Axos: Glaring Commercial Real Estate Loan Problems and Lax Underwriting Beneath This Priced-For-Perfection Bank

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  • Axos Financial is a $3.1 billion market cap regional bank headquartered in San Diego, California that was incorporated in 1999 and went public in March 2005. 
  • Axos trades at a 35% P/TBV premium compared to similarly sized community and regional banks, pricing in investor expectations of outsized growth, a low-risk loan book and multiple years of runway ahead.
  • Its aggressive valuation premium implies that, despite operating in an environment that has devastated many peers, Axos has navigated it by (1) allocating to the lowest-risk asset classes (2) with superior underwriting standards, that have resulted in (3) a portfolio of high-performing projects.
  • Our research, including industry analysis, interviews with 21 former employees, lease agents and industry experts, combined with an examination of Axos’ loan book derived through local property records, indicates a company exposed to the riskiest asset classes with lax underwriting standards and a loan book filled with multiple glaring problems.
  • Contrary to many peers who backed away from the deteriorating commercial real estate market post-covid pandemic, Axos doubled down, increasing its total exposure from $5.5 billion in March 2021 to $9.9 billion in March 2024. Now, 53% of Axos’ total loan book is exposed to these segments.
  • By comparison, a 2023 Moody’s study found that regional banks’ exposure to direct commercial real estate made up only 16.5% of their respective loan books, on average.
  • The industry has begun to plummet: distressed U.S. commercial properties rose from $56.9 billion in 2022 to $85.8 billion in 2023. $2.2 trillion in commercial mortgages are set to mature before the end of 2027.
  • Even AAA-rated bonds backed by CRE debt are now taking losses, and multifamily investments have plunged to four-year lows.
  • “It’s a sh*t show,” one Axos deal partner told us about the office market in New York. 37.5% of Axos’ commercial real estate loans were in New York, where a CRE “bloodbath” has resulted in commercial realty foreclosures increasing 65% year over year.
  • Beyond its dangerous allocation choices, Axos’ lax underwriting standards expose it to major added risk. A former regional leader told us Axos’ customer base in commercial and multifamily revolved around “borrowers who couldn’t get loans from other banks”.
  • In New York alone, with over 125 competing mortgage lenders including top tier banks, Axos faces stiff competition. A former loan originator told us that Axos had to stretch its underwriting criteria to compete: “There had to be a problem for us to even have a shot at it”.
  • Per one former employee on Axos’ embrace of borrowers with criminal histories: “If the felony was explainable, we’ll bank them”. A second added that bad “credit scores…didn’t kill a deal”. A third said “I don’t recall there ever really being a…minimum net worth or minimum liquidity requirement”.
  • A former Axos credit review officer detailed the practice of loan “evergreening,” or providing loans to non-performing or doubtful borrowers to avoid recognizing problems, per litigation records. Similar schemes, also known as “extend and pretend”, were described by former employees during our investigation.
  • These underwriting standards have resulted in a portfolio filled with clear problem loans, based on our review of a cross-section of Axos’ loan book. On March 31, 2024, Axos reported it had provisions for credit losses in its CRE category of just $83 million, a metric that seems vastly understated.
  • For example, Axos lent up to $97.5 million (4.8% of tangible book value), for an apartment construction project in Queens. The underlying borrower has been criminally indicted twice personally, including a case involving a construction kickback scheme with a mafia captain. His company was indicted in a third case.
  • One reason most banks don’t lend up to $97.5 million to individuals with multiple indictments and documented mob ties is that even if things go well, it can be difficult to get your money back. This is made even more challenging when things go poorly, as seems to be the case with this property.
  • The project was scheduled for completion in May 2024, but contrary to many buildings that pre-lease significant portions of a project, the leasing agent told us it has leased zero units, indicating it may already be in distress.
  • In December 2020, Axos lent up to $48.2 million (2.4% of tangible book value) to build an apartment block in Brooklyn, according to local property records. Four years later, amidst zoning issues with the Department of City Planning in New York, there are no signs of construction activity and weeds are growing on the land, per our visit to the site last month.
  • In 2021, Axos lent up to $34.7 million (1.7% of tangible book value) for the construction of a medical office building in Harlem at 2226 Third Avenue, according to local property records.
  • By 2023, the borrower faced multiple foreclosures after allegations emerged that he had embezzled money from real estate projects and lost much of it to extravagant personal spending and gambling on stocks. The borrower is now under investigation by the DoJ and SEC over allegations of embezzling real estate funds, per local media.
  • Construction on the medical office building was completed in February 2024. The whole building is vacant, and the owners are attempting to remarket it with a change in use, per our interview with the leasing agent.
  • In 2022, Axos lent up to $35 million (1.7% of tangible book value) to a developer to construct a 12-story apartment building in Manhattan. Two years later, we found a seemingly derelict property with graffiti tags and little signs of construction.
  • In November 2023, Axos took over a $105 million loan (5.2% of tangible book value) on an office building in Manhattan called “The Six.” Its owner, Savanna, has been “defaulting on debt, repeatedly extending loans, and reducing its ownership stake within individual properties,” per media reports. The building is currently less than 50% occupied, per CoStar.
  • Axos has $1.4 billion of multifamily loans originated during or prior to 2020, when interest rates were close to zero. Former employees told us that, given a typical fixed period of around 5-6 years, many of these come due within the next year and risk being underwater.
  • Axos has been extending loans or attempting to offer slight discounts to keep them afloat, but “in a lot of cases the loans, the properties didn’t cover”, per a former employee.
  • Axos’ rosy-looking credit metrics show signs of manipulation or distortion. Disclosed loan to value (LTV) ratios in commercial real estate are 17% less than the median average of 9 of its peers.
  • “the Bank routinely misrepresented the average loan to value ratio’s of its loans to investors,” per allegations by a former credit review officer documented in litigation records.
  • Non-performing loans as a percent of its key commercial real estate category have stayed almost flat in the last 2 years, from 0.4% in 2021 to 0.43% in 2023. By contrast, large national banks like Wells Fargo and Bank of America have seen this ratio increase by 1.9%-2.0% in the same period.
  • Provisions for future stress as a percent of the commercial real estate category (called “allowances”) have inexplicably decreased 0.5% since June 2021, from 1.8% to 1.3% at the end of December 2023.
  • We estimate that at least $1.1 billion of CRE loans originated at lower interest rates will face renewal in the coming year, testing the sufficiency of Axos’ abnormally low provisions. Axos’ auditors identified this as a critical audit matter given “the judgmental and subjective nature” of the company’s forecasts.
  • Banking is an industry as old as Mesopotamia. Over the last 4,000 years, the industry’s participants have evolved in tandem. All U.S. banks are subject to the same federal funds rate and interest rate dynamics, and similar regulations and requirements. Competitive edges, along with comparable ratios and margins, are generally razor thin.
  • For as long as banks have been around, there have also been ‘too good to be true’ outliers that claim to have discovered a magical lending formula. In this case, 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. We think otherwise.
  • While we do not to call into question Axos’ liquidity position or its depositor base, history shows that these ‘outliers’ often take on undisclosed risk to fuel their optimistic numbers.
  • Overall, Axos’ exposure to the riskiest asset classes, its lax underwriting standards, and glaring issues with its portfolio indicate that the company faces significant stress ahead.

