Morgan Stanley is making a bold return to UK real estate lending by financing Blackstone’s £265m acquisition of the Adelphi building in the West End with a five-year £190m senior loan, CoStar News can reveal.
The punchy return to property lending by Morgan Stanley is exemplified in the nature of the financing package, which includes an additional £10m which will subsidise loan interest payments from this summer as substantial renovation works are carried out at the 292,122 sq ft trophy asset off the Strand.
Departing anchor tenant the Department for Work and Pensions, which occupies more than half of the building and almost half of the total income, leaves in the summer paving the way for Blackstone’s £20m refurbishment plans for the lower part of the building.
For a substantial period of the five-year loan, therefore, the building will be around 50% occupied, with Blackstone incentivised to ensure an efficient grade A refurbishment, and then seek to re-let the prime West End office space and sell at a premium to the £265m purchase price.
Blackstone’s ability to secure £10m of funding to make partial loan interest payments to compensate for the asset’s income shortfall during the construction period is the preserve those investors with the greatest sway with lenders, that is, those with the greatest capital to deploy.
This risk profile of the loan’s overall structure has been priced into Morgan Stanley’s margin which is slightly above 400 basis points over three-month LIBOR, while the LTV – based on the £190m senior facility – stands at 71.7%.
Blackstone is acquiring the West End trophy asset from Dubai investment fund Istithmar, which agreed to a consensual sale of the asset 16 months ago after the securitised loan balance matured.
Morgan Stanley fought-off considerable competition to win the financing mandate, with Blackstone running a dual-track tendering process seeking term sheets for both £190m straight senior and a split £160m senior loan plus a £30m mezzanine loan. Both variations included the additional £10m for the reserve.
Eastdil Secured ran the financing mandate for Blackstone.
Goldman Sachs and Bank of America Merrill Lynch both also pitched for the financing mandate, including a host of senior lenders, including BNP Paribas, while the £30m plus £10m mezzanine ticket received terms sheets from, inter alia, Pramerica, DRC Capital and Starwood Capital, at differing levels of commitment.
This is Morgan Stanley’s first UK senior loan since the global financial crisis, CoStar News understands, and the first European loan since two French loans in 2011.
Last October, CoStar News revealed Morgan Stanley was eyeing up a return to UK property lending and that the global investment banking giant could secure its first loan before the end of the first quarter.
Attention will now turn to Morgan Stanley’s exit strategy for the £190m loan, which will reveal the kind of real estate lender the global investment bank is to become this time around; whether a balance sheet holder, a syndicator or, like last time, a capital markets player.
Istithmar, Dubai’s investment fund, agreed to a consensual sale 16 months ago for an asset it paid £325m in 2007 after the Barclays Capital Indus Eclipse 2007-1 CMBS loan balance was not repaid at maturity, prompting Capita Asset Services, the loan servicer, to market the asset in autumn 2011.
This led to Perella Weinberg’s collapsed £285m offer two months later, backed by a senior- financing syndicate from Société Générale, BNP Paribas and Deutsche Pfandbriefbank.
Prudential M&G, which owns the outstanding £35.8m B-note, will suffer a partial loss due to the £30m mark-to-market swap liability, but bondholders in the remaining £212.3m securitised loan will be repaid in full in time for the next interest payment date on 25 April.
Blackstone’s bet on successfully repositioning the asset is similar to the business plan behind its acquisition of Devonshire Square last July for £325m which was financed by a five-year £220m Goldman Sachs senior loan, which was syndicated to AXA Real Estate and AIG.
Blackstone and Morgan Stanley declined to comment.