Summary
Hindenburg Research has published a detailed investigative report revealing significant risks and underwriting weaknesses in Axos Financial's commercial real estate loan portfolio. The report exposes serious concerns about Axos's exposure to high-risk loans amid a deteriorating CRE market.
Who is Axos Financial
Axos Financial is a $3.1 billion market cap regional bank headquartered in San Diego, California, founded in 1999 and publicly listed since 2005. It operates a predominantly digital banking platform offering both banking (loan and deposit services) and securities businesses across the United States, emphasizing technology-driven financial services.
Key Points from Report
High-Risk Loan Concentration and Market Exposure
- As of March 2024, Axos Financial has $9.91 billion (53% of its total loan book) exposed to commercial real estate and multifamily loans, significantly above the regional bank average CRE exposure of 16.5% reported by Moody's in 2023.
- Axos aggressively increased its CRE exposure by 81% from March 2021 to March 2024, even as many peers reduced their risk in the COVID-19 affected CRE market.
- New York represents 37.5% of Axos's commercial real estate loan book, where commercial property foreclosures have risen 65% year over year, pointing to a 'bloodbath' in the CRE sector.
- Distressed commercial real estate in the U.S. surged from $56.9 billion in 2022 to $85.8 billion in 2023, with over $2.2 trillion in commercial mortgages maturing by the end of 2027, as per independent studies.
Portfolio Quality and Problematic Loans
- Axos reported only $83 million provisions for credit losses on its CRE loans as of March 31, 2024, which appears significantly understated given the troubled projects uncovered.
- The report highlights multiple loans to troubled borrowers including individuals indicted for fraud and linked to organized crime, such as a $97.5 million loan for a Queens apartment project with zero units leased to date.
- Several large loans for projects in Brooklyn, Harlem, and Manhattan remain stalled, vacant, or completed but empty, with underlying borrowers facing legal and financial crises.
- A major $105 million loan for an office building in Manhattan, 'The Six,' is under distress with less than 50% occupancy and repeated debt defaults by the owner.
Lax Underwriting and Risk Management
- Former employees disclosed that Axos targeted borrowers rejected by other banks, including those with felony records and poor credit scores, with minimal net worth or liquidity requirements.
- Practices such as "evergreening" loans were reported, where non-performing loans were extended to avoid recognizing losses, described internally as "pretend and extend."
- Axos' reported low loan-to-value (LTV) ratios and non-performing loan metrics diverge significantly from industry peers, suggesting possible data manipulation or under-reporting of risks.
- The company relies heavily on A-B note structures in CRE loans, which reduce visibility into borrower quality and complicate risk assessment.
Activ8 Finance Analysis
Axos Financial's substantial exposure to the rapidly deteriorating commercial real estate sector and evidence of lax underwriting practices highlight significant underlying risks that may not be fully reflected in its financial disclosures or credit metrics. The presence of problematic loans to borrowers with criminal indictments and stalled projects raises questions about the sustainability of the bank's loan portfolio and potential future credit losses. Investors should be cognizant of the opaque loan structures and the possibility of delayed recognition of loan stress within the portfolio. These factors suggest caution regarding the bank's current valuation and reported financial health.