Initial Disclosure: After extensive research, we have taken a short position in shares of Axos Financial, Inc. (NYSE:AX). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.

Basics On The Business: A $3.1 Billion Digital Focused Bank, Headquartered in California

Axos Financial (“Axos”) is a $3.1 billion market cap regional bank headquartered in San Diego, California that was incorporated in 1999 and went public in March 2005.[1]

The company describes itself as a “technology-driven financial services company that provides innovative banking products and services to customers nationwide”, per its website. It is led by Gregory Garrabrants, who has been CEO and President since 2007.

Axos has two key businesses: its “banking business” and its “securities business”.

Its banking business covers deposit and loan activities for a range of customers, from personal consumers to commercial and industrial customers, per Axos’ filings. Its banking business accounted for ~95% of Axos’ pre-tax income as of December 2023. [2]  

Its securities business, comprising the rest of Axos’ pre-tax income, is aimed at financial market participants and includes brokerage, investment advisory and clearing.

The bank’s entire loan book was valued at $18.7 billion on March 31st, 2024, comparable in size to many regional banks.

Bull Case: Asset-Light Business Generating Returns On Assets In The 90th Percentile Of Its Peer Group, While Maintaining Prudent Underwriting

Axos has operated since inception as a digital bank, meaning it doesn’t have the fixed costs typically associated with legacy “brick and mortar” banks.

The bank has described its loan growth as “prudent” with “low LTVs” and has said in the past that its conservative underwriting and secured lending has well-positioned its portfolio for an economic downturn. [Pg. 12]

Over the last 10 years, Axos has grown its total loan book at an average of 22% per year. Its profitability has regularly increased in tandem, with net income growing 23% per year on average.

(Source: Axos Financial Presentations And Annual Reports, [Pgs. 8, 43 & Pgs. 4, 6, 5])[3]

In its May 2024 investor presentation, Axos reported earnings metrics that dwarfed most of its peers, with returns on equity, returns on average assets and net interest income all at, or above the top 94th percentile of its peer group.[4]

(Source: Axos Investor Presentation [Slide 4])

Along with its strong growth and margin performance, Axos’ risk metrics remain better than industry averages, with non-performing loans and leases to total loans currently at just 0.63%, compared to a Q1 2024 industry average of 0.91%.

Fundamentals: Axos Trades At A 35% Premium Relative To Peers Based On Price/Tangible Book Value

Price to Tangible Book Value (P/TBV) is a baseline valuation metric commonly used to analyze bank stocks. It compares the company’s price to the equity available to stockholders, leaving out intangible assets such as goodwill or intellectual property.

Axos trades at a ~35% P/TBV premium compared to similarly sized community and regional banks, pricing in investor expectations of outsized growth, a low-risk loan book and multiple years of runway ahead.

(Source: Hindenburg Research, Bloomberg)

On May 15th, 2024, Axos shares hit all-time highs of $63, with the stock currently trading around 15% off those highs. 

Axos’ aggressive valuation premium implies that, despite operating in an environment that has devastated many of its peers, Axos has navigated it by (1) allocating to the lowest-risk asset classes and (2) accumulating a portfolio of extremely high-performing projects driven by (3) superior underwriting standards.

Part I: Axos Has Allocated To The Highest Risk Asset Classes—53% Of Axos’ Total Loan Book Is Exposed To The Sharply Deteriorating US Commercial Real Estate Market

Between Commercial Real Estate And Multifamily Segments, Axos’ Total Exposure Is $9.91 Billion As Of March 2024

Rather than allocating to the lowest-risk asset classes, Axos is highly exposed to the riskiest.

Commercial real estate (“CRE”) lending is commonly defined as loans originated on properties that are used for business purposes, such as offices or retail stores, as well as multi-unit residential buildings, called “multifamily”. [5]

Collectively we refer to Axos’ disclosed categories of “Commercial Real Estate” and “Multifamily & Commercial Mortgage”, found in its filings, as Axos’ “Total Commercial Real Estate Exposure”.  

Over the last 3 years, between March 2021 and March 2024, pandemic lockdowns and the shift to working from home helped catalyze an exodus from commercial real estate by many industry participants.[6]

During that time, Axos doubled down. Its total commercial real estate exposure grew in absolute value by 81%. [1, 2] Its CRE category grew 94%, during the same time period. [1, 2]

(Source: Axos 10Q Q3 2024 [Pg. 18])

At the end of March 2024, Axos reported a balance of $5.9 billion in its commercial real estate segment—32% of its entire loan book or 292% of tangible book value. It also reported $4 billion in its “Multifamily and Commercial Mortgage” category—21% of its entire loan book or 198% of tangible book value.[7] [Slide 10]

As a result, Axos’ total commercial real estate exposure has ballooned to 53% of total net loans, or $9.91 billion.

(“Total Commercial Real Estate” Source: March 2024 Quarterly Financial Statement)

By Comparison, A 2023 Moody’s Study Found That Regional Banks’ Exposure To Direct Commercial Real Estate Made Up Only 16.5% Of Their Respective Loan Books, On Average

A 2023 Moody’s study found that the average regional bank, defined as holding $10-160 billion in assets, had 16.5% of assets exposed to CRE, far less than Axos’ 53%.

The same study found that the highest direct total CRE exposure came from community banks at 24.3%, a number still less than half of Axos’ current exposure.

The Industry Has Begun To Plummet: Distressed U.S. Commercial Properties Rose From $56.9 Billion In 2022 to $85.8 Billion In 2023

“At Some Point, That Avalanche Is Going To Hit”: $2.2 Trillion In Commercial Mortgages Are Set To Mature Before The End Of 2027

AAA-Rated Bonds Backed By CRE Debt Are Now Taking Losses And Multifamily Investments Have Plunged To Four Year Lows

Distressed U.S. commercial properties grew from $56.9 billion in 2022 to $85.8 billion by the end of 2023, according to MSCI, which noted that offices constituted 41% of distressed assets and that the “multifamily market constituted the largest pool of potentially distressed assets, with a value of USD 67.3 billion, ahead of office with USD 54.7 billion.” [8]

Cumulative distress has been on a steady rise since 2022 and has eclipsed its post-Covid highs.

(Source: MSCI)

The Federal Reserve and the International Monetary Fund (IMF) have both commented on the threat, with the latter noting in January 2024 that the US commercial real estate market has seen “one of the steepest price declines in at least a half century”.

Commercial real estate data firm Trepp predicts “distress will keep rising,” per a February 2024 Wall Street Journal report that states more than $2.2 trillion in commercial mortgages are set to mature before the end of 2027. Lonnie Hendry of Trepp told the Journal:

“At some point, that avalanche is going to hit.”

