Musk’s refusal to pay rent is contributing to Goldman’s bad real estate debt

Goldman Sachs was hit by a spike in commercial real estate loan defaults in the first quarter, due in part to Elon Musk's refusal to pay Twitter's rent.

The value of loans to commercial real estate borrowers (CRE) that are in arrears on repayments rose 612 percent to $840 million in the first quarter, according to reports filed by Goldman's licensed banking firm with the U.S. Federal Deposit Insurance Commission has.

According to Bankingregdata.com, which compiles the FDIC reports, that was much higher than the increase in delinquent CRE loans reported by the entire US banking industry, which rose 30 percent to just over $12 billion over the same period .

The spike in defaults in Goldman's deposit business comes at a time when rival banks are warning of growing losses on commercial real estate loans, which are largely tied to office buildings and forgiven before the pandemic that ushered in the work-from-home culture.

Goldman has far less exposure to commercial real estate lending compared to its larger peers. According to the FDIC report, the company had $8.4 billion in outstanding loans secured by commercial real estate at the end of the first quarter. Wells Fargo had $91 billion and Bank of America had $60 billion.

However, the rising defaults are another sign of the frustrations the bank is facing as it seeks to diversify its business away from its traditional focus on deals and commerce.

Goldman was among a group of banks, including Citigroup and Deutsche Bank, which loaned Columbia Property, a real estate investment trust, $1.7 billion for seven office buildings in San Francisco and New York, including two that housed major offices for Twitter are.

Twitter stopped paying his rent in November and Elon Musk, the social media network's billionaire owner, has told employees he has no intention of resuming payments or paying off past dues, the lawsuits say. Columbia Property, which is suing Twitter for the missed payments, defaulted in February. Columbia Property declined to comment. Twitter, which has instituted a policy of not responding to the press, could not be reached for comment.

Given Goldman's relatively low exposure to the sector, the bad loans will not have a material impact on the company's earnings. “For Goldman, lending isn't that big of a deal,” said Christopher Kotowski, banking analyst at Oppenheimer. According to Goldman's own calculations, commercial real estate loans make up less than 20 percent of the bank's total loan portfolio.

Still, according to Bankingregdata.com, more than 10 percent of CRE loans held at the company's subsidiary bank, accounting for 90 percent of total loans, are in some form of default, while the average default rate among its competitors is less than 1 percent.

In SEC filings and discussions with investors, Goldman defines its CRE lending more broadly to include loans to investment firms that buy and sell real estate debt and loans used to package CRE loans into investment securities.

By this measure, defaults are lower, but still higher than competitors. “If you look at the aggregate of our commercial real estate lending activity, our default rate is less than 2 percent,” Goldman said.

However, the FDIC puts these loans, which tend to have significantly lower default rates, in a different category.

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

In 2020, corporate lending has been one of the company's priorities, Goldman said. “We're adopting the banking model,” said then-CFO Stephen Scherr during a presentation to investors. “We believe this will be an important source of future upside for the company.”

The bank has benefited from higher interest rates and its lending institution's profits rose to $3.7 billion in the first quarter — an all-time high and a 20 percent increase from the same period last year.

Still, the larger loan portfolio also represents a source of potential losses as Goldman is willing to lend to riskier corporate borrowers relative to its peers. Just over 65 percent of its commercial loans are to non-investment-grade “junk” borrowers, compared to 28 percent and 17 percent at JPMorgan Chase and Citi, respectively.

Goldman's total outstanding loans increased to $3.2 billion, or about 2 percent of outstanding loans, at the end of the first quarter, compared to $2.4 billion a year ago, according to FDIC data.

Most of that is tied to credit cards and other consumer loans, which account for about 65 percent of loan default provisions, according to Bankregdata.com.

Goldman earlier this year signaled its intention to pull out of consumer lending by selling $1 billion in loans tied to its consumer bank Marcus.

David Fanger, who follows Goldman for bond rating firm Moody's Investors Service, said: “While their risk appetite may be greater than that of other companies, they are generally more proactive in managing risk.”

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