The past four years have radically changed the landscape of the US property market. The residential market has surged, with the average house price now nearly 50% higher than in January 2020. However, it has been a very different story for the commercial property market due to remote working. Despite the best efforts of some prominent technology companies, all the evidence suggests that the return to the office in the US has stalled. Office vacancy rates have continued to increase as firms decide to save money by not renewing their leases, or selling their offices.
Around 15% of office space in the United States is vacant (double the pre-Covid figure), but the rates are even higher in the major cities, such as Los Angeles and Chicago. In San Francisco, more than 20% of office space is vacant. This is not only bad news for property companies, but also for banks such as Axos Financial (NYSE: AX).
As short-seller Hindenburg Research has pointed out, instead of cutting its exposure to the flatlining commercial market, Axos has significantly increased lending to the commercial sector, nearly doubling it over the past three years. Commercial property (counting apartment blocks, which are also doing badly) now accounts for slightly more than half the bank’s loan book.
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How investors feel about Axos Bank
Although headquartered in California, Axos has made a particularly strong push into New York’s commercial property sector. While the city’s vacancy rates are roughly the same as those in the US as a whole, there has been a surge in repossessions in recent months, and experts predict worse to come. The rate at which commercial properties are being foreclosed is one of the highest in the US, and rising. Even more worryingly, Axos’s loan book is especially concentrated on a relatively small number of individual projects, with one developer comprising nearly 5% of its total loan book.
There are also anecdotal indications that, in a bid to expand, Axos has lowered its lending standards, taking on commercial loans that other lenders in the area are unwilling to back, and making high-risk loans to firms in other sectors, such as cryptocurrencies. Despite these risks, investors continue to be extremely bullish about Axos. Although most comparable midsized US banks typically trade at, or on, a small premium to the value of their net tangible assets, Axos is valued at a much larger 51% premium.
The market has ignored these problems, even though Axos is one of the most shorted small regional banks. The stock nearly doubled from $33 in November to a high of $61 last month. However, it has now fallen back by around 15%, and is trading below its 50-day moving average. I, therefore, suggest that you short Axos at the current price of $53.75 at £40 per $1. In this case, I’d put the stop loss at $77.75. This should give you a total downside risk of £960.
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