Bank OZK Has Dominated Construction Lending. Its CEO Has No Plans To Slow Down

No one has handed out more U.S. construction loans over the past year and a half than a midsized bank in Little Rock, Arkansas. In fact, no entity is even close.

Bank OZK handed out more than $3B in real estate construction loans in 2023, while its closest competition, JPMorgan Chase and Wells Fargo, each originated less than $2B, according to MSCI. As most banks are pulling back from the real estate sector, Bank OZK is leaning in — it followed up last year's dominance with another $688M in construction debt in the first quarter. 

“We're getting a much larger share of the pie right now, but it's just a smaller pie,” Bank OZK CEO George Gleason told Bisnow in an interview this week. 

The 121-year-old financial institution sits in a unique position in commercial real estate lending, spending decades of economic and real estate cycles building its lending arm into a linchpin of development financing. Its construction lending business totaled $12B in outstanding loans at the end of the first quarter, 44% of its total real estate balance sheet. 

But while construction loans are often seen as some of the riskiest debt instruments in commercial real estate, especially amid a banking crisis centered around CRE debt, Bank OZK's gambles always seem to pay off. 

It recorded a record $171M in profit at the end of Q1 and pushed its earnings per share up 7.1%. A seventh consecutive month of record net interest income helped executives increase the bank’s dividend for the 55th month in a row.

On an earnings call last month, Gleason noted that a principle of Bank OZK’s strategic plan includes growing its real estate business “as big as it can be while maintaining discipline.”

Achieving that goal means growing the business regardless of the economic cycle, which Gleason said sets it apart from its peers in the sector. 

“There are a lot of people that come and go in the construction development business,” Gleason told Bisnow. “When it's hot and fashionable to be in it, you have a lot of banks that jump into the space and do it.” 

Many of those fair-weather lenders exit the space entirely when the market turns, Gleason said.

“It's real hot, or it's real cold,” he said, and Bank OZK is there regardless of the temperature.   

Gleason acquired what is now Bank OZK in 1979 when it had $28M in assets. At the time, Bank of the Ozarks was a community bank in Jasper, Arkansas, that had been around since 1903, but Gleason grew it to be the third-largest bank in the state by 2004.

The former attorney spent much of the next two decades expanding the firm through acquisitions across the Southeast, and the bank was rechristened Bank OZK in 2018 to reflect its growing national presence. Today, the bank has more than 2,700 employees in 240 offices across eight states and is the largest bank chartered in Arkansas. 

The bank has been a construction lending juggernaut since at least the early 2000s and has increasingly concentrated its lending activity toward luxury apartments and condos in New York and South Florida. Today, it’s jockeying for more market share as Gleason sees an opportunity to grow as other banks pull back. 

Its total assets were at $36B at the end of the first quarter, up 24.4% from a year earlier. The bank has grown its deposits by 32% year-over-year to $29B and its total loan book grew 27% to $28B.

It’s not the first time the bank has looked to fill in the gaps as other lenders are in retreat, said Catherine Mealor, an analyst at Stifel who covers the bank. 

“Bank OZK typically takes advantage of those moments when others pull back to step in and do it on their terms,” Mealor said. “It’s been very successful for them.”

Its commitment to the construction lending space regardless of the macroeconomic landscape has allowed it to build a services infrastructure that is unparalleled in the industry, said Scott Wadler, managing director responsible for debt origination in Miami at Berkadia.

“Bank OZK has built this machine where they can service the loans in-house. They've got great underwriters, they've got a great closing team, they work with good counsel,” Wadler said. “They have really become specialists in what I would call the Class-A construction space.”

It is known for its rigorous lending standards that it refuses to deviate from, which have helped it build a portfolio of projects that have limited risk exposure, Wadler and Mealor said. 

It keeps its loan-to-cost ratios on its loans at or below 50%, while generally only working with developers that have both a strong track record and access to their own equity for when projects go over budget. 

The guardrails remain in place during development booms and busts, Gleason said, which has kept the firm from making many bad bets. It also allows the bank to grow its piece of the pie when other lenders exit the market, which is exactly what's happened over the past year.

Lending across all of commercial real estate was $429B in 2023, down 47% from a year earlier, according to the Mortgage Bankers Association. The sluggishness continued in Q1, when banks originated just 21% of non-agency CRE mortgages, down from 41% of market share a year prior.

“Lenders have their pick of the litter because they’re seeing a lot of construction requests right now,” Wadler said.  

The lack of liquidity in the space has empowered those who are active to set higher floors on interest rates and push up debt service costs to sponsors. That has both the benefit of higher income from interest payments, but also the risk of more stressed borrowers missing their bills. 

