Private Markets 360° | Episode 53: Navigating Real Estate Debt in Evolving Markets

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Jocelyn Lewis [00:00:00]:

Welcome to Private Markets 360, your insider's guide to the world of private investments. Today, we are excited to have Glenn Grimaldi, CEO of Naftali Credit Partners, joining us. Glenn has a wealth of experience, having spent the majority of his career on the banking side, running a national platform for HSBC with a team of 70 and managing $20 billion in debt. His journey from traditional lending to spearheading a private credit firm offers a unique perspective on the evolution of financial markets particularly in real estate debt. Today, Glenn will share his insights on the shift to private credit, Naftali Credit Partners' philosophy of rational and disciplined investing, and how they navigate the complexities of today's real estate market to identify value and manage risk. Glenn, welcome to Private Markets 360. It's a pleasure to have you with us today. How are you?

 

Glenn Grimaldi [00:00:56]:

I'm fine, thank you. Thank you so much for having me. It's exciting. Hopefully I can make it exciting to talk about banking. It's not always the most subject, but private credit's more exciting. I do start out by saying I'm a fast, quickly recovering banker. I'm now firmly entrenched in private credit. I've left some of the big bank infrastructure behind, but I haven't left— hopefully I haven't left out the training and all the wealth of experience that I had there.

 

Chris Sparenberg [00:01:24]:

I don't think we're going to be short of exciting topics to cover here, Glenn.

 

Glenn Grimaldi [00:01:28]:

Okay, good. My kind of crowd.

 

Chris Sparenberg [00:01:31]:

Let's kick things off talking about your career journey. You started, as you mentioned, on the banking side. You ran a national platform for HSBC. Can you tell us what prompted your shift from traditional lending into leading a private credit firm like Naftali Credit Partners?

 

Glenn Grimaldi [00:01:46]:

Sure. It was a very good long run. I was in senior finance in commercial real estate from the very beginning of my career out of graduate school. It was something that I wanted— I thought I was going to go into on the ownership side, but wandered into the banking world from my finance background and never left. And through a series, even though I was at HSBC for quite a long time and wound up leading a very large portfolio and platform, I really got there through a succession of bank takeovers and mergers and buying portfolios and selling portfolios and even working out portfolios that gave me a wealth of experience. The banking world was, at least when I entered it, fairly entrepreneurial, at least way more entrepreneurial than today. And as it progressed and got regulated through and made its own mistakes, I wouldn't say all the regulations were unfounded. The environment in banking changed quite a bit.

 

Glenn Grimaldi [00:02:48]:

Banks had started to be delevering themselves. Capital rules changed and made real estate, real true real estate lending less and less profitable. And the shift in private credit started really in the '08-'09 downturn in the market, the financial crisis. And that has accelerated over the past decade and more and basically created an opportunity for private credit to at least show their chops and how they might do it differently. And the capital rules and reserves and some of the things that the banks and financial institutions are dealing with in terms of regulations don't exist in the same way. I think that was by design. The federal government basically shifted the— there was still a— there's still a massive demand for commercial real estate finance. It's just shifted from financial institutions to a lot more sort of a decentralized system of private credit.

 

Glenn Grimaldi [00:04:00]:

And the reason I left is for the reasons that I'm outlining. It wasn't as fun. It wasn't as entrepreneurial. The bank was like all other banks were shrinking. And I wanted to use my knowledge to grow a platform. And instead of shrinking a platform, that's— that was the catalyst. The second catalyst was my long-term clients, Naftali Group, Mickey Naftali, who's the chairman of the company, were starting a debt fund or had started one. They were on their second debt fund and said, why not? Completely separate of my deciding to leave, within a few weeks of me leaving, they said, why don't you help us with the second debt fund? And it was really like coming home for me.

 

Glenn Grimaldi [00:04:49]:

We see the same, we think about risk the same way. We've done billions of dollars of deals together, and there couldn't have been a more exciting match for me to shift my career and help grow a business at a very opportune time. It was an amazing journey to get here.

