Morgan Stanley has been selected to finance Starwood Property Trust’s (STWD) maiden equity investment in Dublin, a four-strong office portfolio acquired from Lone Star, with a five-year senior loan of up to €245m.
Morgan Stanley has priced the senior loan at 190 basis points over three-month EURIBOR and will seek an exit through the syndication market. Underbidders on the senior loan included Helaba, Deka Bank and Bank of Ireland, CoStar News understands.
Lone Star sold the stabilised offices portfolio two weeks ago for €350m in an about turn from an intended refinancing, as Starwood’s mortgage REIT redirects capital into core-plus equity investments to capitalise on attractive yields value add real estate.
The property portfolio is comprised of the Iveagh Court Complex, the Watermarque Building, Marsh House and 11-12 Hogan Place. Eastdil Secured ran the original refinancing mandate for Lone Star and the subsequent acquisition financing mandate.
STWD’s €350m Dublin office portfolio acquisition from Lone Star, which reflected a net initial yield of circa 5.6%, is indicative of the evolution of the largest US mortgage REIT business into value add real estate equity.
In October 2014, STWD committed $150.0m to a newly-formed partnership with three sovereign wealth funds for a 33% equity interest in a retail fund which acquired four regional US shopping malls located in Florida, Michigan, North Carolina and Virginia.
STWD’s refocus is driven by enduring low interest rates, tightening credit margins and more attractive equity yields in certain jurisdictions on a risk-adjusted basis.
In effect, STWD has applied its identical investment rationale for debt investments – focusing primarily on assets with some degree of transition, such as leasing-up, redevelopment or construction – into value-add real estate, aided by the equity investment expertise of affiliate Starwood Capital Group’s London-based team.
While STWD and Starwood Capital Group declined to comment, last month’s earnings call for the US mortgage REIT’s 2014 annual results underpins the firm’s rationale.
Barry Sternlicht, Starwood Capital Group’s founder, chairman and CEO, said: “We continue to look though because of the competitive world at equity opportunities and these opportunities go through the same kind of rigor that our debt opportunities do. The mall portfolio participation is greater than 10% cash yields, which are attractive and accretive to the dividend and they don’t get repaid.
“It’ll be years before we have to worry about getting the money back and redeploying it. So it increases our duration of our book by doing equity investments and we obviously have a call option on appreciation, particularly if we can take advantage of the interest rate cycle in by assets here.
“So you’ll see us probably do more in the core space, core plus space, value-added space in the equity and it will grow as a percentage of our assets.”
Furthermore, in the same earnings call, Rina Paniry, chief financial officer of Starwood Property Trust, added equity investments to the stable of planned further investments for the REIT.
Paniry told analysts: “In addition to funding on previously committed loans and originations of more traditional loans, you may also see us investing in assets that we have not traditionally invested in, such as the [regional US] mall portfolio we talked about earlier.
“We will mine the multitude of investment opportunities available to us, be it our lending, special servicing, B-piece, conduits and equity platforms, all of which provide us with access to unparalleled expertise across the global real estate markets and uniquely positions us to take advantage of opportunities going forward.”
STWD has $8.9bn under management, as at the end of 2014. Two-thirds of this, $5.7bn, is invested in senior secured mortgages and mezzanine loans, followed by smaller allocations in subordinated mortgages, preferred equity, CMBS and RMBS.
In addition, the inherited $1.7bn LNR book is now comprised of predominantly CMBS notes, $753.5m, and conduit loans, $391.6m.
Just before Christmas, Starwood refinanced a matured speculative development loan secured by Aldgate Tower in the City of London with a £200m whole loan. Of the total, STWD originated $229m (circa £155m).
In the earnings call Q&A with analysts, Jeffrey DiModica, managing director at Starwood Capital Group, said: “So we did a big loan on an office building in London that is just being completed and for lots of reasons the guy held off leasing and we made the loan even though the building is substantially unlet.
“We like our basis, and since we lent him the loan, he’s going to be 50% leased and that’s probably in three months. So it’s a really good real estate. So there’s no problem. The banks have trouble with an empty building so easy for us and he has an issue with one of his partners so that created an opportunity. He wanted whatever, buy him out, or whatever, and placed a construction loan [we’ll] permitted that.
“Our partner, Jeff Dishner in London, is fond of saying, you lend in the beer countries and we stay away from the wine countries. So, we’ll probably say that’s the truth. We have pretty much put a red line around France.”
Morgan Stanley also declined to comment.