Blackstone Win in CWCapital Sale Shows CMBS Strength: Mortgages

The largest auction of troubled assets in the commercial mortgage-backed securities market is showing the strength of investors’ appetites for real estate as more distressed properties from the crash come up for sale.

Four months after CWCapital Asset Management LLC put properties with $2.57 billion of unpaid loan balances on the block, Blackstone Group LP (BX), Starwood Capital Group LLC and CIM Group are completing deals for offices and malls in Southern California, a Dallas resort and a Los Angeles skyscraper. About 700 bidders registered interest in the auction, which includes foreclosed loans, according to Morgan Stanley.

Rebounding property values are prompting special servicers -- firms that negotiate with delinquent borrowers on behalf of bondholders -- to unwind holdings from the real-estate collapse at higher than estimated levels. Commercial property prices have rallied 71 percent from their 2009 low, surpassing 2007 highs in some areas, according to an index from Newport Beach, California-based research firm Green Street Advisors Inc.

“The depth of investor interest demonstrates continued demand for various types of real estate across the country,” Richard Hill, head of U.S. CMBS and commercial real estate debt research at New York-based Morgan Stanley, said in a telephone interview. “We expect there will be other special servicers that will take similar action to take advantage of investor demand, coupled with rising property valuations.”

Blackstone Purchases

Blackstone yesterday completed two purchases totaling about $315 million of the third-and fourth-largest assets from the sale. The New York-based firm bought the Four Seasons Resort and Club Dallas at Las Colinas and a senior mortgage on 119 West 40th St., a 22-story office building in midtown Manhattan, according to a person with knowledge of the transactions.

Blackstone paid about 86 cents on the dollar for the Dallas hotel. It bought the New York loan for about 75 percent of the investment by the previous owner, a venture including L.H. Charney Associates Inc., George Comfort & Sons Inc. and Fortis Property Group LLC, according to the person with knowledge of the deal, who asked not to be named because the details were private. The property had been appraised at $200 million at underwriting and $135 million in September, signaling Blackstone paid a premium to the last appraisal, according to Barclays Plc analysts in a note today.

CIM is poised to buy 2 California Plaza, an office tower in downtown Los Angeles that’s the largest asset in the auction. The Los Angeles-based investor is set to take ownership later this year, according to a person briefed on the purchase, who asked not to be named because the transaction hasn’t been completed. The property had an unpaid mortgage balance of $468 million, according to Morgan Stanley.

Montclair Plaza

CIM also is buying Montclair Plaza, a shopping center in the Southern California city of the same name, GlobeSt.com reported two days ago. CIM is under contract to pay about $170 million for the property, GlobeSt.com said. That price is “substantially higher” than the appraisal of $150 million a year ago, Barclays Plc said in a note.

“Appraisals have improved, so it’s a good time to sell some of this off,” said Christopher Bushart, senior director at New York-based Fitch Ratings. Auctions are “an efficient way to get rid of a lot assets in one fell swoop.”

Other buyers from the CWCapital auction include Starwood, which said last month that it paid $191 million for seven office properties and four retail centers. The Greenwich, Connecticut-based private-equity firm, led by investor Barry Sternlicht, plans to sell some of the assets.

Stuyvesant Town

CWCapital, a unit of Fortress Investment Group LLC based in Bethesda, Maryland, is the largest special servicer of soured mortgages, overseeing about $17 billion of delinquent loans, according to data compiled by Bloomberg. They include the $3 billion loan on Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, which CWCapital took over in 2010 after the second-biggest CMBS default in history.

“CWCapital feels that the market is in prime position to leverage the fluid capital markets and the recovering real estate market,” President Dave Iannarone said in an Oct. 10 statement announcing the sale, which concluded bidding in December.

Spokesmen for CIM, Blackstone and CWCapital declined to comment.

The auctioned properties came from 13 CMBS pools created from 2004 to 2008, according to Morgan Stanley. More than 90 percent of the assets were tied to deals made in the boom years of 2006 and 2007 when real-estate values were peaking. The $160 million senior mortgage on 119 West 40th St, bought by Blackstone, was packaged into securities in 2007.

Starwood Purchases

Investors paid about 30 cents to 90 cents on the dollar for the assets, according to Morgan Stanley, which estimates Starwood Capital paid about 60 cents per dollar of unpaid loan balances.

Comparing prices of real estate auctioned since the financial crisis is difficult because properties vary in types and degree of distress. JPMorgan Chase & Co., Wells Fargo & Co. and Lone Star Funds paid about 80 cents on the dollar in August 2011 for Anglo Irish Bank Corp.’s $9.65 billion portfolio of U.S. real estate loans, two people who were told of the auction results said at the time.

There were about $66.6 billion of distressed CMBS loans as of the end of 2013, or almost half of all the outstanding distressed commercial real estate loans by all lender types, according to Morgan Stanley.

Spreading Recovery

Individually, the purchases from the CWCapital auction provide glimpses of the recoveries in cities beyond primary markets such as New York and San Francisco, where the rebound in real estate values has been the strongest.

Downtown Los Angeles has attracted increasing interest from investors and developers from the U.S. and abroad. New York developer Joseph Moinian sold a 4.6-acre site in the area designated for a retail, hotel and residential complex to Chinese developer Oceanwide Real Estate Group Co. for $180 million last month, and Shanghai-based real estate company Greenland Holding Group Co. bought 6.3 acres in downtown for $144.8 million on Jan. 29, according to Jones Lang LaSalle Inc. (JLL)

In nearby Orange County, the region southwest of Los Angeles with 3 million residents that once was a hub for the subprime-mortgage industry, office vacancies have fallen to their lowest since early 2008, according to Jones Lang LaSalle. Starwood’s purchases in the auction include two office properties and one adjoining retail site in Orange, California. Blackstone also has been an active buyer of office buildings in Orange County during the past year.

Market Bet

With the Dallas Four Seasons, Blackstone is betting on further improvement in the area’s office market, where rising occupancies translate into more group business for the hotel, according to the person with knowledge of the auction.

In Manhattan, which has led the commercial real estate recovery and has seen prices approach peak levels, CWCapital’s eventual sale of Stuyvesant Town will be the biggest special servicer deal to come to market. The property’s value has rebounded as New York’s apartment market tightened and CWCapital pushed through rent increases.

An April 2013 legal settlement on rents at the complex will take about 18 months to implement before sale, according to a servicing note last month, suggesting Stuyvesant Town wouldn’t come on the market until later this year at the earliest. The property was valued at $3.4 billion as of Sept. 1, up from about $2.8 billion when CWCapital took it over, according to Bloomberg data.

‘Right Call’

“CW’s decision to hold the StuyTown assets and improve their operations as servicer has been the right call and benefited bondholders as the implied value of the assets has increased significantly,” said Edward Shugrue, chief executive officer of Talmage LLC, a New York-based investor in commercial property debt. “Given the economic tailwinds and strong demand for New York real estate, 2014 could be a very opportune time to explore a disposition.”

Of the 700 potential bidders, 153 submitted offers, according to Morgan Stanley.

“That’s a very impressive amount,” said Hill. Larger trophy assets don’t come up for bid often and smaller properties in secondary or tertiary markets “are still gaining a significant amount of interest from investors because they offer higher yields.”

To contact the reporters on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net; Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net

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