 

Jocelyn Lewis [00:05:07]:

That's really inspiring. And it's also interesting to see how you took that wealth of information that you had gained on the banking side and married that credit expertise with owner development expertise as well. And your shift, it wasn't just about moving from one side of the market to another, but more so bringing together that expertise with that deep understanding of value creation. And that mindset seems to be closely tied to the way that you've built Naftali Credit Partners from the beginning. So Glenn, you've mentioned that Naftali Credit Partners operates with a distinct philosophy. that's centered on rationality and discipline. Would you please elaborate on the philosophy and how that's a differentiator from other players in the market, especially given your insights from the traditional banking side?

 

Glenn Grimaldi [00:06:04]:

Yeah, I would say in a nutshell, we were— the integration of lending and the developer mindset is that we have developer DNA in a credit fund. We don't think of ourselves as purely lenders. We think of ourselves, and you mentioned value creation, we think, and look, even as a banker, I thought my job was to fundamentally understand risk and value, not to be a pure banker. A little insight, and I'll tell you about the platform itself and its philosophy. Usually in big banks, the real estate guys are separate and apart from the commercial bankers. They think of themselves as bankers inasmuch as they're in a bank, and they can access the bank's capital. But they really think of themselves as real estate people first, as people putting together deals and trying to understand fundamental value rather than just as commercial bankers. They're quite distinct in banks.

 

Glenn Grimaldi [00:07:00]:

And that mindset helps. It certainly helped me because I was always sitting in the shoes of the developer thinking, how are they thinking? What do I need to help them with? What do I need to watch out for? And what are they telling me or not telling me that will help me decide whether I'm going to invest in their project? So on the Naftali side, that's the way I typically worked with Mickey when he was my borrower. So I learned a lot from him. Hopefully he learns something from me. And the mindset here is how can we work together to help our client. We're not a fund that preys on clients. We're not about distress. I would say the philosophy here is the same as it was when I was a banker.

 

Glenn Grimaldi [00:07:48]:

Find a good project in a good neighborhood with a good borrower and help them access capital where it's more difficult to access than before and help them build their project. So we're trying to invest in helping different tiers of borrowers fulfill their at least financial needs to build their project. And I guess the other thing is, I think where we can help differently than a bank is, well, number one, we can— for our LP investors who are looking at us and saying, why are you better? First of all, we think we can understand cost and value better than your traditional bank lender who depends on external sources to help them understand value, like hired firms and engineers and consultants. The consultants for me are literally a walk down the hall, either to the chairman or CFO or head of construction or CIO. Those assets that are at my fingertips are something I never had as a banker. I used to meet once a quarter with the OCC discussing my projects back in the day, and they used to often ask me, how come you didn't know about this cost overrun or that issue in that construction loan? And I have to explain to them how the projects work. I said, let me just see if I can give you an example. The banker, the senior banker is often like the parents.

 

Glenn Grimaldi [00:09:14]:

They're literally the last to know what's going on. We'll find out sooner or later, but we might not be able to anticipate what's going to happen. And the differentiator here is that's what I have at my fingertips now. We can pass on projects where we think there's going to be issues where the borrower is not willing to confront them and fix them. And in the middle of the project, if something goes wrong or a little bit differently than we expected, we're typically a very good bridge between the senior lender and the capital stack and the borrower to say this is something normal and propose a solution instead of everybody panicking and saying this is a problem. So we're here to solve problems. We're here to understand fundamental value, and we're here to help the borrower finish the project and move on to the next one. That's what we're here to do.

 

Chris Sparenberg [00:10:08]:

And it's unique to be at the heart of both private credit and real estate. And as we think about the unique challenges in this current market, especially on the real estate side where older deals were structured without anticipating the return of historical interest rates. Can you tell us how Naftali Credit Partners is approaching this environment and what specific property fundamental issues are you seeing?

 

Glenn Grimaldi [00:10:32]:

Yeah, it's funny. A lot of younger people haven't seen interest rates like this. I know we call them high, but they're basically historically normal. I would say for a good amount of my career, interest rates were give or take around where they are now. So it's not so bad. I think the real issue is that the market got hooked on low interest rates for such a long period of time. It saw that as the norm, and it created an operating model around interest rates rather than on value creation and understanding the market. So, look, I'm not an interest rate guru.

