Also This Week in Capital Markets Report:
Colony Financial Sells Shares To Continue Residential Investment Spree;
Blackstone’s Single-Family Rental Securitization Receives Strong Ratings;
Starwood Hotels Continues Asset-Light Strategy; Mall Anchored by JCPenney and Sears Suffers 100% Loan Loss; and
Fundraisings from Lone Star, GTIS, SL Green and Pepplebrook Hotel
Starwood Property Trust plans to spin off of its single-family residential (SFR) business to its stockholders in a newly formed real estate investment trust. The REIT, to be called Starwood Waypoint Residential Trust, will be one of the larger publicly traded investors, owners and operators of U.S. SFR homes and non-performing residential mortgage loans.
Starwood Property Trust’s portfolio, which will be owned and operated by Starwood Waypoint Residential, consisted of 5,817 units in single-family homes and nonperforming loans (NPL), totaling $750 million of invested capital at the end of the third quarter. The NPL portion consisted of 1,549 loans with $413.4 million in unpaid principal balance and $313.6 million in market value of the underlying properties and $197.7 million in book value.
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As part of the spin-off, Starwood Property Trust expects to contribute $100 million in cash to provide initial funding for Starwood Waypoint Residential's operations. The new REIT also expects to secure a line of credit with initial available borrowing capacity of more than $400 million.
“Starwood Property Trust took advantage of the housing cycle and acquired both single-family homes and NPLs at prices that we believe were at a significant discount to replacement cost in select target markets dominated by Florida and Texas in an effort to achieve an attractive long-term total rate of return on our shareholder’s capital,” said Barry Sternlicht, Starwood Property Trust’s chairman and CEO. "(Our) investment in the sector has now reached critical mass. It has become a distinct business separate from our core lending platform, more closely resembling an equity play."
With the $100 million in contributed cash and $400 million credit facility Starwood Waypoint Residential said it intends to continue buying portfolios of NPLs backed by single-family homes. The REIT will then seek to convert the loans and either add the homes to its rental portfolio, sell them, or restructure the loans and hold or sell them at higher prices if market conditions warrant it.
Colony Financial Sells Shares To Continue Residential Investment Spree
Thomas J. Barrack, Jr.’s Los Angeles-based Colony Financial Inc. raised more than $210 million from selling stock shares last week to repay debt and use to fund future investments.
The stock sales comes after the firm secured a new revolving credit facility of $360 million last August. Since then, Colony Financial has been on an investment roll. Over the last 90 days, the firm has made several major investments:
It invested $143 million in a joint venture planning to originate short-term, first mortgage loans on multifamily properties. The new lending platform was formed in part to take advantage of the void expected to be left by the recently announced multifamily lending curtailment by government sponsored enterprises such as Fannie Mae and Freddie Mac.
From July through October, Colony also spent $51 million to purchase and renovate 2,700 apartment units in Georgia, Texas and Florida. It also originated a $30 million first mortgage loan to finance the acquisition and redevelopment of single-family residential properties in infill coastal Southern California markets.
Last month, Colony invested $130 million in a joint venture that acquired a portfolio of loans secured by multifamily and senior housing assets. The portfolio included 27 loans, all of which were performing at acquisition, with an aggregate UPB of approximately $194 million. The aggregate purchase price for the portfolio was approximately $177 million, representing 91% of the portfolio’s UPB. Our share of this investment is 73%.
Blackstone’s Single-Family Rental Securitization Receives Strong Ratings
Investment bankers last week began the Wall Street roadshow pitching a Blackstone Group-backed securities offering funded exclusively by income from single-family rental (SFR) properties. The marketing effort included ratings from three agencies on the offering: Invitation Homes 2013-SFR1
Invitation Homes 2013-SFR1 is a securitization transaction that will be collateralized by a $479.1 million non-recourse, first lien, floating rate mortgage loan that will be originated by German American Capital Corp. on the securitization closing date in November 2013.
The loan is secured by the borrower’s fee simple interest in 3,207 one- to four-unit residential properties in five states: Arizona, California, Georgia, Florida and Illinois.
All of the properties acquired by Blackstone’s Invitation Homes are rented, with an average monthly rental payment of $1,312. Properties in California and Arizona constitute the majority of the pool, representing approximately 40.1% and 34% of the assets, respectively.
The loan has a two year term with three, 12-month extension options and generally amortizes on a monthly basis in an amount equal to one% per annum of the loan’s outstanding principal balance on the origination date.
Moody’s Investors Service assigned provisional ratings to offering giving the $278.7 million of Class A certificates a Aaa rating. Moody’s evaluation of the issuer’s ultimate ability to repay interest and principal was based on a recovery analysis of the portfolio of SFR properties backing this securitization.
"Our recovery analysis approach is not an opinion that the loan will default and is not a prediction of the sponsor’s intended future plans, but rather represents our analysis of what we consider to be a significantly stressful resolution," the firm said.
Moody’s also evaluated the portfolio cash flow of Invitation Homes 2013-SFR1 to assess the probability of default during the term of the loan. However, the current limited availability of historical information surrounding vacancy rates, expenses and cash flow associated with SFR properties through a stressed environment prevented it from relying significantly on the transaction’s cash flow to meet its long term obligations.
