Bank OZK Stays Committed To $3.2B Life Sciences Loan Book Despite Leasing Woes
Bank OZK, the Arkansas-based regional bank that has been the subject of scrutiny over its exposure to commercial real estate, is busy diversifying its portfolio to reduce the percentage of its total loans made to CRE, according to its third-quarter earnings.
But its exposure to the sluggish life sciences asset class has remained static despite leasing challenges at the mega campuses it has financed.
Bank OZK’s Q3 earnings reflected record net income and earnings per share, and it is working to reduce its share of commercial real estate lending, with its Real Estate Specialties Group, or RESG, accounting for 64% of its loan composition, down from a record peak of 70%.
Meanwhile, the bank’s life sciences loans have stayed constant from Q2 at $3.2B, or 10%, of RESG’s loans.
Among its life sciences bets is a $915M loan to IQHQ for the Research and Development District project, a 1.7M SF waterfront life sciences development in San Diego. The project has yet to sign any life sciences tenants, and its struggles were part of Citigroup's decision to downgrade Bank OZK on May 29.
When asked during its Q2 2024 earnings call about that loan, Bank OZK CEO George Gleason responded by reassuring everyone about the good credit of the sponsor and his faith in the project.
“If it takes two years to lease or three years to lease or five years to lease, those guys will get to the finish line on it, I'm confident,” he said. “That's certainly our view of it. If we had been asked questions about it, I think we could have avoided all the drama and unnecessary publicity about this project because it's an excellent asset … we consider it a high-quality asset and we don't expect to discuss it again.”
IQHQ has kept current with payments on its loan, which was given a two-year extension, and contributed an additional $87M to finance the project.
But it’s far from the only life sciences investment by Bank OZK. And considering the difficult leasing environment the industry finds itself in right now, with one-third of the nation’s lab space available, many of these projects will likely face, or already face, challenges finding tenants.
Bank OZK declined to comment earlier this month, citing its pre-earnings release silent period.
In May of 2023, Bank OZK loaned $265M for the construction of Pacific Center, a 790K SF Sterling Bay development in San Diego’s Sorrento Mesa neighborhood that was originally set to complete in Q4 and has yet to lease any space. Sterling Bay didn’t respond to repeated emails and calls seeking comment for this story.
According to a JLL analysis, the Sorrento Mesa submarket had 273K SF of negative absorption over the last year, has 36% of lab space currently available before the completion of Pacific Center and is predicted to take four years to recover supply and demand equilibrium.
Other large projects will be coming online in that same submarket, including Bioterra, Longfellow’s 323K SF, all-electric lab space that was supposed to open in September. It had no announced tenants as of late September and was built with a $203M loan partially financed by Bank OZK.
In Seattle, the Chapter Building, part of an office and life sciences mixed-use project, also attracted $106.9M of Bank OZK construction funds in 2022 and topped out last November after five years of construction.
CBRE Executive Vice President Chris Moe previously told Bisnow in July that the Chapter Building, expected to open this year, hadn’t signed any leases to his knowledge. Leasing activity in the market has slowed to a crawl.
Chicago’s Lincoln Yards redevelopment by Sterling Bay, which has stalled in recent years, boasts a life sciences component: Ally at 1229 W. Concord Place, which scored a $125M Bank OZK loan in 2021 and has yet to announce a tenant.
A reappraisal of life sciences-related loans issued by the bank reveals rising loan-to-value ratios that reflect drooping property values, increased debt loads or some combination of the two.
Bank OZK had 46 loans reappraised in Q3, according to its most recent financial filing released Oct. 17. Three involved life sciences properties, all of which saw their LTV increase, with jumps ranging from 2% to 10.5%.
The earnings don’t offer specific changes in value or loan amounts, but they indicate that 57% of the loans it had reappraised had been evaluated after the Federal Reserve began raising interest rates in March 2023.
In Boston, Bank OZK lent $246M to the 808 Windsor project, the second building in the Boynton Yards project in Somerville, a joint venture between Leggat McCall Properties and DLJ Real Estate Capital Partners.
The 370K SF project, which is still under construction, also has no leases. Bank OZK’s Q3 commentary identified a $246M life sciences loan, with no location or client specified, that had its LTV rise from 42.5% to 53%.
OZK also loaned $119M for US2's 10 Prospect St., also in Somerville, the first part of an expected megadevelopment called USQ, which also hasn’t announced any leases. Within the Q3 Bank OZK docs, a $119M life sciences loan was also identified as having its LTV increase from 41.9% to 50.5%.