 

Glenn Grimaldi [00:11:08]:

I've been involved in every market with interest rates up, down, sideways, moving down, moving up. Whenever any borrower asks me about interest rates or the environment, I would say, look, at the end of the day, interest rates go up, interest rates go down. I don't know. We're here to help you build your project. You're in the middle of it now. You have to finish it, right? You can't just wait for things to get better. You have to build where the capital is available to you. Otherwise, it's just going to cost you more to carry it.

 

Glenn Grimaldi [00:11:36]:

I guess the other thing is value. And you're not financially engineering your project around rates or leverage, then you've got the right project and we're interested in helping you, even if you have to access a little bit more capital and the rate has to be a little bit higher. In downturns, I used to say to my borrowers, when the interest rates went up, they used to complain and say, oh my gosh, these rates are so high. This is horrible. That's not what they used to be. And I used to say, okay, we're in every decade. I, as the banker, get a couple of years, you get the other 8. They're all good.

 

Glenn Grimaldi [00:12:13]:

This cycle is really not high interest rates, it's just moved back to normal. And I think finally the market's understanding that this is the new normal and realizing these are pretty good rates. If they go up again, they might be higher, but they're pretty good. And you can have a whole career with interest rates around, I don't know where they are now, 6 or 7%. You can make a whole career on that. So what we're responding to is where people have bought properly and where people are managing costs and income in a way in which they've created value around their project. That's what we're fundamentally doing. It's not a unique approach.

 

Glenn Grimaldi [00:12:58]:

It may be a market for professionals rather than the engineering financing returns. But okay, that's where we come in. We're not here to engineer returns. We're here to ferret out what the borrower's plans are and find out whether true value is being created or preserved and lend on those projects and help them. That's how we're approaching it. That's exactly what the equity side of the company does on its development side. It's successful because it doesn't fall in love with things. It figures out how to buy and sell properly and control costs.

 

Glenn Grimaldi [00:13:41]:

It's boring stuff, guys. But that's—

 

Chris Sparenberg [00:13:44]:

That's brilliant stuff.

 

Glenn Grimaldi [00:13:45]:

It's— it may— I make it sound very easy. Some days it's not very easy, but if you stick to it and you hold to those principles, there will be success.

 

Jocelyn Lewis [00:13:55]:

That's the trick, right? It's holding to your principles. It's holding to those pillars that have defined your success throughout periods of volatility in the market, like periods of stress often reveal weaknesses in underwriting as well as risk management. So as you look at the market today, you've seen mistakes in the past, whether it's during your prior time or even mistakes that can pop up because things were just unknown. But I think private credit, you've mentioned that there's patterns too. There's patterns and maybe repeatable mistakes that the banks have made.

 

Chris Sparenberg [00:14:40]:

Yep.

 

Jocelyn Lewis [00:14:41]:

And what I would like to hear, Glenn, is if you could expand on some of those pitfalls and how Naftali Credit works to avoid them, particularly when you're thinking about financing construction projects.

 

Glenn Grimaldi [00:14:58]:

It's a great question. I would say maybe it starts out at— the fundamental issue always starts out at deploying money. When you start thinking that's all your business is about and you have to put out money no matter what without finding a good dealer, being picky, and there's a velocity to it, then you have an issue. Whether you're a developer or whether you're a lender, that's where you have issues. So I would say first start— we look at the philosophy is be picky, always believe. And frankly, this has been my philosophy since I entered the business. There's always another deal. They never end.

 

Glenn Grimaldi [00:15:39]:

Every day will bring a new thing. And you don't have to do the thing that's in front of you if it doesn't work. You just don't. If you believe that tomorrow there's going to be another one and there's— it's infinite, you tend to actually live with the philosophy that you're going to have another deal and you don't have to work on things that don't work, which I've seen many folks do. And I think that's an issue in private credit now. There's so much capital, there's so much pressure to deploy it that at the end of the day, as private credit lenders are subject to the same pressures of moving money around and getting it out and pleasing people and getting deals done. And in construction loans, which is the part of the crux of the question you asked. You often don't find out those mistakes for 3 or 4 years.