NBC reported on May 21, 2024 that multifamily rents in April fell 0.8% because “a massive amount of new supply entered the market, with still more in the pipeline”.

This supply glut is further exacerbated by weak investment appetite: data retrieved from Costar as of May 2024 shows that multifamily investments have fallen to four-year lows.

(Source: Costar)

On May 23, 2024, Bloomberg reported that “for the first time since the financial crisis”, AAA rated bonds backed by commercial real estate debt were suffering losses.

The article detailed how buyers of the AAA portion of a $308 million note on the 1740 Broadway building in midtown Manhattan took a 26% loss after the loan was sold at a steep discount.

(Source: Bloomberg)

Lea Overby, a CMBS strategist at Barclays, told Bloomberg:

“Now that we’ve seen the first commercial mortgage backed securities get hit, other AAA bonds are bound to see losses…”

37.5% Of Axos’ Commercial Real Estate Loans Were In New York

“The Worst Market I’ve Seen”: New York City CRE “Bloodbath” Has Resulted In Commercial Realty Foreclosures Increasing 65% Year Over Year

“It’s A Sh*t Show,” One Axos Deal Partner Told Us About The Office Market In New York

Axos reported that as of June 2023, 37.5% of its commercial real estate loan category was in New York, per its latest 10-K. [Pg. 6]

New York is a geography that warranted its own “Risk Factor” in Axos’ 10-K, where it disclosed that “declining real estate values, particularly in California and New York, could reduce the value of our loan and lease portfolio and impair our profitability and financial condition.”

Over the last year, numerous media reports and industry research reports detailed the unfolding disaster in New York’s CRE market. The Financial Times called it a “bloodbath” last year. Bisnow quoted a source calling it the worst market they’ve ever seen, and the New York Times wrote in March that prices were tumbling. [1, 2, 3, 4]

(Source: Media Articles [1, 2, 3, 4])

One commonly tracked indicator is the number of foreclosures, measuring a key risk for when lenders are generally forced to sell the underlying property collateral.

In New York, the number of commercial property foreclosures increased 65% year on year in March 2024, according to Attom Data, a commercial real estate analytics firm.

After California, which accounts for another 7.1% of Axos’ CRE category, New York had the highest number of commercial foreclosures out of any state, per the data.

(Source: AttomData)

Our research found office buildings in New York financed by Axos between 2020-2024 that are facing stresses in commercial real estate markets, as detailed in Part II.

We interviewed an Axos deal partner, asking about their assessment on New York office pricing. They told us “it’s a sh*t show”, further explaining:

“… every day you’re hearing about a different office that loses a very large tenant. And when you have these empty offices, you can’t fill them back up. Offices have a distinct issue where they’re huge amounts of blocks of space where the landlord pays to build them out. So you have to pay tenant improvement”.

In brief, Axos is highly exposed to the riskiest asset classes in the country that are in a state of collapse. Navigating this minefield unscathed, as its stock price suggests it has done, would require Axos to have nearly flawless loan selection.

Part II: A Closer Look At Axos’ Portfolio Shows A Loan Book Filled With Glaring Problems

On March 31, 2024, Axos reported it had provisions for credit losses in its CRE category of just $83 million. [Slide 27]

Axos has reassured investors that it has largely been immune to broader market stress, saying “we’re not really seeing anything that we find concerning”, per the CFO’s comment on the Q3 2023 earnings call. [1]

Our findings show otherwise—that Axos’ embrace of troubled borrowers in the riskiest markets in the country has predictably resulted in major projects that appear to be either stalled or deeply underperforming. Others are nowhere near completion or barren and vacant.

Axos Lent Up To $97.5 Million (4.8% Of Tangible Book Value), For An Apartment Construction Project In Queens

The Underlying Borrower Has Been Criminally Indicted Twice Personally, Including A Case Involving A Construction Kickback Scheme With A Mafia Captain

His Company Was Indicted In A 3rd Case

In October 2023, Axos entered into an agreement to lend up to $97.5 million for an apartment construction project at 147-35 95th Avenue, Jamaica, Queens per New York property records.[9] [10] [Pg. 5] The property is slated to be a 521-unit apartment building, per Multi-Housing News.

By itself, the loan represents up to 4.8% of Axos’ tangible book value and could be one of Axos’ larger loans, even higher than the maximum loan values indicated on Axos’ website for construction lending.

The underlying borrower is Sutphin Boulevard Equities, owned by Solomon Feder, per state government records. [Pg. 25][11]

A basic Google search shows Solomon Feder is party to 3 criminal indictments for fraud, a kick-back scheme with a reported mobster and an off-the-books compensation scheme.[12]

#1: In February 2022, Solomon Feder was indicted over allegations relating to a “$20m off-the-books compensation scheme” involving “envelopes of cash” to avoid detection.

In February 2022, Solomon Feder was indicted in a scheme that enabled construction companies to under-report payrolls, per a press release by the Manhattan District Attorney. This involved workers being paid “with envelopes of cash”, to avoid detection.

#2: In January, 2023, Solomon Feder was indicted in a construction kick-back scheme involving a Gambino mobster “captain”.

A Statement of Facts, released by the Manhattan District Attorney, mentioned Feder and his company. [Pg. 10] The indictment showed Solomon “Sol” Feder’s company had upped the price for contract work on 250 5th Avenue at the behest of the key accused in the kickback scheme, Robert Baselice. [Pgs. 9-10] The case is still ongoing, per court records.

(Source: Criminal Indictment, naming Solomon Feder [Pgs. 9-10])
(Source: New York Post January 2023, reporting on the indictment)

At the time of the kickback scheme, the purported mastermind, Robert Baselice (aka Robert Basilice) was an executive with The Rinaldi Group, a contractor that has not been charged with any wrongdoing. A 2010 NY Post article referred to Baselice as a “Gambino crime-family associate” when he was indicted in a large scale gambling ring bust.[13]

#3: In May, 2023, Big Apple Designers, owned by Solomon Feder, was indicted over a scheme to fraudulently qualify as minority and/or women-owned business enterprises, per a New York government press release. [Pg. 5]

(Source: New York Supreme Court Records, available at Manhattan District Attorney Website)

The Project Run By The Axos Borrower Involved In 3 Indictments, With Documented Mob Ties, Is Scheduled For Completion In May 2024

It Has Leased Zero Units, Per The Lease Agent, Indicating It May Already Be In Distress

One of the reasons most banks don’t lend up to $97.5 million to individuals with multiple indictments and documented mob ties is that even if things go well, it can be difficult to get your money back.

This is made even more challenging when things go poorly, as seems to be the case with this property, slated for completion in May 2024, per CoStar.

