through [the aftermath of the technology downturn and the GFC], it was a great thing for my career to see early on how things could go wrong and to understand that there is downside risk in every commercial real estate investment. It made me a better credit investor,” he says.
Nonetheless, Rose believes that a combination of regulatory changes and a better understanding of the potential downside has had an impact and he suggests credit standards are largely stronger than they were in the last cycle.
“We as an industry are going into this period of much healthier LTVs and DSCRs, which are at record low and high levels, respectively,” Rose says. “The industry is healthy and, accordingly, I anticipate a whole lot less distress and a much quicker rebound in the CRE lending market than we saw coming out of the GFC.”
The green wave
Invesco Real Estate’s debt business strongly considers ESG when lending. This commitment goes down to the asset level and the credit level.
“We have a robust ESG policy which starts with our due diligence process,” Rose says. “We ensure the asset is ESG-eligible and make sure we are collecting data on all three pieces to monitor and report. We are also focused on resiliency during our due diligence process, working with two third-party data providers to model out resiliency issues at the property level.”
One of the newer risks emerging today is the potential for an asset to no longer be viable as ESG standards become more stringent. “We can’t find ourselves in a position as a lender making a loan on a property today, that prior to repayment, becomes uninsurable on an economic basis – that would be an untenable position for us as [a firm that’s] focused on protecting against downside risks,” Rose adds.
Invesco Real Estate closed a roughly $85 million loan in May for a property in an up-and-coming subset of the industrial sector: the outdoor storage space.
The firm originated the loan on a 73-acre site just north of Oakland, California, that is used by an investment-grade tenant to house cars being moved from highways to ships and vice versa.
“This is a unique segment of the industrial space that has seen a lot of incremental demand at a time when more of these sites are being converted into big box warehouses,” Rose says. “You’re seeing diminishing supply at a time when there is elevated demand from the traditional users of outdoor industrial space like car transport and construction supply companies and companies like Amazon, which need more space for their vans.”