 

Glenn Grimaldi [00:16:27]:

So that's a— it's a particular issue with construction lenders that, look, you have a budget, you have some money out. All right, maybe the cost overrun's coming later, or maybe the units will go up in value and save the day, or interest rates will go down. All of these kinds of things that you talk yourself into are part of the mistakes that lenders and even developers can make. So how do we look at construction loans? We look at the budget, we look at the location, we look at the borrower, again, sort of fundamental building blocks. And through the expertise that we have on our marketing and sales side, our construction cost side, our understanding of land value, and also understanding of what buildings are being built and will either rent or sell properly. And their unit layouts. We're looking at whether there's value being created. There's a lot of deals out there that are— there's a lot of construction loans out there where the developer doesn't look like he's actually creating a lot of value.

 

Glenn Grimaldi [00:17:35]:

It even looks like they might be losing some money when the building's done, and that's not a great bet. And in some ways, they're under pressure too. They have to build. We don't have to lend to them, but they have to finish somehow. And hope springs eternal on some jobs. It's hard to structure deals and make them better in the financing side. If the deal is Jell-O, you can't prop it up with steel. It's just going to melt around it.

 

Glenn Grimaldi [00:18:03]:

So it has to start with a good foundation. You have to buy the land properly. You have to have the right contractors. You have to have the right architects and look, those are the fundamental things we're looking at. A good borrower with a good location that understands costs and how to build. That's what we're looking for. And it doesn't have to be an institutional national developer. It can be someone local that actually has an understanding of the local market that we're helping.

 

Glenn Grimaldi [00:18:32]:

And it could be regional and it could be national, but the fundamentals are the same.

 

Chris Sparenberg [00:18:38]:

We're touching a lot on strategy, and I want to expand that into what you were just discussing with opportunities. As you think about current market dynamics, where are you seeing the best risk-adjusted returns in real estate debt? And as a follow-on, are there specific sectors or geographic gateway markets where Naftali Credit Partners focuses?

 

Glenn Grimaldi [00:18:58]:

Yeah. In the past, I've lent in probably 45 states. I had offices on the West Coast and the East Coast and the South and Chicago. Right now, the best opportunities we're seeing are actually in our backyard, especially around construction where our expertise is. Fund 2 is a gateway city fund, so we can go anywhere. The same thing will be for Fund 3. But when it comes to heavy construction, ground up or land or things that need zoning expertise or cost expertise in the region, we're probably going to stick to our backyard where we have teams on the ground in New York and South Florida. It could be New Jersey and surrounding areas, but we're going to stick to those markets where we think there's real value opportunity and we have real expertise.

 

Glenn Grimaldi [00:19:50]:

We've gone further afield where there isn't construction. There might be lease-up risk or repositioning of an existing asset where we're evaluating market dynamics, rents, and costs, that's a little bit different. So we'll roam further afield for that. We're going to be skewed more towards housing for sure. It's in our DNA. Even the portfolio that I ran for many years is probably 65% to 70% weighted towards multifamily. It's a fairly mundane business, but it's a business of dollars and cents and making sure that you know what your client wants if it's a condo buyer, and knowing what your client wants if they're a renter, and also knowing how to control costs both on the construction side and on the operating side. So the DNA of the company is construction.

 

Glenn Grimaldi [00:20:50]:

It's also residential. It's not leaving out other categories for us. We've looked at office opportunities. We've been on some hotel opportunities. But for now, where we're seeing the best risk-adjusted returns have actually been in condo construction, land pre-development, some value-add for lease-up rental deals. We've seen some of those where they make some sense, where they're— we think the market's undervaluing rental properties, but those are the main areas. If we find hotel opportunities or medical office or even some office opportunities, we'll bid on them. But for now, per your question, the best returns are actually in our backyard, and there's plenty of opportunities in our backyards.

 

Jocelyn Lewis [00:21:35]:

And that highlights the importance of really understanding local markets and the underlying demand within them. And that level of market knowledge seems particularly important given your position in the capital stack. So Glenn, one of the other things that we'd love to talk about is how Naftali Credit Partners consistently operates in a mezzanine position, and we'd love to know how this strategy influences your due diligence process and your assessment of underlying value and your approach to managing risk within your portfolio.

