Short Seller Targets Axos Bank For Problem CRE Loans, Deals With Criminal Borrowers

Shares in Axos Bank tumbled in value Tuesday after short seller Hindenburg Research released a report alleging that the bank has manipulated or distorted its credit metrics to conceal its exposure to potentially troubled commercial real estate loans.

Among the red flags highlighted were San Diego-based Axos' disclosed loan-to-value ratios to commercial real estate, which are 17% less than the median average of nine similar financial entities, Hindenburg wrote.

But despite Axos executives' public declarations that its CRE loan book has avoided problems, several of the projects the bank has lent to have seen zero returns. In many of those cases, the developers have been convicted or accused of crimes or have faced defaults and foreclosures at other properties.

“We are meant to believe that Axos has selected only the best felons and troubled borrowers and properties to lend to, allowing it to waltz gracefully through the imploding commercial real estate market,” Hindenburg’s researchers wrote. “We think otherwise.”

Hindenburg has taken a short position in Axos. 

In a Securities and Exchange Commission filing Tuesday afternoon, Axos refuted Hindenburg’s claims, stating that the allegations are “misleading, incomplete and false.” Axos additionally said that it takes the most senior secured position in its loans, protecting itself from adverse market scenarios.

The bank’s holding company, Axos Financial, had approximately $21.6B in consolidated assets as of the end of last year. 

Its nonperforming loans in the sector have stayed almost flat in the last two years, from 0.4% of its book in 2021 to 0.43% in 2023, while large national banks like Wells Fargo and Bank of America have seen their ratio increase by roughly 2% in the same period as the industry has experienced stress. Meanwhile, the bank’s allowances, which account for future stress, have decreased 0.5% since June 2021, from 1.8% to 1.3% at the end of December.

A 2023 Moody’s study previously found that regional banks’ exposure to direct commercial real estate made up just 16.5% of their respective loan books. Some banks have scrambled to reduce exposure, especially following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank last year. 

But that doesn’t seem to be Axos’ strategy. 

While other banks have backed away from commercial real estate lending, Axos has doubled down. The bank’s total exposure has grown from $5.5B in March 2021 to $9.9B in March 2024, with 53% of its total loan book now exposed to the sector, according to the report.

The bank reportedly may be victim to its lax underwriting standards, after Hindenburg said it interviewed 21 former employees, leasing agents and industry experts, along with an examination of Axos’ loan book.

The bank’s customer base allegedly revolves around “borrowers who couldn’t get loans from other banks,” a former regional leader told Hindenburg.

That includes borrowers with criminal histories and poor credit scores, per the report.

In its filing, Axos said that the borrowers Hindenburg highlighted weren't its clients, and instead, it provided credit to established fund partners such as Related Fund Management and The Carlyle Group. It also said that the lines of credit are secured by multiple assets, have low advance rates and are cross-collateralized. The filing also provided additional details on properties highlighted in the short seller report in an attempt to demonstrate the report’s inaccuracies. 

“Selecting any one asset on a multi-asset line of credit, as was done in this short-seller report, does not accurately portray the underlying risk of the facility,” the filing said.

In one instance showcased in the report, Axos lent up to $97.5M for a Queens multifamily project to an underlying borrower that has been criminally indicted twice personally, including a case involving a construction kickback scheme with a Mafia captain. 

In its filing, Axos claims that it lent money to a joint venture between Slate Property Group and Carlyle, not the property developer. Axos also states that while Hindenburg alleges that the property is not yet leased, the project is 98% complete but doesn't yet have a certificate of occupancy.

In another case, Axos lent $34.7M for the construction of a medical office building at 2226 Third Ave. in Harlem in October 2021. Though the building completed construction, it remains vacant.

The borrower, Elie Schwartz of Nightingale Properties, faced multiple foreclosures after allegations of embezzlement from real estate projects, losing most of the money to personal spending and a $12M failed bet on First Republic stock. 

Schwartz is under investigation by the Department of Justice and the Securities and Exchange Commission, Bisnow previously reported, and a judge has allowed investors to seize Nightingale's assets after he failed to pay back the $53M he misappropriated from two investments in Atlanta and Miami Beach.

But Axos claims that it doesn't have a relationship with Schwartz at the property. Instead, it is a senior secured loan to a credit vehicle managed by Related. 

A mortgage filing in New York City property records shows Related as lending the developer $40M, then assigning $34.7M of that mortgage to Axos three days later. 

The report documents several other instances where Axos lent money to projects only for lots to sit empty, with no construction taking place. That includes three parcels along 36th and 37th Streets in Manhattan, where Axos lent up to $35M to build a 12-story apartment block in March 2022. 

But Axos said the loan to developer ZD Jasper Realty was made by Bridge City Funding, not them. Axos has a real estate lender finance facility to Bridge City with seven cross-collateralized assets on the line, all of which are performing, the bank said in the filing. 

Axos added that ZD Jasper has received several required permits to develop the property at 429 W. 36th St. into a 52-unit, 12-story apartment building, including zoning approval and demolition, and $24M of the loan has been advanced.

In November, Axos took over a $105M loan on a Manhattan office building dubbed The Six. The owner, Savanna, has repeatedly extended loans and defaulted on debt. The building is allegedly less than 50% occupied.

Axos does not refute that the building is half-occupied but added that Savanna is negotiating multiple leases at rents above the loan's underwritten amounts. As with the other properties, the bank also said that Savanna isn't Axos' borrower, but Cirrus Partners is. In November, Axos received a paydown of approximately $10M from the vehicle managed by Cirrus, it said in the filing.

The former bank employees Hindenburg quotes claim Axos has offered new loans at discounts to its borrowers to try to avoid taking losses. A former Axos executive sued the bank, alleging she and several colleagues were fired for highlighting disclosure issues and noncompliance with the bank's underwriting standards.

"Her audit sample contained a disproportionately high number of borrowers that appeared to lack evidence of real business activities and deceptive documentation," attorneys for former Senior Independent Credit Review Officer Jennifer Brear Brinker wrote in the lawsuit. 

Axos, as well as its largest individual shareholder, billionaire Don Hankey, first gained notoriety this year by extending more than $500M in capital to former President Donald Trump to help him cover civil judgments against him and repay other lenders, The Associated Press reported. Trump was convicted last week on 34 felony counts of falsifying business documents to cover hush money payments.

Axos' stock price opened trading Tuesday down 12% but recovered somewhat to be down more than 6% in the early afternoon.

UPDATE, JUNE 4, 5:40 P.M. ET: This story has been updated to include commentary from a regulatory filing by Axos Financial in response to Hindenburg's report.