(Source: CoStar, Real Estate Platform)

Given the imminence of completion, we expected many of the 521 units to have already been rented, as is common with most successful projects. But when we called the lease agent, The LiscoGroup, in mid-May they told us: [14]

Nothing is leased yet… The building is still empty… It will finish in construction, it should be done in the next month or so.”

When we asked if it would be possible for us to rent 200-300 units they told us it “shouldn’t be an issue”.

In short, one of Axos’ large specialty loans appears to have zero apartments rented and is owned by an individual with multiple indictments and alleged ties to the mob, information found through a basic internet search.

Given our conversations with former employees, as described later in Part III, we suspect Axos agreed to lend to this individual knowing his history or was almost incomprehensibly negligent in missing these red flags.

In December 2020, Axos Lent Up To $48.2 Million (2.4% Of Tangible Book Value) To Build An Apartment Block In Brooklyn, According To Local Property Records

4 Years Later, There Are No Signs Of Construction Activity And Weeds Growing On The Land, Per Our Visit To The Site

In December 2020, Axos was listed as a lender on 962 Franklin Avenue, along with Fortress, a global asset manager, per New York property records. [Pg. 3] The developer is Continuum, a boutique New York developer. New York City Department of Finance Records lists the loan as up to $48.2 million.

The project appears to be running into challenges with environmental and zoning permissions. In June 2023, the New York City Department of City Planning determined that the rezoning proposal may have a “significant adverse impact on the environment”.

Over 3 years after Axos’ entered into the lending agreement, the property zoning proposals still do not appear to have been approved, according to NYC planning records.

In late 2023, local media reported that the site was still an empty lot with overgrown weeds.

(Source: Brownstoner Media, September 2023)

We visited the site in May 2024 and found that the situation remains unchanged.

(Source: Hindenburg Investigator, May 2024)

Its neighboring property, 960 Franklin Avenue, has also faced opposition from local residents and construction has not commenced, per media reports. Just months ago, in April 2024, Axos loaned up to $91 million to the new stalled development on 960 Franklin Avenue, according to New York Property records. [Pg. 5]

In 2021, Axos Lent Up To $34.7 Million (1.7% Of Tangible Book Value) For Construction Of A Medical Office Building In Harlem At 2226 Third Avenue, According To Local Property Records

By 2023, The Borrower Faced Multiple Foreclosures After Allegations Emerged That He Had Embezzled Money From Real Estate Projects And Lost Much of It To Extravagant Personal Spending And Gambling On Stocks

The Borrower Is Under Investigation By The DoJ And SEC Over Allegations Of Embezzling Real Estate Funds, Per Local Media

In October, 2021 Axos lent up to $34.7 million for construction of a property at 2226 Third Avenue in Harlem per New York property records.[15] [Pg. 5] The deal was recorded during the height of Covid, exemplifying Axos’ strategy of ‘doubling down’ on CRE when many others began to withdraw.

The ultimate owner of the development is Elie Schwartz, through his firm Nightingale Properties.[16] As of media articles from 2023, Schwartz and his firm are currently facing foreclosure on multiple properties due to allegations he embezzled real estate funds for personal use and to gamble on stocks, which he lost. Schwartz is in the process of unwinding his assets including his properties, personal residences, and jewelry as part of restitution efforts to harmed investors.

Schwartz is currently under investigation by the SEC and DOJ related to the allegations of embezzlement and real estate fraud.

(Source: The Real Deal)

Construction On The Medical Office Building Was Completed In February 2024

The Whole Building Is Vacant And The Owners Are Attempting To Remarket It With A Change In Use, Per The Agent

Beyond the project sponsor’s extreme state of distress, the development Axos lent to appears to be failing.

Construction was completed on the office property in early February of this year, per local media. The development, called “The Labs on 121”, offers lab space that is “precisely developed to not only meet – but far surpass – today’s life science demands”, per its brochure. [1, 2]

(Source: New York Yimby)

In April 2023, The Commercial Observer, a real estate news site, reported that “the 10-story, 193,000-square-foot building at 2226 Third Avenue hasn’t signed any leases yet”.

A leading CRE data provider, CoStar, shows that the whole building is still vacant.

(Source: CoStar, Yellow Denotes Available)

We spoke to the agent of the property, CBRE, in early May 2024. They told us that they were attempting to remarket it as a more general facility and not just life sciences:

“So the building was really built to be a life sciences building, but we’re sort of marketing it as a dual, like, we’re also looking at some schools and stuff like that.”

They went on to confirm that the entire building is still available:

“Yes. The whole building is available. It’s 200,000 [square] feet.”

For a such a large, completed construction to have zero tenants and face a major rebranding all while the owner battles foreclosure and potential criminal and civil fraud charges indicates that Axos will likely face distress on the property.

In 2022, Axos Lent Up To $35 Million (1.7% Of Tangible Book Value) To A Developer To Construct A 12 Story Apartment Building In Manhattan

2 Years Later, We Found A Seemingly Derelict Property With Graffiti Tags and Little Signs Of Construction

In March 2022, Axos lent up to $35 million to developer ZD Jasper on 3 parcels on 429 West 36th and 430th & 434th West 37th street in Manhattan to build a 12 story apartment block, per The Real Deal and New York Property Records. [Pg. 3] ZD Jasper is a family firm that has around 12 employees, per a 2022 YouTube video. [0:21]

In March 2023, it was reported that development was being stalled by a neighboring property owner who has not signed off on the demolition of the existing property, per The Real Deal.

In May 2024, nearly 2 years after the loan sanction, we visited the property. All we saw was a derelict building with graffiti tags and little sign of construction activity.

(Source: Hindenburg Investigator May 2024)

In short, the project has apparently not started construction ~2.5 years after Axos financed the transaction.

In November 2023, Axos Took Over A $105 Million Loan (5.2% Of Tangible Book Value) On An Office Building In Manhattan Called “The Six”

Its Owner Has Been “Defaulting On Debt, Repeatedly Extending Loans And Reducing Its Ownership Stake Within Individual Properties” Per Media Reports

The Building Is Currently Less Than 50% Occupied, Per CoStar

As we noted in the introduction, the first AAA rated bonds backed by commercial real estate debt that were suffering losses were office buildings.

Axos and its CEO Garrabrants have often tried to reassure investors that they are not affected by major dislocations in the office category (as discussed earlier). In April 2023, Garrabrants implied that Axos has avoided the most stressed pockets of the office market:

 “I think office, clearly in many cities in places that we stayed away from for a long time is doing terribly” (Source: Axos April 2023 Investor Call)

In July 2023, Garrabrants further reassured investors:

“The majority of our commercial real estate secured by office properties are located in metropolitan areas that have not seen a meaningful negative impact from work-from-home and other dynamics.” (Source: Axos July 2023 Investor Call)

Despite this claim, we found signs of trouble in this segment.

For example, in November 2023, Axos took over a $105 million loan on an office called “The Six”, located on West 56th Street in Manhattan, per New York property records. [Pg. 4, Pg. 4]

The underlying owner of the building is the Savanna Group, a “vertically integrated real estate investment manager” per its website and CoStar.