“You've seen very low losses on this business, really throughout their history,” Mealor said. “In this next real estate cycle, you could argue that's going to be tested.”

Executives at the bank expect its net charge-offs to increase in 2024, and the bank has steadily grown its allowance for credit losses to $537M, up $237M over the last seven quarters. It also expects to see higher levels of debt repayments in 2025 and 2026, which could reduce revenue as interest-generating loans move off of its books and into permanent financing. 

A dramatic shift in rates could test the bank’s balance sheet, but executives believe their efforts to push up minimum interest costs for borrowers has provided a strong enough hedge.

To further hedge against a dramatic shift in rates, Bank OZK raises the floor on floating-rate debt on borrowers with a maturing loan that want an extension and wait for rate cuts to reduce the cost of financing in the permanent loan market, where terms are typically longer.

The bank is benefiting from higher rates for its existing loans, since they typically have floating rates that have moved up with the benchmark rate from the Federal Reserve. That movement has helped insulate Bank OZK’s portfolio from having its margins squeezed as lenders run up against rate ceilings. 

“They had one of the best net interest margin and net interest income stories of 2023, because 80% of their loans are floating and they've benefited from higher rates,” Mealor said. “Even as deposit costs are increasing, their margins still stay among the best in the industry.”

Gleason said a higher-for-longer interest rate environment is a tailwind for the bank's interest income growth as more loans that were underwritten years ago when rates were much lower run into current market realities. 

“Sponsors are willing to pay a higher rate on their construction loan short term to tread water, knowing that they're going to get a lot more proceeds on their permanent loan because they’re going to be at a lower rate,” Gleason said. 

The bank is still hitting the gas pedal on new construction financing and expects its real estate group’s loan origination volume to be in line with the $7.2B it doled out in 2023. Many of those new loans will likely be for projects in South Florida, which surpassed New York as the largest piece of Bank OZK’s real estate loan portfolio in the first quarter. 

The lender now has $4.4B in outstanding loans across Miami, Fort Lauderdale and West Palm Beach, compared to $4.2B in the New York metropolitan area. It has more than double the outstanding debt in each region than its third-largest market, San Diego. 

This year alone in South Florida, Bank OZK provided a $328M construction loan to Related Group and GTIS Partners for the 75-story Baccarat Residences, which is 95% pre-sold, along with a $172M loan for a condo tower in the master-planned SoLé Mia community being built by LeFrak and Turnberry Associates. 

It gave Hines $220M for the first phase of its mixed-use project in Fort Lauderdale’s Flagler Village and Oak Row Equities $181M for a 41-story tower in Edgewater. 

The debt for the Edgewater project is indicative of the types of projects Bank OZK targets. Oak Row, which has offices in New York and Miami, is a well-established real estate firm with a 4M SF portfolio that has previously done deals with the bank. It bolstered its financing position by bringing in Related Fund Management, the investment arm of Related Cos., as an equity partner on the Edgewater project. 

The tower at 2600 Biscayne Blvd. will include 400 apartments and 180K SF of office space at a time when the idea of financing office construction is abhorrent to most lenders. But Oak Row has something most other proposed office towers in Miami don’t — a commitment from a tenant to pre-lease 50% of the space.  

“We're very lucky,” said Erik Rutter, managing partner at Oak Row Equities. “The office product at this building is about 180K SF and we pre-leased 90K SF of that prior to going to the market for our construction loan. The remaining 90K SF, we're in active conversations with about 250K to 300K SF worth of tenants.”

Pre-sales play an integral role in locking in financing for condo towers as well, both at Bank OZK and in the broader lending space, because it acts as both a proof of concept for the project while reducing the overall sponsor leverage. 

Despite a recent boom in luxury condo development in South Florida, Gleason says demand remains strong in the region and he has no concerns about an oversupply. He likened current hand-wringing about a supply glut to a similar narrative that took shape just before the pandemic. 

Back then, a wave of new deliveries had given markets like Miami Beach a 19-month supply of condos, and the Miami-Dade County Property Appraiser warned in May 2018 that a “market correction” appeared imminent.

But Gleason remained confident because Bank OZK, which had financed 20 projects in the area for a total of $2.3B, knew the details of every project in the market, how many units were sold and what the deposit structure looked like. Its staff had crunched the numbers and knew the demand was there. The pandemic, and the wave of migration it kicked off, was just an added bonus. 

“We were very confident and people were forecasting doom and gloom, but we had the data, we had done the homework,” Gleason said. “Similarly, the market’s not quite as tight now — and is probably more appropriately balanced now than it was then — but still, there's demand for the product. We feel very good about what we’re doing down there.”