A partnership between Blackstone Real Estate Debt Strategies, Blackstone Real Estate Income Trust, Canada Pension Plan Investment Board’s CPPIB Credit Investments III subsidiary and Rialto Capital Management last week entered into an agreement with the Federal Deposit Insurance Corporation to acquire a 20 percent in a $16.8 billion portfolio of senior mortgages originated by Signature Bank.
The partners are paying about $1.2 billion for the portfolio, with the FDIC maintaining an 80 percent stake in the venture and providing financing equal to 50 percent of the value of the venture, according to a press release. Based on what has been disclosed, the transaction implies a price of about $12 billion for the portfolio.
The sale was part of a broader effort by the FDIC for the failed bank’s $33 billion portfolio, which was launched in September via New York-based advisory Newmark. It was also seen as a key milestone for the US commercial real estate market given its scale and visibility. Although the portfolio was not seen as a good indicator of value for the broader US market due to the FDIC’s participation as well as its concentration in New York, there was a consensus that it would provide some much-needed indicators.
The portfolio comprises more than 2,600 first mortgage loans on retail, market-rate multifamily and office properties, most of which are in the New York area. Most of these loans are performing and roughly 90 percent are fixed rate with low in-place coupons and strong debt coverage ratios.
Blackstone and its partners liked the opportunity given its scale and the ability to work with the borrowers and its partners to maximize the potential value of the assets, said Jonathan Pollack, global head of Blackstone Real Estate Credit. The partnership sees the acquisition as a good source of long-term returns, added Geoffrey Souter, managing director, head of real assets credit at CPP Investments.
According to the release, Blackstone will be the lead asset manager of the portfolio and Rialto Capital will act as the loan servicer and operating partner.
The sale came after published reports indicated that Blackstone, along with New York-based manager The Related Companies, was one of the final bidders for parts of the portfolio.
The transaction also supports a larger, positive narrative around New York’s commercial and residential markets. The Signature Bank commercial portfolio has concentration in market-rate apartment, office and retail sector properties and the transaction comes at a time when apartment occupancy levels are at or near all-time highs and the retail sector is performing well. While the office sector remains challenged, this is starting to change.
While market participants are aware of the challenges the office sector faces, there is an additional factor to consider: inflation has increased the cost of construction as well as the price of materials as did higher rates. New supply has slowed materially in markets including New York.
An offering memorandum from Newmark outlines the breakdown of the portfolio, which has been divided into 14 pools. Twelve of those pools, ranging in size from $268 million-$5.9 billion, will be offered on a joint venture basis with the FDIC. The remaining pools, at $309 million and $899 million, will be offered on an all-cash basis.
Additionally, six of the 12 joint venture pools are being offered with optional leverage and three of the joint venture pools will have a cash-purchase option. The two all-cash pools will be limited to bids from FDIC-insured banks and feature loans with interest rate swaps and loan participations.
Still, despite the completion of what was a complex, large-scale transaction and indicators of a less hawkish outlook from the Federal Reserve, the commercial real estate market continues to face significant challenges, according to Shomo Chopp, managing partner at New York-based distressed manager Terra Holdings.
At its most recent meeting, the Federal Reserve opted to keep its target rate unchanged at 5.25-5.5 percent, with the potential for lower rates.
“There is a sense that we could come out okay on the other side because the Federal Reserve could lower rates in 2024. But that likely won’t change anything,” Chopp said.
He continued: “The big issue we have is not the question of whether there will be foreclosures and losses but rather the extent to which the losses will be. Even if rates come down the way people are projecting, it is not going to solve the problem that many of the loans coming due were financed with cheap money and facing increasingly expenses and low increases in rents.”
Controversy around the sale
The sale comes after Toronto-based mega-manager Brookfield highlighted what it believes is a lack of transparency in the Federal Deposit Insurance Corporation’s auction process of the loan book. In a letter sent to the FDIC, Brookfield cited the process as being secretive and alleged the regulator was picking some winning bidders for assets at prices below the highest offers.
“[We] have heard from numerous sources including from your adviser [Newmark] and from media reports, that a winning bidder has been selected and that this bidder’s price is lower than ours,” Brookfield said in its letter, as reported by the Financial Times.
New York-based manager Related Companies emerged in prior weeks as the winner of the FDIC’s auction, which is slated to be finalized by December’s end. “If the winning bidder’s price is in fact lower than ours, as it appears to be, we intend to launch a formal protest, as we believe that this would be in violation of law,” wrote Lowell Baron, chief investment officer at Brookfield. Officials at Brookfield declined to comment on the report.
Since the Federal Reserve began its current cycle of rate tightening roughly 18 months ago, commercial real estate sponsors have sought to buy time – sometimes to complete a business plan or wait for a lower rate environment. But market participants now believe that time has run out and borrowers and lenders are going to have to face problems around maturing loans.
Chopp has observed a recency bias in which market participants have looked at spots of good news lately and have formulated a more hopeful outlook.
“But I don’t know how you can take a massive chunk of value out of the market, which is what happened when rates rose. That takes a huge chunk out of peoples’ net worth or the net asset value of funds,” Chopp added. “Servicers have often not been marking down loans because they don’t want to take appraisal reductions but that is part of the problem, coping with high values buoyed by low interest rates. The question is what to do next?”