The general contractor on this project was the aforementioned Rinaldi Group, where Robert Baselice, the purported “ringleader” of the mafia kickback scheme mentioned above had previously worked as a senior executive.

Baselice, representing the Rinaldi Group, was present for the topping out of the building in July, 2019.

The Savanna Group portfolio is reportedly in a state of distress, per The Real Deal.  It has been “defaulting on debt, repeatedly extending loans and reducing its ownership stake within individual properties”.

(Source: The Real Deal)

Data from CoStar shows the building is only 46.5% leased, 6 months after Axos’ loan agreement.

(Source: CoStar, Real Estate Platform)

At the end of May 2024, we spoke to CBRE, the broker for the property, who confirmed about half of the building was still available:

“We leased by about a half a building. It’s a 90,000 square foot building. I say probably what’s left is close to that. In that 40 to 50k range”

The broker also offered that pricing may need to come down further to have a better chance at occupancy:

I think the pricing is pretty expensive.”

In terms of the collateral value, a recent transaction at 1740 Broadway is illustrative of the current stress in the Class A office space in New York. 1740 Broadway is a 640k square foot office tower located less than two blocks away from 106 W 56th Street. After a fire sale in mid-April 2024, investors in the AAA rated bonds, backed by 1740 Broadway, got less than three quarters of their return, per Bloomberg.

(Source: Bloomberg)

Assigning a similar square foot valuation of $290.46 would value The Six at a mere $25.4 million.[17] [1]

While Axos has claimed to be immune from the stress in the office market, in our view, the characteristics of one of its largest office loan transactions suggest otherwise and show hallmarks of stress.

Axos Has $1.4 Billion Of Multifamily Loans Originated Prior To 2020, When Interest Rates Were Close To Zero

Former Employees Told Us That, Given A Typical Fixed Period Of Around 5-6 Years, Many Of These Come Due Within The Next Year And Risk Being Underwater

Axos Has Been Extending Loans Or Attempting To Offer Slight Discounts In An Effort To Keep Them Afloat, According To A Former Employee

Asked about potential loan stress last month, Axos’ CFO Derrick Walsh told investors:

“No, we’re not really seeing anything that we find concerning.” (Q3 2023 Earnings Call)

Interest rates have risen from near zero to 5.5% since 2022. With the sharp rise in rates, many of Axos’ multifamily mortgages are now coming out of their fixed period and risk becoming delinquent.

Axos reports the vintage of its loans, showing that $1.4 billion of loans, or 36% of the multifamily book, was originated before June 2020.

(Source: Axos March 2024 Quarterly Financial Statement [Pg. 22])

An executive who left the bank in 2024 told us that many of these multifamily loans coming up for renewal were now underwater on the collateral value:

“We would find out that a loan was in trouble… [What] really exacerbated it [was] when the rates started going up and skyrocketed last year. And a lot of the hybrid loans started to come due… Because you [the borrower] get into this, you’ve had this loan for 3 or 5 or 7 years and it’s been fixed and everything’s been hunky dory and you forget about it. You forget that time frame is coming to a close. And now you’re going to have to address these higher rates. And in a lot of cases the loans, the properties didn’t cover.”

They went on to opine that some of Axos strategies to cure these loans were “kind of a joke” and ultimately ineffective given the magnitude of interest rate increases:

“I think what they were really trying to do is give the borrowers adequate time to try to refinance somewhere else. Sometimes they would maybe negotiate a little bit smaller, initial bump instead of being nine and a quarter. Maybe they’d go to, which I thought was kind of a joke, eight and three quarters or something like that. I mean, if it doesn’t work at nine and a quarter, it’s probably not going to work at eight and three quarters.”

A Call For Transparency: If Axos Is Truly Confident In Its Underwriting, It Should Disclose Details About Its Commercial Lending Portfolio

There is significant opacity around Axos’ loan book. We were only able to infer loan amounts and counterparties through local property records, scattered media reports, and litigation records, without full details on each deal.

If Axos is confident in its loan quality, as it suggests, it should be happy to provide more details to investors on its commercial loan portfolio such as deal terms, disbursed amounts and counterparties, in order to fully assess its exposures and risks.

Part III: Axos’ Lax Underwriting Standards Expose It To Major Risk

Our findings show that the issues with Axos’ portfolio stem from its lax underwriting standards.

Axos lends in the most competitive metro regions of the country, including New York and California, which account for 66.5% of its real estate loans. [Pg. 26]

In these states, borrowers have hundreds of options competing for their business, including well-established banks like J.P Morgan, Citi, and many others.

A New York commercial real estate broker and former investment bank director we interviewed told us:

“[New York] It’s very competitive from a lending perspective, which makes it possible to do deals here, but also makes it very cutthroat in a lot of ways. A lot of banks will bend over backwards to do deals in New York…From a competition standpoint, I don’t think that there’s a market that’s tougher.”

In New York, the active subset is probably about 250 [lenders]…” [18]

Axos has touted its “conservative” underwriting. The company’s ‘commercial lending’ website touts “streamlined processing and common sense underwriting.” [Pg. 12]

Our research revealed precisely the opposite. A former Axos loan originator told us that Axos had to stretch its underwriting criteria to compete:

“There had to be a problem for us to even have a shot at it.”

A Former Regional Leader Told Us Axos’ Customer Base In Commercial And Multi-Family Revolved Around “Borrowers Who Couldn’t Get Loans From Other Banks”

If The Felony Was Explainable, We’ll Bank Them,” They Told Us

Bad “Credit Scores… Didn’t Kill A Deal” And “I Don’t Recall There Ever Really Being A… Minimum Net Worth Or Minimum Liquidity Requirement”, We Were Told By Former Employees

Former employees told us that far from applying “common sense” to its lending, there were few restrictions on the type of borrowers Axos worked with, and that Axos even banked felons and borrowers with troubled histories:

“It was the borrowers who couldn’t get loans from other banks. So it’s the dirty borrowers. Did they have a felony? If the felony was explainable, we’ll bank them, because he [the Axos CEO] was all about being well secured to the real estate.”

In a market with well-established competition for CRE deals, Axos would differentiate itself by embracing loans with problems other bank refused to touch, then try to add extra protections into the deal structuring, according to a former senior loan officer we spoke with who worked in the multifamily loan division:

“That was about the only way we could win anything, is if there was any hair. If it was a straightforward, straight up A/B kind of deal, we couldn’t compete on pricing or leverage. So there had to be a problem for us to even have a shot at it. And usually it was a borrower problem or it was an occupancy issue..”

They went on to add that “we couldn’t complete… unless other banks wouldn’t touch him”, further reiterating that:

“…they [other banks] priced so much better than we did that we just couldn’t compete unless, as I said, unless the borrower was really hairy or something like that and the other banks wouldn’t touch him. Then we had a shot.”

