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Oaktree Investment Turns Renamed Sabal Into Portfolio Player

September 6, 2011

August was yet another "frenzied" month for CEO R. Patterson "Pat" Jackson and his fast-growing team of small-balance debt analysts and asset managers at Sabal Financial Group. The pace is exactly what Jackson and associates had been hoping for as the recently recapitalized - and renamed - loan analyst and servicer continues to augment its fee-based services with more and more principal investment activities.

While continuing to hire more experts at offices around the country, Sabal's increasingly cramped headquarters team in Newport Beach, Cal. prepared for its mid-September expansion into another half-floor at the home office.

"Some of us are working off of card tables here," Jackson related at the end of a week during which he'd approved four more new hires at Sabal's growing network of offices.

But the most important developments during the month were confirmations that Sabal and partnering firms had been selected winning bidders for a couple more sizable portfolios of small-balance-heavy portfolios.

The core competencies at the former Milestone Asset Resolution Co. stem from its work analyzing and servicing mostly commercial real estate-secured (CRE), acquisition, development and construction (ADC), and commercial and industrial (C&I) loans for banks across the country. Milestone and now Sabal have provided credit valuation advisory services to some 85 banks and other lenders over the past several years.

But as its clients and other lenders have looked to shed distressed assets in recent years, the Jackson-led team has partnered with investment funds managed by the renowned Oaktree Capital Management to acquire and resolve portfolios chock full of small-balance assets.

Then earlier this year, Oaktree's advisory clients invested directly into the firm since renamed Sabal, helping fund its ambitious portfolio acquisition activities. Over future years Jackson and company hope to boost Sabal's current $2 billion-plus in assets under management up to perhaps $10 billion - before strategically selling at opportunistic rates of return and perhaps switching to small-balance lending.

As August's activities suggest, they're well on their way.

Sabal acquired a $212 million (unpaid balance) portfolio from an unidentified Midwest bank, featuring both performing and non-performing loans secured primarily by small-cap retail, office and industrial properties, as well as land. It's heavily concentrated in Wisconsin, Illinois and Florida - which is convenient given that Sabal now has offices in Chicago and Miami in addition to Greenville, SC, Washington DC and New York (and another not far from the Pasadena HQ).

Sabal is also part of a team participating in one of the Federal Deposit Insurance Corp.'s structured offerings of stakes in loan portfolios inherited from solvency-challenged institutions the agency absorbs. Sabal along with Oaktree and Calista Corp. is acquiring a 25 percent stake in a $158 million (UPB) portfolio FDIC inherited from FirsTier Bank.

The vast bulk of this portfolio's collateral assets are in Colorado. As Sabal operatives and their partners work with borrowers to resolve distress situations and otherwise manage assets with an eye toward maximizing returns over several years, the investor group will split proceeds with FDIC 25-75 until their respective capital contributions are recovered - then 50-50 thereafter.

While a dozen-plus competing groups reportedly vied for that particular portfolio stake, Sabal tends to strategically target distressed small-balance assets in tough markets in order to minimize the competent competition - and accordingly maximize ultimate investment yields. And that means targeting a lot of smallish loans community banks originated in the 2000s - many of them too speculative or otherwise risky for conduit-type lenders.

Hence today there's a pretty decent flow of small-balance NPLs and REOs in still-sputtering secondary and tertiary markets - and of secondary quality as well in many cases, Jackson notes. They include quite a lot of land collateral - assets Sabal is well structured to manage until better economic times boost values.

The principal activity makes great sense to the Sabal brain trust, given its extensive history evaluating and managing these very asset profiles on behalf of banks in all parts of the country, along with other lender types and occasionally regulators as well. As Jackson puts it: "Those are our prime customers - and target assets."

It also makes sense to focus on the small-balance space, which is under the radar of so many ambitious, well-heeled asset manager targeting distressed real estate. Not that there aren't plenty of sharp teams bidding against Sabal - it's just not as deep a pool of talent and capital as those typically battling over pools of larger and higher-quality assets, Jackson stresses.

"We determined there's real gold in these (distressed small-balance) assets over the long-term - and there aren't 50 groups competing in this niche." The number of serious bidders for Sabal's preferred portfolios is mostly in single digits, continues Jackson, who previously was CEO of IndyMac Commercial Lending Corp.

Still it's become abundantly clear that successful bidders are highly unlikely to achieve the 25 percent internal rates of return the more optimistic distressed-asset specialists were licking their chops over a couple years back when creditors started shedding soured mortgages.

Given the abundance of capital targeting these assets, the bidding will typically push pricing to where yields will come in at "sub-20" IRRs - although it will vary widely by individual asset, Jackson concludes.

While pursuing relationships with more would-be asset sellers as well as prospective capital partners, Sabal is building up its staff to work with borrowers to resolve distress - amicably where viable but "the next possible solution" where necessary, as Jackson puts it. Logically this sometimes also entails working with local operating partners, perhaps including experienced receivers.

Depending on the pace of economic recovery in the far-flung and diverse markets where Sabal holds (or will hold) stakes in real properties, Jackson foresees asset resolution probably stretching at least another half-decade or more in many cases.

At that point the Sabal team may well be in position to jump into another discipline augmenting its fee-based work: originating small-balance loans.

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