US manager sees Europe as a Cornerstone debt market

Having bought Protego as a stepping stone into European property two years ago, Cornerstone believes the time is right to start lending in a now debt-starved market, reports Alex Catalano

“Europe is on sale now and we think it is a good time to be a capital source for buyers,” says Rob Little, finance CIO of US investment manager Cornerstone.

He arrived in Europe to check out the market five years ago, when “it was quite frothy and Cornerstone Europe was not part of the family”, he says. But in January 2010 Cornerstone bought Protego as a European beach-head and now global investors are waking up to the attractions of real estate lending in a debt-strapped market.

“We saw the opportunity not just in the equity space, where we were active, but also in debt, which is the bigger part of the US business,” says Little. “It was an incredibly important medium-term opportunity; it is a terrific time to bring our long-term, fixed- rate debt products to a capital-starved market and really try to make a name here.”

Protego had focused on equity investment  and Cornerstone Europe now manages €2bn of assets, running eight funds and separate account mandates, focused on the UK, Germany and the Nordics.

Nick Pink, CIO of Cornerstone Europe, says: “Obviously we don’t have direct debt experience in Europe, but we do have a good understanding of the borrowers in the market, so can provide great insight into stock and deal selection.”

Cornerstone will initially source deals via originating intermediaries such as Laxfield, which it has been doing business with for  a decade, helping Laxfield with inward investments for European clients in the US.

“Sooner rather than later, our goal is to buy or build in-house lending expertise, like we have in the US,” says Little. “We will start fairly small and discretely by learning the business subtleties of London’s market, then branch out both in our product line and geographically, most likely following the markets where Cornerstone Europe has expertise: the Nordics and Germany.

“We have a number of angles and as the market is starved of debt capital, we don’t foresee tremendous challenges in finding deals this year. We want to do the right deals with the right people and establish our credibility as a good lender.”

term lending looks attractive

Cornerstone aims to lend about £300m this year in longer-term, fixed-rate loans, at a margin over the relevant gilt, in the seven- to-15-year tenor. “This seems attractive to the borrowers we’ve spoken with, given that rates are as low as they are,” says Little.

The initial focus is on core senior debt and London, where the action is now. “Regional deal volumes are fairly depressed, partly because people can’t raise debt,” Pink says. “There is an opportunity with good borrow-ers who know what they’re doing. Our expertise in these markets will allow everyone to get comfortable with the risk that’s taken.”

But Pink thinks Cornerstone will also be able to look at more interesting stretched senior and junior debt deals soon. “There’s value all the way through the capital stack; from a third-party capital-raising perspective there is perhaps more interest in the higher- yielding end than in the senior one.”

The initial capital for lending will come from Cornerstone’s parent, Mass Mutual, but there are plans to bring other investors into debt funds. “Real estate debt will be an increasingly important part of the invest-ment toolbox,” Pink says. “Investors need it and the market needs it, so the pricing, on a risk-adjusted basis, is quite attractive.”

Institutional investors recently put up £312m for a club-style debt fund Cornerstone launched in the US. Says Little: “In the US,  pension schemes and other large investors really have taken a hold of the debt market.”

Mass Mutual is power behind $32bn US property operation

Cornerstone manages $32bn of US property for its parent, financial giant Mass Mutual, and 145 other institutional clients. These cover a wide range of formats, including separate accounts, funds and co-investment. Last year it invested $5.7bn in debt while equity acquisitions and sales totalled $2.4bn.

Cornerstone has £11.7bn of US and Canadian real estate loans, originated and serviced by five regional offices. Offices are the main target, but it also lends on retail, focusing on local or community malls with a dominant food retailer, and apartments.

For industrial lending it targets warehouse and R&D facilities in international ‘gateway’ cities. Hotels also come into the mix.

it also provides higher-yielding bridging finance, construction loans, mezzanine debt and participating loans. In the past 15 years it has raised four mezzanine funds, the last of which has just finished investing.

“We backed off the mezzanine market a  bit as it was evolving out of the financial crisis, but are starting to see opportunities again,” says chief investment officer Rob Little. “We’ve had enquiries about a mezzanine product from investors seeking a little additional yield.”

Cornerstone also has a capital markets operation that trades CMBS, managing $4.4bn of securities. It also buys REIT bonds and government-insured, residential single-family mortgages.

As well as vanilla investment lending, it also provides higher-yielding bridging finance, construction loans, mezzanine debt and participating loans. In the past 15 years it has raised four mezzanine funds, the last of which has just finished investing.

“We backed off the mezzanine market a  bit as it was evolving out of the financial crisis, but are starting to see opportunities again,” says chief investment officer Rob Little. “We’ve had enquiries about a mezzanine product from investors seeking a little additional yield.”

Cornerstone also has a capital markets operation that trades CMBS, managing $4.4bn of securities. It also buys REIT bonds and government-insured, residential single-family mortgages.

 

 

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