“We weren’t doing Fannie and Freddie quality properties either. We weren’t doing those types of deals.”

A former senior loan officer also told us that at Axos, credit scores and credit problems wouldn’t typically kill the chances of a deal:

“They haven’t been a credit driven borrower, at least in the IPL [Income Property Lending] space. I mean credit scores. Well, we got them. Didn’t really, it didn’t kill a deal, let’s put it that way. If they liked the real estate… and if he [the borrower] had some credit problems, that was okay.”

A Former Credit Review Officer Uncovered Evidence Of Loan “Evergreening”, Or Providing Loans To Non-Performing Or Doubtful Borrowers, During Her Time At Axos Bank, Per Litigation Records

Similar Types Of “Pretend And Extend” (aka ‘Zombie Lending’) Schemes Were Described By Former Employees During Our Investigations

Evergreening is a term used in banking circles to describe banks renewing or providing further loans to borrowers that should otherwise be recognized as non-performing or doubtful – it is sometimes referred to as ‘zombie lending’.[19]

In March 2022, a former credit officer at Axos Bank brought a suit for wrongful termination claiming Axos bank retaliated against her attempts to raise concerns about compliance at the bank.

One specific allegation of evergreening she made related to “warehouse lending”. [Pgs. 11-12] These are loans provided to “third-party mortgage companies”, per Axos’ 10-K. They get reported in a single segment along with single family mortgages and totaled $4.1 billion in value or 22% of Axos’ overall loan book, per Axos’ Q3 2024 financial statement. [Pg. 18]

(Source: Axos Q3 2024 Financial Statements. [Pg. 18])

According to the court complaint, Axos Bank had financed approximately $45 million of loans by two third parties – Commerce Home Mortgage and A&D Mortgage. [Pgs. 11-12] These loans turned stressed and were aging beyond Axos’ internal policy and the terms of the loan agreement, per the officer.

According to the complaint, instead of reporting these non-compliant loans, Axos decided to evergreen them, in what Axos called “hospital line” loans. [Pg. 12] The term “hospital line” was a “reference to the status of the loans on life support” per the same complaint. [Pg. 12]

Similar schemes – not correctly identifying borrower stress and giving extensions on loan maturities – were corroborated by our interviews with former employees, who called them “pretend and extend”.

One multifamily property manager told us that for defaulting borrowers, who couldn’t make loan payments or single payments to keep the loan regular, Axos would find another way:

“They’ll say I don’t have a million dollars. Okay, we’ll have to go find another solution. So, a lot of times, like I said, we call it pretend and extend. So if there’s a loan maturity, [or] the borrower can’t get a loan, we’ll give them more term.”

Part IV: Axos’ Rosy-Looking Credit Metrics Show Signs Of Distortion or Manipulation

Axos has seen a collapse in commercial real estate in its key markets. With its underwriting standards that embrace troubled borrowers and situations, and specific signs of stress with multiple portfolio properties, it is unfathomable that the company has dodged the issues in its markets.

Despite this, ratios that normally indicate stress (non-performing loans), likely stress (allowances for credit losses) or those that should track the value of underlying collateral (loan to value ratio), have remained essentially flat for Axos between 2021-2024.

The superior credit metrics and LTV figures that Axos touts imply that the bank is navigating the super-saturated and extremely competitive commercial real estate market with precision and finesse, and has resulted in investors awarding Axos a premium valuation.

We suspect these metrics to be highly misleading or manipulated.

#1 Suspect Key Credit Metric: Axos’ Disclosed Loan to Value (LTV) Ratios In Commercial Real Estate Stands At 39% As Of December 2023

This Ratio Is 17% Less Than The Median Average of 9 Of Its Peers, Nearly All Of Whom Fall Between 50% And 78% LTV

A Loan to Value ratio (LTV ratio) compares the amount borrowed to the value of the underlying asset at the time of origination, per Axos’ disclosures. It is thus a measure of the bank’s security against the loan in case of a foreclosure situation.

Axos discloses LTVs in commercial real estate at 39% as of December 2023, 17% lower on a median average basis to comparable peers. The majority of its peers report similar disclosures in commercial real estate of greater than 50%.

(Source: Company Presentations and Annual Reports, Data as of Dec-23[1, 2, 3, 4, 5, 6, 7, 8, 9])[20]
 *Customers Bancorp as of Q2 2023

When we asked former employees about the outlier LTV ratios, their experience pointed to much higher LTVs at origination. A manager responsible for credit risk told us regarding the overall commercial book:

“On the commercial side, I think a lot of the properties were 65, 70 [LTV] at most, the low 70s, I think, if I recall correctly. The vast majority of them had significant equity.”

Another manager working within Commercial Real Estate specifically, and aware of construction and bridge loans, told us that LTVs would be between 50-60% on completed value for construction projects:

“Typically it would be like 50 to 60% LTV-ish, on the as-complete value.”

Even Axos’ website says that for construction and bridge loans, which make up 64% of the commercial real estate book, it will finance up to 70% LTVs depending on the property. [1, 2]

Since over $3.4 billion, or 59% of the commercial real estate loan book was originated before June-end 2023, most prior to the collapse of commercial real estate prices across the US, it is evident that on a current value basis, LTVs would likely be far greater than disclosed.

In short, the disclosed LTV ratio, instead of offering the comfort of prudent underwriting, appears to be a red flag of potential data distortion, further supported by our findings in Part 3.

#1 Suspect Credit Metric Cnt’d: “The Bank Routinely Misrepresented The Average Loan To Value Ratio’s Of Its Loans To Investors”, Per A Former Credit Review Officer

A former Credit Officer, who left the bank in 2021, explained how Axos “routinely misrepresented” loan to value ratios to investors, per allegations in a legal complaint.

(Source: Brinker v Axos Court Complaint [Pg. 14])

The complaint alleges that Axos bank was using differing metrics than true LTV, and that the denominator (i.e. collateral value) was overstated by using advance rates, which typically would take into account assets beyond just the property.

After highlighting numerous disclosure issues and loan malpractice with compliance teams and leaders at Axos, instead of resolving them, the former credit officer claims she was fired. [Pg. 14] The case is ongoing, per legal records on PACER.

#2 Suspect Key Credit Metric: Axos’ Non-Performing Loans As A Percent Of Its Key Commercial Real Estate Category Have Stayed Almost Flat In The Last 2 Years, From 0.4% in 2021 to 0.43% in 2023

By Contrast, Large National Banks Like Wells Fargo And Bank of America Have Seen This Ratio Increase By 1.9%-2.0% In The Same Period

If Non Performing Loans Increased To These Levels, It Would Mean $131 Million Additional Non Performing Loans For Axos, About 7% Of Tangible Book Value In 2023

At Axos, as is common across the industry, loans are classified as non-performing when a borrower has unpaid dues for more than 90 days.

While the reporting is designed to be prescriptive, deal structures (e.g. payments at the end of a term) and extensions in loans may ultimately delay the eventual recognition of loans as non-performing. As a result, tracking non-performing loan ratios versus industry peers or so called “bell-weather” stocks is vital. 

