Mortgage funds record a resilient year amid uncertainty for traditional lenders

Looking back almost a year later, March 2020 feels surreal. A cruise ship off the coast of California was held at sea when passengers tested positive for COVID-19; the NBA suspended its season; the coronavirus pandemic was declared a worldwide emergency — all in the span of a few days. Then, for many industries, the bottom fell out.

Arixa Capital, a West Coast private lender and investment management firm, spent the remaining days of March 2020 trying to right the ship in a sea of uncertainty and anxiety about what the pandemic meant for real estate investing.

“On March 12th, the world was normal; on March 13th, it wasn’t,” said Greg Hebner, managing director of Arixa Capital. “It was pretty frightening because all of us were so unsure about what happened next.”

Arixa Capital had hundreds of millions of dollars in loans on their balance sheet. Would those loans be impaired? Would they lose value? Would collateral lose value? Would people make interest payments? Could construction projects continue?

“The stock market was plummeting …and people were getting margin calls. There were those two or three weeks where nobody really understood how far and how fast this thing could go,” Hebner said.

The uncertainty put strains on repo market liquidity, and traditional loan buyers put purchases on hold. Loans that had already been originated were stopped, and when Wall Street firms reopened, the rates were relatively inaccessible. This sent many companies scrambling to find new capital, often straight into the arms of mortgage fund managers.

Mortgage funds, like those managed by Arixa Capital, proved better able to protect lenders from the pandemic-induced market volatility. Because of this, and a few other strategic choices, this is where Arixa Capital’s 2020 story diverges from many others.

Since COVID-19 hit last year, Arixa Capital has not had a single loan go into default. The firm never missed a draw and never missed a draw inspection. They expanded their team, and they added more new customers in 2020 than any previous year in the firm’s history.

“It wasn’t because of our incredible marketing efforts, or because of a new Instagram post,” Hebner said. “There were a lot of clients seeking us out because we hadn’t destroyed our reputation or left people in the lurch.”

How did they do it? First, they acted quickly and proactively. Although the Arixa Capital team had never worked remotely before, their systems were entirely cloud-based, which made it easy to rally the team during shelter-in-place orders. They didn’t waste time before hopping on the phone with clients, which was the top priority as soon as everyone was safe at home.

“The biggest advantage we had is we talked to all of our clients. We got them on the phone and we engaged with them,” Hebner said. With past experience as a developer, Hebner knew the best thing he could offer clients was as much support as possible.

Hebner also personally visited project sites to check in on borrowers and see if they needed anything. “You’d be shocked at how happy they were just to see somebody who came onsite when our state was shut down, and who walked the project and said, ‘Hey, how are you guys doing? Are you guys OK?’ and just being an empathetic listener,” he said.

Arixa Capital’s vertically integrated model helped reinforce this hands-on customer experience. Everything from origination to valuation to construction draws and servicing is handled in-house, which meant the firm could help clients assess their unique situations and figure out what they could and couldn’t do. This was in stark contrast to firms that relied on third-party servicing companies, which were overwhelmed in late March with thousands of clients calling in to check up on loans.

Finally, the firm’s capital mix, which includes permanent capital, was a major differentiator during the pandemic. “Because a lot of companies couldn’t control their capital … they couldn’t control the conversation and the experience, and their reputations took the hit for that,” Hebner said.

Overall, Arixa Capital closed the books on a pretty solid year financially. Their investment returns didn’t move around much in April and May, the funds performed well, and Hebner is optimistic that performance will only improve in 2021. Because so many firms pulled back and stopped making loans in April, May, and June, Arixa Capital was able to be more selective about risk. “We were able to put on our books some fantastic new investments, which will benefit us and our investors in 2021,” he said.

Despite the unknowns of a new administration in Washington, D.C., and the long-term effects on the industry, Hebner believes 2020 was truly a pivotal year for Arixa Capital and will secure its reputation for years to come.

“It is a once-in-a-generation moment in time that is going to set the [stage] for how your firm is going to be perceived and your reputation,” Hebner said. “So much of our business goes on trust.”

Arixa Capital is one of the West Coast’s premier private real estate lenders providing small balance loan solutions to lower middle market residential and commercial investors and developers. For more information, visit https://www.arixacapital.com/