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Bank OZK Outlook Downgraded For $1B In Potentially Troubled Loans

An analyst from a major Wall Street bank slashed its outlook on Bank OZK as the prolific construction lender faces “newfound but substantial concerns” over two loans totaling more than $1B.

The Arkansas headquarters of Bank OZK.

The loans at issue are a $915M construction loan on a major San Diego life sciences project and a $135M loan to an Atlanta-mixed use project, a development by Lincoln Property Co. called Echo Street West.

Citigroup analyst Ben Gerlinger slashed his price target on Bank OZK from $57 per share to $37 per share and downgraded his rating from buy to sell because of the loans, as well as mounting concerns about life science real estate demand in general, Morningstar reported.

Neither the San Diego project, IQHQ's 1.6M SF Research and Development District, nor the roughly 300K SF office portion of Echo Street West have signed any tenants. 

“The company has had its name associated with skyline altering commercial development projects, with minimal total loss content,” Gerlinger said in his report to clients, according to Bloomberg. “[But] we have newfound but substantial concerns with what we believe to be OZK's largest individual loan (totaling $915 million), a multi-use project in Atlanta (‘Echo Street West’; $135 million loan) and life sciences construction lending in general.” 

News of the downgrade sent Bank OZK’s stock tumbling more than 14% in early afternoon trading. The Little Rock, Arkansas-based bank is by far the most active construction lender in the U.S., financing $3B in loans in 2023 when no other lender reached the $2B mark, according to MSCI data.

It followed up last year's dominance with another $688M in construction debt in the first quarter. OZK’s construction lending business totals $12B in outstanding loans, 44% of its total real estate balance sheet.

Bank OZK CEO George Gleason told Bisnow in an interview this month that despite the perceived risks around lending to construction projects, its underwriting is conservative and it only works with experienced developers.

“I've been chairman and CEO of the bank now for 45 years. We've never lost money, and we're in a very cyclical business,” Gleason said. “To never lose money means that you've got to constantly be disciplined and forward-thinking about the way you manage your balance sheet.”

Gerlinger predicted that Bank OZK would have to set aside more money to cover potential losses at RaDD and Echo Street West, which could eat into its earnings.

Both projects broke ground in the low-interest rate and rapid growth era of late 2020 and early 2021, but they are opening in a vastly different financial and real estate environment, with demand from office and life sciences tenants far lower than their recent peaks.

IQHQ's $1.6B, three-city-block RaDD is the largest life sciences project under construction in the country, and while it was meant to kick off a life sciences renaissance for downtown San Diego, demand for lab space has collapsed and availability is approaching 20%, an all-time high.

Construction of Echo S 2treet West in 2023.

Lincoln Property Co. landed the $135M construction financing from Bank OZK in April 2021, according to real estate tracking firm Databank, and soon after broke ground on the $265M project that includes 292 apartments, 300K SF of office and 50K SF of retail.

The 19-acre project, located just west of Georgia Tech’s campus in the English Avenue neighborhood, is currently home to the 20K SF Guardian Works events venue.

The OZK loan is set to mature on April 28, 2025, but Lincoln has the ability to extend it to 2027, according to Databank.

Officials with Bank OZK and Lincoln Property didn't return calls seeking comment. 

Atlanta was an early-pandemic winner of tech company relocations, but its office market has cratered as landlords wrestle with record sublease volumes. And while there has been a flight-to-quality among office tenants, many developers who built speculatively have struggled to fill their buildings.

Of the 13 properties and 2.1M SF of new office delivered in the past year by the end of the first quarter, tenants pre-leased 22.3% of that space, according to Sara Barnes, Avison Young's manager of market intelligence for the Southeast region. 

Greenstone Properties and Goldman Sachs last month agreed to sell the newly delivered 14th + Spring project, a 12-story, 324K SF tower in Midtown, for a loss to help satisfy the $75.8M loan that was set to mature last December. 

While SLC Ventures' second phase of The Interlock in West Midtown, like Echo Street West, has found tenants for much of its retail space, its 185K SF office portion remains empty, Barnes said.

Matt Wasielewski contributed reporting for this story.