Musk’s refusal to pay rent worsens Goldman’s property loans

Goldman Sachs suffered a surge in commercial real estate loan defaults in the first quarter, partly due to Elon Musk’s refusal to pay Twitter’s rent.

The value of loans to commercial real estate borrowers (CREs) climbed 612 percent to $840 million in the first quarter, according to a report filed by Goldman’s licensed banking unit with the US Federal Deposit Insurance Commission.

According to bankingregdata.com, which collates the FDIC report, this was much higher than the increase in delinquent CRE loans reported by the entire US banking industry, which was up more than 30 percent over the same period to $12bn. .

The delinquent surge in Goldman’s deposit-taking business comes at a time when rival banks are warning about mounting losses on commercial real estate loans, most of which are attached to office buildings, and work-from-home amid the pandemic. were done before the start of Culture.

Goldman has much less exposure to commercial real estate lending than its larger rivals. At the end of the first quarter, it had $8.4 billion of outstanding loans backed by commercial assets, as reported by the FDIC. Wells Fargo had $91 billion and Bank of America had $60 billion.

However, rising delinquencies are another sign of the frustrations faced by the bank as it seeks to diversify its business away from its traditional focus on deals and trading.

Goldman was one of a group of banks, including Citigroup and Deutsche Bank, that loaned $1.7 billion to Columbia Properties, a real estate investment trust, against seven office buildings in San Francisco and New York, including two large offices for Twitter. were also included.

Twitter stopped paying its rent in November and the social media network’s billionaire owner Elon Musk told employees he had no intention of resuming payments or covering past dues, according to the lawsuits. Columbia Properties, which is suing Twitter over missed payments, defaulted on the loan in February. Columbia Properties declined to comment. Twitter, which has a policy of not responding to the press, could not be reached for comment.

Given the relatively low risk in Goldman’s sector, the bad loans won’t have a material impact on its earnings. “Lending doesn’t make much sense for Goldman,” says Christopher Kotovsky, a banking analyst at Oppenheimer. By Goldman’s own calculations, commercial real estate loans account for less than 20 percent of the bank’s total loan book.

Still, more than 10 percent of its CRE loans at its banking subsidiary, which account for 90 percent of its total loans, are in some form of default, according to bankingregdata.com, while the average default among its peers is lower. more than 1 percent.

In SEC filings and discussions with investors, Goldman defines its CRE lending more broadly and includes loans made to investment firms that buy and sell real estate loans as well as CRE in investment securities. Used to pool loans.

On that scale, crimes are low, but still high compared to peers. “If you look at the entirety of our commercial real estate lending activities, our delinquency rate is less than 2 percent,” Goldman said.

The FDIC, however, places these loans in a separate category, which have much lower default rates.

Goldman, which became a regulated bank in the wake of the financial crisis, has put more resources into lending over the past decade. The firm now has about $180bn in bank loans outstanding, up from more than $3bn a decade ago.

In 2020, Goldman said that corporate debt was one of the firm’s priorities. “We’re embracing the bank model,” then-Chief Financial Officer Stephen Sher said during a presentation to investors. “We believe this will be an important future resource for the firm.”

The bank benefited from higher interest rates, with its lending unit profit rising to $3.7 billion in the first quarter – an all-time high and a 20 percent jump from the same period last year .

Still, the large loan book is also a source of potential loss, given Goldman’s willingness to lend to riskier corporate borrowers than its rivals. More than 65 percent of its commercial loans are to “junk” borrowers without investment grade credit ratings, compared with 28 percent and 17 percent, respectively, for JPMorgan Chase and Citi.

Goldman’s total amount of outstanding loans rose to $3.2bn at the end of the first quarter, according to FDIC data, or about 2 percent of its outstanding loans, up from $2.4bn a year earlier.

Most of them are related to credit cards and other consumer loans, which make up about 65 percent of its loan loss provisions, according to Bankregdata.com.

Goldman signaled its intention to get out of lending to consumers earlier this year by selling $1 billion of loans belonging to its Marcus Consumer Bank.

David Fanger, who follows Goldman for bond ratings firm Moody’s Investors Service, said: “While their risk appetite may be larger than that of other firms, they are generally more active in risk management.”