Bank OZK rating cut to sell from buy at Citi on 'trepidation' over two loans

By Steve Gelsi

Analyst Ben Gerlinger flags 'substantial concerns' with Atlanta project and life science construction

Bank OZK's stock was headed toward its largest one-day percentage drop in more than four years on Wednesday after Citigroup analyst Benjamin Gerlinger downgraded the Little Rock, Ark.-based lender to sell from buy on concerns over the health of two large loans.

Citigroup cut Bank OZK's (OZK) price target to $37 a share from $57 a share.

The bank's stock price fell by $6.70 to $39.49 in midday trades. With a loss of about 14.2%, its the largest one-day drop in the stock price since its 18.3% loss on March 20, 2020, according to FactSet data.

"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," Gerlinger said.

Gerlinger said has "trepidation" over the two loans because of a lack of tenants thus far for the projects.

Since 2020, the research and development district on San Diego's waterfront backed by Bank OZK has been under developent.

"We believe 0% of the 1.7 million square feet is leased - indicative of a difficult life sciences construction lending market," he said.

The development has also been rejected by large pharmaceutical companies opting to remain or expand in the rival Torrey Pines area, he said.

While there's still time to find a life science tenant before the loan is due, conversations with life science commercial real estate lease brokers continue to flag a glut of space available, he said.

Bank OZK's loan to the 19-acre Echo Street West project in Atlanta supported the development of 292 apartments, 300,000 feet of office space, 50,000 square feet of retail space and 16,000 square feet of event space.

While a portion of the retail space has been leased, the office component appears to be unleased, Gerlinger said.

Given that Bank OZK may have to increase its loan loss provision - which is an expense set aside as an allowance for uncollected loans and loan payments - Gerlinger cut his earnings estimates for the company.

He lowered his fiscal 2024 earnings estimate by about 5% to $5.94 a share, while the FactSet consensus estimate is currently $6.13 a share.

Gerlinger cut his 2025 earnings outlook by 8% to $6.41 a share, compared to the FactSet estimate of $6.36 a share.

If leasing partners are added rapidly, Gerlinger said his profit estimates could prove to be too conservative.

A spokesperson from Bank OZK did not immediately reply to an email and phone call from MarketWatch inquiring about the Citi downgrade.

Prior to Wednesday's moves, Bank OZK's stock has fallen 7.3% in 2024, compared to a gain of 11.2% by the S&P 500.

-Steve Gelsi

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05-29-24 1221ET

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