BREDS co-founder joins Mack’s three-pronged expansion push, reports David Hatcher
When Peter Sotoloff joined Mack Real Estate Group in October to launch its new debt division, it was clear the company meant business.
“We have a vision of a great real estate debt business built on three different types of investing,” says his new employer, Richard Mack. “To do that required finding a superstar and I think we did that by bringing Peter in.”
Sotoloff is a co-founder and former origination head of Blackstone Real Estate Debt Strategies (BREDS) and helped build the division into a $9bn-plus business. Mack is part of the dynasty that established fund managers Apollo and Area. Mack Real Estate Group was set up last year after Area was sold to Ares.
Sotoloff and Mack plan to establish a “three-legged stool” debt business with striking similarities to BREDS, in the form of Mack Real Estate Credit Strategies. “We aspire to be a competitor to Blackstone, Starwood and Colony,” Sotoloff says.
The three legs will be Mack’s $527m hedge fund, which buys CMBS notes and was not sold to Area; a senior lending mortgage REIT; and a debt fund targeting mezzanine loans and preferred equity. All three are intended to invest on both sides of the Atlantic.
“On a risk-adjusted return basis, we think real estate debt makes a tonne of sense for institutional investors,” says Mack. “We want to be a one-stop shop for investors and be in all parts of the capital stack where we can play an effective role.”
In each area that will mean value-added investing, with a focus on transitional assets for the origination elements and distressed notes on the CMBS side.
The division’s first big move will be to launch a senior lending mortgage REIT, which is expected to have around $200m
of initial capital, with the ability to call on double that if needed. It will issue floating-
rate loans at up to 75% loan-to-value ratios and lot sizes of $25m upwards.
Stepping into a market gap
“You are seeing far more CMBS maturities than new issuance and anything that has defaulted won’t go back into the system,” says Mack. “We see the opportunity to step in where the loan-to-distribute model falls short; insurance companies don’t want to lend and banks can’t lend.”
The problem is particularly acute in Europe, where despite increased competition, LTV levels are still generally conservative, according to Mack.
“If you have a Hamburg office building with near-term lease maturities and an 80% LTV loan, if you refinance with a local bank, realistically you are going to get 55% or 60% – and that’s our opportunity. We don’t expect to make money on transitional loans in London or Paris, but in secondary cities.”
The company also reportedly intends to raise a $750m closed-ended fund early next year with a higher-return lending focus. It will look to lend on larger assets than the mortgage REIT, with a similar minimum loan size of around $20m – larger assets being necessary to allocate the same amount of capital if the debt is for a smaller element of the capital stack.
“We have a strong degree of competence in development [Mack has 4,000 multi-family homes under construction across the US] and with our history, very risk-averse senior lenders have reached out to us and want us to be involved when they lend on development; they want to team up with us in terms of first-loss risk,” says Sotoloff.
Mack’s hedge fund, established in 2004, is also thought to be ripe for expansion and is expected to seek $250m of new equity early next year. Mack says the fund’s CMBS target market is the only US debt area still showing signs of true distress.
“There is lots to buy out there that was originally single A or triple B rated but is now trading at under 40 cents. They are small, high-leverage tranches requiring fine underwriting and our job is to find the right ones,” he says.
The birth of Mack Real Estate Credit Strategies adds a crucial pillar in the new Mack family business. For Sotoloff, the move is an opportunity to burnish his superstar status. Building up Mack Real Estate Credit Strategies to rival the monolith that is BREDS will be a challenge, but the duo clearly intend to stomp into its territory.
For a profile of BREDS, see October 2014 issue, pp16-20, or visit www.recapitalnews.com