 

Glenn Grimaldi [00:22:13]:

Yeah, where we're lending in the mezzanine stack typically was reserved for a good amount of my career to basically senior lending. There wasn't a lot of mezzanine lending. So even as a senior lender, I think some of the skills that I had to figure out early on, if we were lending 75% loan to cost as a bank, and that was all structured as a senior loan, even if we were syndicating the senior loan. You had to have some training and understanding what 75% loan-to-cost could turn into. It could turn into an 85% or 90% loan-to-cost, or 75% loan-to-cost, you could figure out might be a 75% loan-to-value, or— but there could be a dip in rents or prices of condos, and you had to be able to figure that out. So I'm not in unfamiliar territory as a mezzanine lender. I'm actually in fairly familiar territory. So the real trick is figuring out, and as it was back in the day, figuring out that the banks have delevered.

 

Glenn Grimaldi [00:23:14]:

So the banks have realized, look, we don't want to cut it this thin. We actually want to delever ourselves and we want to take a piece where we don't have to think about cost overruns, and we're going to outsource that thinking to private credit. What some of those banks have found out is there's a real differentiator between private credit coming from a firm like us and private credit coming from a firm that just has capital that's willing to look for a certain return, but not have the expertise and underlying value. So we see ourselves as true credit and truly credit enhancing the seniors. And I think that's helpful. Maybe where I come in is I speak senior debt fluently. But I also can bridge the gap between the developer and the senior debt and maybe make that bridge. And that's where— that's how we sit in the mezzanine stack.

 

Glenn Grimaldi [00:24:12]:

I created the syndication division at HSBC, and we probably over a 15-year period syndicated $50 billion of senior construction and other types of financing with partner banks. So we know how to play with seniors, we know what they're looking for. And also, we know what they're looking for in terms of our expertise backstopping them if there's an issue. So that's how I see my role, that I don't see it as very different. It used to be that mezzanine lenders were, and maybe some of them are now, if they're not doing the right job, they're doing much higher loans in the capital stack and they're going for really truly different risk. I still see my job as taking advantage of how the capital markets have dislocated or been inefficient around financing real estate. And in many ways, I'm looking for senior debt risk, or at least what I think is we used to be senior debt risk where we're not going to lose any money but get an outsized return for it. And what, in many ways, what we're getting paid for is our professional expertise in dealing with the senior in the capital stack and understanding vis-à-vis the borrower's project, whether they're really truly going to make their plan and create true value.

 

Glenn Grimaldi [00:25:45]:

It's not really a market for amateurs. It's really, even though we've been in this market for a bit, it's actually getting a little bit harder. So I think there's more and more need for us, hence raising Fund 3. I think it's really going to be an opportune time. There hasn't been this long of an inefficiency in the capital markets around financing commercial real estate, at least in my career. Usually the downturns last a couple of years and then everybody, the banks and the insurance companies come roaring back. But I see this sort of fundamental shift that private credit is really taking up all of the slack of the banks and some of the insurance companies. Even the insurance companies are lending or being partners with private real estate.

 

Glenn Grimaldi [00:26:36]:

They're investing more and more in private credit and real estate. So I see this as a prolonged shift or maybe a permanent shift in the way the market approaches credit for real estate. And look, we're seeing some of the traditional private credit folks that were in the mezzanine business actually doing a lot as they've raised more and more capital. They're actually delevering themselves. They're moving into the senior debt part of the stack. They're not mezzanine lenders anymore. They have lots of capital they want to deploy and they're deploying, they're delevering if they don't have the expertise and they're actually in some cases looking to partner with us to help them credit enhance their senior. So it's part of a cycle that I've seen before and it's happening with private credit.

 

Glenn Grimaldi [00:27:27]:

It's natural.

 

Chris Sparenberg [00:27:28]:

Yeah. Change is the only constant in this part of the market. You mentioned being in market with Fund 3. You also gave us some hints there of kind of how the LP landscape is changing with the role that insurance companies play. I think it's fair to say the overall LP landscape is changing quite a bit. There's growing demand for transparency from investors, particularly institutions in the private credit side. Can you tell us how you see institutional investors engaging with credit now and what shifts you might be observing in terms of allocations, capital structures, other preferences they're bringing into these fundraising conversations?

 

Glenn Grimaldi [00:28:09]:

I guess we're going to find out over the next year as we start our real fundraising. But yes, those institutions have not stopped being regulated. They're still being scrutinized whether their investment is in— it's not— it might be passive or they don't have any discretion, but they still have to report. So the regulations, sooner or later the regulations catch up and those institutional investments can't just be thought of as just some money sitting with a private credit manager. So at the end of the day, The system's going to work to look for transparency. Coming from the environment I came from, transparency around— I was a professional auditee at the bank, having transparency and records and letting everybody know what's going on at the project. It's in the DNA of at least where I came from. And it's also in the DNA of the company on the equity side.

