As loan servicers find their place in post-CMBS Europe, Starwood’s reported plan to sell Hatfield Philips International to Situs could make good sense.
Starwood, which is led by Barry Sternlicht (pictured), is said to have been pondering whether to re-brand its real estate loan servicing and advisory businesses, LNR and Hatfield Philips International (HPI), ever since it acquired them in 2013.
HPI operates only in Europe and is a subsidiary of LNR Partners, which operates in the US… and in Europe. That can be confusing.
Now, Starwood may not have to spend the money at all, because last week reports surfaced that HPI is to be sold to rival real estate loan servicer Situs Group.
The probability that Hatfield is on the block will not come as a great surprise to many in the European CRE lending market. When Sternlicht moved on LNR Partners, the bets were on that he would keep LNR and sell HPI sharpish. After all, CMBS, the market with the biggest requirement for loan servicers, was growing again in the US after its knock down in the financial crisis. Unfortunately, CMBS remained stubbornly out of fashion in Europe.
Not only has new primary servicing work been thin on the ground in Europe, it also pays peanuts. In fact sometimes, say those in the market, it doesn’t actually pay at all.
Special servicing on the other hand pays handsomely. In its heyday, at the time of peak real estate loan distress in Europe, Hatfield was making a 50 percent return on its revenues and was in the driving seat on half of all European CMBS loans in special servicing, including 75 percent of the German ones.
No longer though. This business has been burning off, more rapidly in the last two years when the bullish European property markets meant selling the many secondary-quality assets that were CMBS collateral became easier.
Starwood brought in former Royal Bank of Scotland loan restructurer Blair Lewis in 2014 to find ways to grow in Europe. He has pursued two strategies, both designed to generate fees in their own right and also to create new loan servicing work for the HPI book downstream.
Neither is easy. One, debt brokerage, is an increasingly crowded field and the LNR/HPI offer has faced stiff competition. The other involves applying HPI’s loan workout experience to the specialist world of property non-performing loan (NPL) investing.
The NPL expansion has been very successful. LNR/HPI has advised bidders on NPL portfolios with a face value of around £65 billion. However, some 90 percent of their work, according to sources, has been for one client – Cerberus Capital Management. While this looks like concentration risk, if you are going to hitch your wagon to one client, one of the two biggest in the market seems like a good idea. Cerberus bought NPLs with a face value of €28 billion in Europe last year. The other leading NPL buyer, Lone Star, has its own captive servicer/asset manager in Hudson Advisors.
Starwood and Cerberus are rivals but they are said to have a good relationship. Other rivals have not been so keen to hire a Starwood subsidiary, it is said. This despite the LNR/HPI business being put in the ownership of Starwood’s mortgage REIT – Starwood Property Trust – rather than with the private equity side.
Yet a dividend yield-focused US REIT does not seem like a natural owner of an opportunistic European business. Situs, a loan servicer, feels like a better fit. Situs is itself under new ownership since January 2015 when it was acquired by private equity firm Stone Point Capital. If a sale goes ahead, it would be a big consolidation in the rarefied world of European CRE loan servicing.
HPI was launched in 1997 and a sale by next year would mean the business will have lasted exactly 20 years, pretty much tracking the rise and fall of property securitisation in Europe. This is not to say that there won’t be a future for any real estate loan servicers in Europe. A sale, though, could be the fruition of another Sternlicht cunning plan – which would explain why the money was never spent on that re-branding.
Jane Roberts is consultant editor at Real Estate Capital