US private equity firm snaps up transitional assets loan portfolio, reports Al Barbarino
Texas-based private equity firm TPG continued its rapid expansion into real estate last month by acquiring 75% of a $2.5bn portfolio of US real estate loans from Deutsche Bank’s Special Situations Group. The deal involves higher-yielding debt on transitional assets, along with an 11-strong DB origination and risk management team.
The firm struck the deal through a new REIT called TPG Real Estate Finance Trust (TRT) and said it had raised $750m from institutional investors to originate new loans. DB retains a 25% interest.
The portfolio comprises 57 performing first-mortgage loans on transitional assets across property types in gateway US markets, mainly New York and Los Angeles. They have a weighted average life of under three years and a $40m average loan size.
The New-York based DB team TPG is taking on was dedicated to this portfolio and specialises in high-yielding commercial real estate debt. At DB, it mainly invested in commercial mortgages bought on the secondary market from institutions and other non-bank lenders.
TPG sees an opportunity in transitional assets, as traditional banks and insurers are less likely to finance them. The bulk of the loans acquired include offices that are not fully leased or are being renovated; apartments being converted to condos; and hotels that are being repositioned.
The move is part of TPG’s effort to find more attractive risk-adjusted returns in the thriving US market. The firm is aggressively expanding its real estate arm in a highly competitive market and last year bolstered this business by purchasing real estate service providers Cassidy Turley and DTZ, which it reportedly plans to merge.
“An enormous amount of capital is looking for attractive commercial real estate opportunities,” says Jim Sullivan, a managing director with real estate adviser Green Street Advisors, who was not involved with the deal. “The investment world is starved for yield and some investors are moving further out on the risk spectrum to capture higher returns.”
Targeting transitional assets
Transitional properties have been the bread and butter of lenders such as C-III Capital Partners, Starwood Property Trust and Blackstone, although the risk profile can vary widely from asset to asset and firm to firm. While the DB portfolio doesn’t have “significant current cash flow”, the loans are performing and TPG assumes that they will be paid off, a source said.
Early reports indicated that for DB, the deal was profit-driven. One source told Reuters that it was “part of normal operating business” and “the timing in the US is favourable to sell real estate positions”.
Others speculated that the sale was also part of DB’s effort to trim its balance sheet, to mitigate the effects of increasingly strict banking rules. Under the Basel III regime, riskier real estate loans of the kind the special situations group majored in will consume more regulatory capital, making them less profitable for banks such as DB to keep on their balance sheets.
By hiving off the special situations group and its portfolio, DB lightens the regulatory capital it must hold against these loans, but retains a stake in the business and its profits.
The $750m raised for TRT will go into new lending to existing and new clients on offices, multi-family housing, condominiums, hotels and industrial assets. TRT and DB’s commercial real estate group, headed by Jonathan Pollack, say they “expect to work together on new business opportunities”.
Elad Shraga, head of structured finance at DB, says: “Our leading commercial real estate franchise offers a highly diversified product suite to clients. This new platform, combining DB’s expertise in high-yield CRE debt and the strength of TPG’s global brand, will improve this client experience.”
Among the DB professionals moving to TPG are Michael Nagelberg, who becomes a director with TPG Real Estate Finance, and Lior Zamir, who carries his vice-president title at DB over to TPG.
Avi Banyasz, TPG partner and co-head of TPG Real Estate, says: “We are very fortunate to have the same strong Deutsche Bank team in place, which will provide continuity for current borrowers and open the door to relationships with a growing number of new borrowers in need of financing.” n
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