Fitch Ratings, which was not one of the three firms Blackstone hired to assign ratings, weighed in nonetheless last week, saying it does not believe single-family rental securitizations warrant AAA ratings.
“While near-record low rates and investor yield requirements are likely to drive demand for the underlying SFR assets in the short term, Fitch reiterates that several notable challenges would prevent the agency from assigning high investment grade ratings to transactions backed by SFR collateral. Fitch would more likely cap its ratings at the 'A' level,” Fitch noted.
Despite the SFR industry's long track record, institutional ownership has largely developed post-crisis. As a result, operating firms have limited track records for investors to evaluate, and their business models/strategies have not been tested under a down cycle. Historical data for market rents, tenant renewals, vacancy rates, and supply and demand are also limited. Although some firms have a few years' operating history, most do not have a proven track record managing outside their footprint or on a large-scale basis.
Fitch's concerns are further heightened by the number of operators concentrating their investments in a handful of states and metropolitan statistical areas (MSAs), which, based on most business models, are at the neighborhood level.
Fitch said it also has concerns about refinancing risk or the absence of a bulk purchaser. If liquidations are needed to pay off a bond at maturity, retail sales may be the only exit strategy.
Starwood Hotels Continues Asset-Light Strategy
Starwood Hotels & Resorts Worldwide Inc. sold both The Westin San Francisco Airport and Aloft San Francisco Airport to a venture led by Ultima Hospitality for $125 million. As part of the agreement, the hotels will be managed under long-term license agreements by Ultima Hospitality and continue to fly the Westin and Aloft brand flags.
“This sale underscores Starwood’s ongoing commitment to an asset-light strategy,” said Simon Turner, president of Global Development for Starwood. “With favorable capital market conditions and improving hotel industry fundamentals, we’re seeing continued strong investor interest in our remaining assets. Our goal is to form relationships with partners like Ultima Hospitality who share our vision for the assets they purchase to be brand-enhancing properties.”
Starwood Hotels & Resorts Worldwide has 1,169 properties in nearly 100 countries and 171,000 employees at its owned and managed properties.
JCPenney-, Sears-Anchored Mall Suffers a 100% Loan Loss
The largest CMBS liquidated loan loss in September was sustained by the Eagle Ridge Mall, a 508,976-square-foot regional mall in Lake Wales, FL, near Tampa, according to credit rating agency Morningstar. The mall's three largest tenants include Sears, Dillard’s and JCPenney. The former General Growth Properties-owned center was taken REO via a deed-in-lieu of foreclosure in September 2010, and accumulated nearly $10 million in additional exposure related to servicing expenses since that time.
Ten Largest Realized Losses - September 2013
|Ten Largest Realized Losses - September 2013|
|Property||City||State||Prop Type||Loan Balance||Realized Loss||CMBS|
|Eagle Ridge Mall||Lake Wales||FL||Retail||$44,499,386||$44,499,386||WBC05C22|
|Prium Office Portfolio (13)||Various||WA||Office||$27,296,011||$25,642,478||MLT04BP1|
|Holiday Inn Dallas North||Richardson||TX||Hotel||$14,894,166||$14,894,166||CSM08C01|
|St. Joe - Windward Plaza||Alpharetta||GA||Office||$47,586,456||$11,619,792||JPC07L12|
|Tech Ridge Office Park||Tulsa||OK||Office||$30,450,446||$11,588,110||BSC07P17|
|500 & 700 Parker Square||Flower Mound||TX||Office||$11,107,583||$11,107,583||LBUB04C1|
|Creekside Corporate Center||Bolingbrook||IL||Office||$11,852,851||$9,415,353||JPC06C15|
|Acworth Crossing Shopping Center||Acworth||GA||Retail||$18,596,206||$9,113,249||MLCF0708|
Capital Markets Round-Up
Lone Star Real Estate Fund III
formed in October 2013, held its final closings in with $7 billion in combined capital commitments. Transactions consummated and targeted by Lone Star Real Estate Fund III include investments in distressed commercial real estate
debt and equity products in the Americas, Western Europe and Japan.
GTIS Partners LP
, a New York-based real estate private equity firm, closed a $716 million residential real estate investment fund, the largest domestic diversified residential fund raised to date. The fund’s total is inclusive of co?investment vehicles. The new fund brings to more than $3 billion the committed equity raised by GTIS Partners since the firm’s 2005 launch. It entered the U.S. residential marketplace as early as 2009, making us one of the first real estate investment companies to deploy substantial capital in anticipation of the return of the domestic housing market. The fund is approximately 60% invested, with a primary focus on markets such as New York, California, South Florida, Texas, Nevada, Georgia and Arizona.
SL Green Realty Corp.
raised nearly $285 million from the sale of common stock. The New York City office building
REIT intends to use net proceeds for new investments and repayment of outstanding debt. In addition, the company closed on a new $275 million seven year, floating rate mortgage financing of 220 E. 42nd St. The mortgage, which bears interest at 160 basis points over the 30-day LIBOR, replaces the previous $183.5 million mortgage that was repaid in August 2013.
Pebblebrook Hotel Trust
raised more than $65 million from the sale of common stock. The Bethesda, MD-based company expects to use the net proceeds acquiring and investing in hotel properties.
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