Over the last 2 years, since interest hikes have commenced regularly, large cap banks like Bank of America and Wells Fargo have seen non-performing loans in commercial real estate increase 3 to 4 times, or an increase of 2% and 1.9% respectively.

However, Axos’ non-performing commercial real estate loan ratio has remained essentially flat, increasing by just 0.03% despite being heavily concentrated in the most problematic markets like New York and California.

(Source: Company Financial Statements as at December end [1, 2, 3, 4, 5, 6, 7, 8, 9])

As of December 2023, this would have meant at least $131 million additional non-performing loans for Axos, about 7% of tangible book value.[21]

#3 Suspect Key Credit Metric: Provisions For Future Stress As A Percent Of The Commercial Real Estate Category (Called “Allowances”) Have Inexplicably Decreased 0.5% Since June 2021

Banks set aside money to create reserves for payments on loans that they do not expect to be paid back on. This is known as allowances for credit losses.

Such allowances are estimated and an area where banks have discretion. Axos states that:

management establishes an allowance for credit losses based upon its evaluation of the expected lifetime credit losses related to the amortized cost basis of loans on the balance sheet.”, per its 10-Q.

Since 2021 – the middle of the Covid pandemic — credit loss allowances as a % of Axos’ commercial real estate loan book have trended down, from 1.8% at the end of June 2021 to 1.3% at the end of December 2023, per its financial statements. [1, 2]

Axos’ CRE allowances were significantly lower than the industry average of 1.6% at the end of December 2023, per S&P Global Intelligence, the credit ratings agency. This is 1.5% lower than mega banks like Wells Fargo, who reported credit allowances of 2.8% at the end of December 2023.[22]

(Source: Axos Financial Statements (1, 2))

An increase in allowances by 1.5% in the CRE category would lead to an estimated $88 million negative impact, or 21% of on consensus net income for 2024, per Bloomberg.[23]

#3 Suspect Key Credit Metric Cnt’d: We Estimate That At Least $1.1 Billion Of CRE Loans Originated At Lower Interest Rates Will Face Renewal In The Coming Year, Testing The Sufficiency Of Provisions

Axos’ Auditors Identify This As A Critical Audit Matter Given “The Judgmental And Subjective Nature” Of The Company’s Forecasts

The sufficiency of Axos CRE provisions will likely be tested in the next 12 months.

Axos discloses that it has $3.76 billion in short duration bridge and construction loans equivalent to ~64% of its commercial loan book as of March 31st, 2024, per its investor presentation. [Pg. 12] At Axos, bridge and construction loans have a maximum term of 3 years, according to its corporate website, and they are generally paid back at the end of the loan terms, sometimes akin to “bullet loans”.

(Source: Axos Website)

­­When analyzing the vintage of the loan book, we note that Axos originated $1.65 billion in commercial real estate loans in fiscal year 2022 (i.e. July to June for Axos). [Pg. 22] Assuming that 64% of Axos’ Commercial Real Estate book has a tenure of ~3 years (the maximum term advertised), this implies that approximately $1.1 billion of commercial real estate loans, or ~18% of that book are estimated due in the next ~12 months.

(Source: Axos Financial 10Q, Q3 2024 [Pg. 22])

As stress in broader markets has spread and interest rates have increased by over 500bps since the Federal reserve started hiking rates in 2022, we expect provisions for credit losses to increase as a % of Axos’ commercial real estate book.

Axos’ auditors have also noticed, raising credit loss allowances in Commercial Real Estate as a key audit matter and noting the “judgmental and subjective nature” of the company’s forecasts. [F-1]

#3 Suspect Key Credit Metric Cnt’d: Axos’ Closest Bridge Loan Peer is Arbor Realty, Where Bridge Loans Make Up Virtually All Of Arbor’s Loan Book

Between December 2021 and March 2024, Arbor’s Multifamily (A Commercial Bridge Loan Proxy) Non Performing Loans Rose From 0.02% to 4.4% Of That Portfolio

By Contrast, Axos’ Non Performing Loans Have Increased By Only 0.18%, From 0.26% to 0.44% In Its Commercial Real Estate Portfolio

If Axos’ Non Performing Bridge Loans Were In Line With Its Closest Peer, It Would Mean $234 Million Additional Non Performing Loans, About 12% Of Tangible Book Value

Bridge loans are short term financing loans that, as the name suggests, are used to “bridge” the gap until a borrower gets more permanent financing or it’s able to meet a particular financial obligation.

At Axos, these loans are generally less than 3 years, per its website, and are counted under the commercial real estate loan portfolio as part of what are known as “specialty” loans, likely owing to their more complex and structured nature.[Pg. 12]

In total, Axos has $1.8 billion in outstanding bridge loans, representing 31% of its disclosed commercial real estate book. [Pg. 12] Axos doesn’t itemize non-performing loans for bridge loans specifically. Axos’ closest listed peer in the bridge loan space is Arbor, where bridge loans account for 97% of its loan book, per its Q1 2024 report. Most of Arbor’s loans are multifamily loans, which are multi-unit properties and generally considered commercial real estate, making it a relevant proxy for Axos’ bridge loan book.

Between December 2022 and March 2024, Arbor’s non-performing loans in its multifamily bridge loan portfolio have increased from 0.02% to 4.4% of its portfolio. At Axos, meanwhile, commercial real estate non-performing loans have only increased from 0.26% to 0.44%, or by just 0.18% during the period.

(Source: Financial Statements of Arbor & Axos [1, 2, 3, 4, 5, 6])

Despite being heavily exposed to bridge loans in its commercial real estate book, Axos would have its investors believe that it somehow has inexplicably managed to avoid the stress that other lenders like Arbor have experienced over the last 18 months.


Banking is an industry as old as Mesopotamia. Over the last 4,000 years, the industry’s participants have evolved in tandem. All U.S. banks are subject to the same federal funds rate and interest rate dynamics, and similar regulations and requirements. Competitive edges, along with comparable ratios and margins, are generally razor thin. This is especially true of banks operating in highly competitive markets like New York and California.

But, for as long as banks have been around, there have also been ‘too good to be true’ outliers that claim to have discovered the magical lending formula. In this case, 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 commercial real estate market minefield without so much as a scratch.

Note that we do not call into question Axos’ liquidity position or its depositor base. History has shown, however, it is almost always the case that these outliers are taking on undisclosed risk to fuel their optimistic numbers and justify their valuation premiums. We see significant downside ahead.

Appendix A

67% Of Axos’ Commercial Real Estate Loans Are Via Indirect Note Structures, Typically “A-B” Notes

Former Employees Indicated This Structure Obscured Axos’ Visibility On The Underlying Borrower

The company claims to have unique structuring and exit strategies that provide them with greater protection than traditional commercial real estate lenders. But in interviews with former employees we were told about arrangements that are typical of senior secured bank loans.

