How do The BAM Companies Mitigate Risk through Diverse Deposit Strategies?

The BAM Companies places a majority of its portfolio cash deposits with JP Morgan Chase & Co, the largest bank in the United States and the world’s largest bank by market capitalization. Chase remains fundamentally strong with diversified deposits, less vulnerable assets, other revenue sources, and the highest regulatory standards for financial institutions. In addition to its Chase deposits, The BAM Companies holds roughly 25% of its reserve cash in conservative yield money market savings accounts with Merchants Bancorp. Merchants Bancorp maintains significant sources of liquidity and intentionally minimizes interest rate risk by conservatively matching the duration of its assets and liabilities. In addition to the $250,000 of insurance available on deposits through the FDIC, The BAM Companies’ holdings at Merchants Bancorp are set up through the bank’s Insured Cash Sweep (ICS) program, which extends FDIC protection up to $100 million per Tax ID.

Why did Silicon Valley Bank Collapse?

Silicon Valley Bank (SVB), a leading U.S. financial institution with over $200 billion in assets, successfully grew its asset base during 2020-21 by attracting deposits from tech startups and venture capital, which were short term liabilities to SVB. To manage the increased influx of cash, SVB invested in longer term U.S. Treasury bonds and mortgage-backed securities, but the Federal Reserve’s series of interest rate hikes starting in 2022 negatively impacted the tech IPO market and led to decreased valuations in bonds. Recently, SVB announced a $2.25 billion capital raise, which caused concern among clients who began withdrawing their deposits. To meet these redemptions, SVB sold bonds at a loss and ultimately failed on March 10. SVB’s reliance on a limited number of deposit sources and their unsuccessful strategy of borrowing short and lending long were contributing factors to their collapse.

How Do We Assess the Health of our Lending Relationships?

A competitive advantage for The BAM Companies has consistently been our long-standing relationships with our creditors. Our principals engage in weekly contact with our lending partners and regularly participate in discussions involving both macroeconomic and industry specific trends. The BAM Companies primarily holds portfolio loans with a subsidiary of Merchants Bancorp (MBIN), who reports that approximately 93% of its loan portfolio and 79% of its investment securities reprice within 30 days, a strategy that further mitigates its risk exposure to interest-rate volatility. Further, less than 1% of its total investment securities were reported as unrealized losses as of December 31, 2022, a metric well-below industry averages. Non-bank debt sourced through agencies like The Federal National Mortgage Association (Fannie Mae) The Federal Home Loan Mortgage Corporation (Freddie Mac) & the Department of Housing and Urban Development (HUD), is utilized for the remaining ¼ of The BAM Companies multifamily investment portfolio.

How Will It Impact Multifamily Real Estate?

Stricter underwriting standards by regional and local banks could be an issue for smaller or under capitalized owners as these banks look to protect and preserve liquidity. However, multifamily, unlike other real estate asset classes, is the most attractive lending opportunity to a myriad of lenders: Fannie Mae, Freddie Mac, HUD, Life Insurance Companies, Banks, and Opportunity Funds. Capital market volatility isn’t necessarily bad for apartment owners. In contrast, this volatility will paralyze some buyers and lead to compelling acquisition opportunities for strong borrowers who have quality relationships with financially sound lenders.

Multifamily has been, and will continue to be, the most resilient asset class in real estate. Apartment fundamentals, especially in the Midwest, remain strong due mostly to the supply/demand imbalance. The U.S. faces a pressing need to build 4.3 million new apartments by 2035, according to a recent study commissioned by the National Apartment Association (NAA) and the National Multifamily Housing Council (NMHC). The current lending environment with stricter underwriting criteria could hamper new construction opportunities going forward, which would enhance apartment fundamentals. Strong borrowers with financially sound lenders have taken notice..

Author: Tony Landa, Chief Investment Office, The BAM Companies, March 2022