 

Glenn Grimaldi [00:29:04]:

We have many partners on the equity side and they have to know about where their money's going and where the project is. That for us, that's easy. I think there might be some growing pains for some of the, some of private credit who are not used to that environment. But our investors are looking for where their money's going. We're going to show them if they want to know about the status. We put out quarterly statements and newsletters about where the projects are and the investor world's a little bit different for me. There's lots of people asking for different things from our partners, ask for many things throughout the course of the year. But it's probably no different from where I came from.

 

Glenn Grimaldi [00:29:46]:

There was always somebody asking me for something about the status of the portfolio. To me, it's not a really different environment. It's a natural part of what you should be doing as a responsible investor.

 

Jocelyn Lewis [00:29:56]:

Right. And it's clear that institutional participation is really helping to shape the evolution of the asset class. So looking forward, the natural question is then where does the market go from here? And Glenn, looking ahead, what do you anticipate will be the most significant trends or shifts in the private credit market for real estate debt over the next few years? Will the sector continue to mature, and what might that mean for metrics and returns?

 

Glenn Grimaldi [00:30:27]:

Yeah, there's already, there's lots of capital pouring into it, and there is caution. There's been early caution this year around non-real estate private credit and redemptions. There's been some headlines about even private credit redemptions. There's a lot of capital that's poured into the sector. There's been some spread pressure this year and some pricing pressure. I think that pricing pressure will continue for a bit, but there will be a reckoning sooner or later. Around pricing and returns. We're not trying— that's a sector view.

 

Glenn Grimaldi [00:31:06]:

Fortunately, I can think about the sector, but I'm only good for one deal at a time. And we can be sharpshooters because we're not trying to be everything to all people. I came from a fairly large institution, but in terms of competing against other larger institutions, I certainly wasn't the biggest. And my philosophy, a lot like the philosophy of the equity side of the house, the building side of the house, is the same. On any given day, in any given city, on any given project, we can beat somebody if we have the right expertise and if we have the right solution for them. So I think about the sector overall, but I often think more like about what's the day-to-day. I know we're talking about big trends in capital, but there's lots of money. There's also lots of deals.

 

Glenn Grimaldi [00:32:00]:

The good thing about the market is there's always a new building. There's not less buildings. There's always more buildings. The debt market here is not self-liquidating. Even on existing buildings, debt comes due every 2, 3, 5 years, even 10 years, and it has to be refinanced or attended to. So it's so dynamic, as Chris said before, the sector things are good, are interesting. Look, they're important in terms of raising capital. But I think our job in terms of going out to the market is to show them why we're different.

 

Glenn Grimaldi [00:32:38]:

We're not trying to be everything to all people, and we're not trying to scattergun our approach. We're trying to do what we do on the equity side, find the right return. There's plenty of deals. We've already done a lot of deals. We've gotten the right returns, and that's our focus. But I think the trend is going to be people are— institutions are going to be pickier. They're going to be— it's not all just there for the taking. The market is tougher.

 

Glenn Grimaldi [00:33:05]:

And I think that plays exactly to our strengths. I think that's actually good for us. They're looking for professionals that have a different story. And there couldn't be a better time for us to tell our story.

 

Chris Sparenberg [00:33:18]:

Thank you for joining us for this episode of Private Markets 360, where we had the pleasure of speaking with Glenn Grimaldi, CEO of Naftali Credit Partners. Glenn provided invaluable insights into his journey from traditional banking to private credit, highlighting Naftali Credit's disciplined and rational approach to real estate debt investing. We discussed the impact of historical interest rates on existing deals, the repeatable mistakes private credit can avoid, and Naftali Credit's focus on high-demand sectors like multifamily in gateway markets. Glenn also shed light on the evolving engagement of institutional investors and his outlook for the future of this maturing sector. If you found this episode insightful, please subscribe to Private Markets 360 for more expert discussions on private investments. Thank you to Glenn for his contributions and to our listeners for tuning in. Until next time.