Morgan Stanley securitises Devonshire Square debt

Morgan Stanley has securitised a portion of the circa £345 million whole loan which it provided to Blackstone last May to refinance the Devonshire Square estate in the City of London.

A £110.5 million portion of the loan has been issued as a single-tranche CMBS – Deer Funding UK PLC – priced at 2.45 percent over three-month Libor. The floating rate notes are due to mature in May 2019, but can be extended to either 2020 or 2021.

Morgan Stanley declined to comment on the deal. The bank is understood to have syndicated part of the loan which it initially provided in the weeks prior to the UK’s EU referendum, in one of the UK’s major lending deals at the time. A person familiar with the Deer Funding transaction said that a portion of the debt has been repackaged into note format to be sold to investors which cannot buy loans directly.

In contrast to comparable CMBS deals, the notes will not be rated by any rating agency by the deal’s closing date, which the issuer said “may reduce the number of potential investors in the notes and may affect the price and/or liquidity of the notes in the secondary market”.

The original financing by Morgan Stanley was provided to Blackstone Real Estate Partners Europe III and Blackstone Real Estate Partners VII. Morgan Stanley is understood to have written the loan at a margin of around 280 basis points.

The £344.9 million whole loan contains tranches of £264 million and £48 million, plus capex facilities of £27.8 million and £5million. The CMBS has been issued against a £116.36 holding of the £264 million tranche.

The underlying property is mainly offices with some retail, leisure and residential, with 12 interconnected buildings containing 670,000 square feet. The assets are 73 percent leased to 41 tenants with a weighted average lease term of eight years. The market value is £480 million, as valued by Savills in May 2016.

Blackstone bought Devonshire Square for around £330 million in 2012 from Rockpoint and the Abu Dhabi Investment Authority. The purchase was originally financed by a £210 million whole loan provided by Goldman Sachs. AXA Investment Managers – Real Assets subsequently took a participation in the deal. The blended margin on Goldman Sachs’ five-year finance was thought to be around 400 bps.

Morgan Stanley has previously financed the estate. Rockpoint had bought the 13 linked buildings for £410 million in 2006 at a 4.6 percent yield with a £340 million Morgan Stanley loan, of which £290m was securitised in the Triton ELoC 26 CMBS. The loan was due to mature in October 2011, but was extended to April 2013. Rockpoint bought the junior loan at a discount to keep control of the property.