In one common structure, the A-B note, Axos has less visibility into its underlying borrowers, posing added risks. An A-B note structure for commercial real estate deals involves two separate tranches “A” – the highest tranche, and “B” – the secondary tranche that is subordinate to the A (i.e. gets paid out later in a stressed scenario).

According to Axos’ investor presentation, $3.97 billion or 67% of its Commercial Real Estate category are structured via such types of indirect notes, where Axos has “first payment priority” (the “A tranche”).

Former employees recalled to us that Axos’ commercial real estate deals commonly used the A-B note structure. A former Commercial Real Estate manager at Axos explained:

“So if it’s a $100 million construction loan, we team up with like, Fortress Investment Group, for example. They were one of our big partners… So basically, Fortress would underwrite the whole loan, so they would underwrite the $100 million construction loan, and then we would give them an advance. Where basically it came out to around 70% of the whole loan. So, you know, they would write the check for $100 million, and then we would essentially write the check to Fortress for $70 million. Right? So really they were only in the deal [for] $30 million. And then they would have $70 million of like leverage essentially.”

Former employees explained that Axos often was reliant on the second partner (B or “junior lender”) for most of the information about certain projects. A credit analyst told us that the company relied on the B-lender for most of the due diligence during the loan cycle. Speaking about interfacing between A lender (Axos) and B lender (usually a credit fund), and how to assess the liquidity position of the underlying borrower after the loan had been originated, they noted:

“I would say a lot of the due diligence at that point would be coming from your B-lender.”

A consultant to a credit fund and junior “B” lender along with Axos in many deals noted the opaque dynamic:

“The borrower doesn’t usually know who it is [the A lender]…They’re [A lender] not interfacing directly with the borrower. And part of that is because if there is a problem, they don’t know how to fix it. A lot of these places don’t know how to fix it”

In short, while A-B structures might be typical in commercial real estate, as former employees explained, the lack of visibility, firsthand due diligence and connection to underlying borrower provides fertile ground for under-recognition of stressed assets.

Disclosure: We are short shares of Axos Financial, Inc. (NYSE: AX)

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[1] Axos is formerly known as the Bank of Internet, or BofI.

[2] Excluding corporate/eliminations.  

[3] Loans reported net of allowance for credit losses.

[4] Note that for efficiency ratios, lower is considered better.

[5] Industry norms held by regulators, ratings agencies, and data providers generally classify multifamily real estate with more than 4 units as commercial real estate. Moody’s classifies multifamily with 4 units and above as commercial. S&P Intelligence also discussed it in relation to CRE loans and when determining credit allowances as a % of CRE loans. Multifamily is also included in Credit Rating Agencies framework for CMBS (Commercial Mortgage Backed Securities). [Pg. 3] A Federal Reserve guidance note as far back as 2006 states that “CRE loans also include loans secured by multifamily property.” [Pg. 2]) Industry and financial publications also note multifamily as part of CRE exposure, including NAREIT, an industry body representing real estate trusts, Altus, a provider of CRE data and news and data provider Bloomberg. Axos defines Multifamily & Commercial Mortgage as 4 units plus. Note that Axos re-organized its CRE definitions post July 2020, just after CRE started to generate negative headlines during the height of the Covid pandemic, creating a separate “multifamily and commercial mortgage” category, referencing Accounting Standard Update (ASU) 2016-13 (collectively ASC 326). [Pg. 7]

[6] Even prior to Covid and the GFC, bank concentration in commercial real estate has been a concern for the Federal Reserve. A Federal Reserve guidance note from 2006 states historically that “concentrations in CRE lending coupled with weak loan underwriting and depressed CRE markets have contributed to significant credit losses in the past”. [Pg. 1] More recently, Axos’ high concentration in CRE was highlighted in a February 2024 Reuters article, which looked at CRE exposures across U.S. regional banks.

[7] Total net loan book

[8] MSCI calls these assets “potential distress”, which it says “may precede full-blown financial trouble”.

[9] The loan is structured via an indirect note with a second lender, per the loan documents. [Pg. 4] The end underlying borrower is ultimately the sponsor.

[10] Loan data referenced throughout this report is as of the most recently available public reports via the Automated City Register Information System “ACRIS” as of 5/31/2024. The loan amounts refer to sanctioned loan amounts and do not necessarily reflect the amount disbursed, given some loan types (e.g. construction loans) will be drawn down over time.

[11] Attached to the NY Department of Environmental Conservation cleanup application for 147-35 95th Avenue, as Exhibit A, is a NY State Entity Operating Agreement which lists Solomon Feder as the sole member of Sutphin Boulevard Equities. [Pg. 36] The signatory on the loan docs is Joel Zupnick, who has partnered with Solomon Feder on other projects.

[12] Our process for verifying that it was the same Solomon Feder: Firstly, Lexus Due Diligence shows a same-aged individual, with a connection to Big Apple Designers, named in the indictments. One of the other companies named in the indictment, Velocity Framers, is connected to JJ Weiss, a director at Key Developers, a Solomon Feder entity per Rocket Reach and media articles.

[13] Realdeal a real estate news aggregator confirmed that Baselice was the same individual from the 2010 case. 

[14] Lease agents, per CoStar.

[15] This was again through an indirect note exposure.

[16] Nightingale owns the property through its entity ONH 2226 Third Ave LLC, per media reports, references to the entity on the development’s website, and property records.

[17] Deal valuations per CoStar

[18] For example, the state of New York, has 133 lenders whose main specialization is “commercial lending”, per FDIC’s BankFind suite tool. This does not include credit unions or funds that are also engaged in lending activity. To recreate the search: go to the FDIC look-up tool, search by active institutions in the State of New York, download the data file and search the “SPECGRPN” column for  “Commercial Lending Specialization”. This yielded 133 results as of May 31, 2024.

[19] The term and the practice of “evergreening” are discussed in research papers by the International Monetary Fund (IMF), for example.

[20] Axos: Weighted Average of CRE Loan Book, OZK: All construction and development loans, CVB: across all CRE Seacoast Bank: Weighted Average Of CRE Non-Owner Occupied, S&T Bancorp: Average of Office CRE Loans, ConnectOne: Weighted Average Of CRE Loan Book, Trico Bancshares: Weighted Average of CRE Loan Book (including Multifamily), Renasant: Weighted Average Of Non-Owner Occupied Office, Customers Bancorp: Average Across Office and Retail CRE, Arbor: Total LTV including a small segment of single family which has lower LTVs. 
[21] We used Bank of America (with lower non-performing loans) as the reference point.

[22] S&P also has a wider definition of commercial real estate, presumably including the multifamily category loans, which shows that Axos’ credit allowance as a % of total commercial real estate increased by 6bps in 2023, versus an industry average increase of 60bps.

[23] Consensus net income (adjusted) per Bloomberg is $420.3 million for 2024. CRE loan book is $5.9 billion in value, as of March 2024.