GE Capital Real Estate’s ambitions to be a leading property lender rather than owner took a leap forward late last year with its purchase of Postbank’s £1.4bn UK loan book, writes Jane Roberts
GE Capital is proof that giant corporations can be as nimble as smaller specialists, when they see the right opportunity. The division of $260bn market capitalisation General Electric switched the European strategy of GE Capital Real Estate 18 months ago; or, as the company puts it, “pivoted” out of direct property investing and into senior mortgage lending.
“The big change was ‘pivoting’ from the real estate ownership business to being a commercial real estate senior lender,” says Ellen Brunsberg, GE Capital Real Estate’s UK managing director, who took the role of building up the new lending operation at the end of April last year.
Brunsberg, who was 17 years a banker at Morgan Stanley, adds: “Since I took over the business I think our ‘pivot’ has become more obvious to the outside world. We were no longer buying real estate, although we continue to seek opportunities to realise value in a strong market, and we want to be a leading senior mortgage lender.”
GE Capital and Brunsberg showed their mettle when, within weeks of getting her feet under the desk, Brunsberg travelled to her US-based bosses and suggested they should bid for Deutsche Postbank’s £1.6bn UK loan book, being sold by Deutsche Bank under the moniker Project Tower. At the time, GE Capital Real Estate’s London-based lending team had made precisely three loans, compared to Postbank’s more than 60.
As well as persuading them that European markets had turned for the better and Postbank was an opportunity GE shouldn’t miss, the other immediate challenge was that the bidding process had already started. “It was clearly complementary to what we did and the quality of clients in Postbank’s portfolio matched ours,” she says. “The issue was that the bid process had already started. We had been offered a chance to participate in the auction earlier in the year – and had declined. So we had to go back…”
Assembling an international team
Once the decision was taken and Deutsche Bank agreed GE could bid, the global real estate group marshalled an international team of 40 to work with Brunsberg, who included Joe Nellis, head of global business development for commercial real estate; Tom Curtin, head of risk; and European general counsel Mark Horncastle.
“We ruined some holidays, because this was August,” she remembers, “But we had a late-to-the-party issue. We said, we know we’re late, but we’re gonna catch up.” The prize was valuable – a rare chance to acquire a high-quality loan book with nearly 40 borrowers, a ready-made pipeline that would help lay the groundwork for the future business. GE believes that it swiftly caught up with the rival bidders in the due diligence process, investment banks JPMorgan and Citibank – the latter bidding in partnership with private equity investor Ares Real Estate Group.
Deutsche Bank was selling Postbank’s UK commercial real estate lending business because it had relatively recently become Postbank’s parent, resulting in changes in strategy: the German bank was not trading the loans because it was worried about risk. GE Capital ruled out buying a handful of non-performing loans in the portfolio and was not prepared to pay par value for the rest on the grounds that it hadn’t written the loans in the first place and couldn’t know everything about them.
At the same time, it was up against two international banks whose big distribution platforms gave them a lot of market intelligence on how to price the loans, plus the option to buy the whole portfolio and trade everything they didn’t want to keep. However, the GE team had the element of surprise: they seem to have had the advantage of their rivals not knowing they had joined the process when final bids were lodged in mid September.
Deutsche Bank selected GE Capital Real Estate in October and on 20 December, the company closed on 55 loans with a £1.4bn ($2.1bn) par value. The purchase price has not been officially disclosed but is believed to reflect a single-digit discount. About two-thirds of the loans are in London and the south-east and one third in the UK regions, Germany and France.
The enthusiasm for the deal within GE Capital was partly because it was the largest portfolio acquisition for GE Capital Real Estate since 2007 and the largest deal for GE Capital since 2008. “Working on the buy side, with changing sentiment on real estate and Europe, was very exciting and there was a lot of co-operation,” Brunsberg says.
After the deal was closed, two asset managers from the Postbank staff, Barbara Kirby and Sandra Hunter, were hired, while Bruce Matthews, previously London general manager, decided to leave. “I have a very strong team in place,” says Brunsberg of the decision not to hire most of Postbank’s staff. “While 55 loans is a lot more than we had, our team was excited and ready to do it.”
A diverse loan portfolio
The acquisition took the UK commercial real estate mortgage book to almost $3bn (£2.1bn) when combined with what was by then a fairly diverse portfolio of six loans made by the London-based property team (see table). That team, headed by James Spencer-Jones, hasn’t closed another new loan since lending to Blackstone on the St Enoch Centre in Scotland last October, but Brunsberg says they haven’t been distracted by the Postbank acquisition.
“We’re hoping to close on two new loans imminently, ones on which we quoted terms in November,” she says. “We are out there, we have rather a strong pipeline and I think that reflects that the market is getting a lot more confident, so you see trades, buying and selling of real estate.” Five of the pipeline loans “are from relationships we’ve developed from Postbank that we’re pretty excited about”, she says. The two imminent closings total about £120m ($200m). One feature that sets GE apart from much of the increasing competition from other senior lenders is that it considers higher loan-to-value, stretch-senior loans, under-writing anything from £10m up to £500m across most sectors, apart from healthcare.
“We won’t do development, but we will look at transitional properties – Fleet Place, in the City, is an example,” Brunsberg says. “We did that deal in just four weeks. We own a building on Fleet Place, were familiar with the location and liked the borrower a lot.” While the aim is to build a high-quality loan book, with a focus on bilateral lending, GE will syndicate pieces of larger loans and plans to do so with some of the bigger deals that it expects to close.
Brunsberg points out that “this accomplishes two things: it allows us to work with trusted co-lenders and develop a syndication market, which will ultimately benefit both borrowers and lenders”. One area knocked back by management’s time on Project Tower was expansion in continental lending. GE has yet to announce details of its non-UK European senior lending strategy, but its points of contact are Alex Ubach Utermöhl in Germany and Christophe Montcerisier in France, and the intention is to develop senior lending businesses there as soon as possible.
GE has UK clients that invest on the continent, and lending in France and Germany, and possibly Spain and Italy too, is on the cards. “We’re looking at a lot of loans in France, at a portfolio in Germany and assessing our interest in Spain,” Brunsberg reveals. With Commerzbank following up last year’s sale of its £4bn UK Eurohypo book with a sale of its €4.4bn Spanish portfolio, GE Capital could surely not be ruled out as a bidder?
Brunsberg isn’t commenting on the Commerzbank sale but stresses that GE is interested in buying both high-quality performing loans for its own book and financing non-performing loan portfolio acquisitions for clients. Before she took over as UK MD, GE backed Cerberus with a term sheet for loan-on-loan finance for the private equity firm’s bid on Lloyds’ Project Harrogate sale – which in the event went instead to Oaktree. Brunsberg believes banks are about to come under renewed pressure to step up the pace of deleveraging.
She has been watching for this opportunity for three years, having joined GE Capital in 2011, in European capital markets, not real estate. That role involved working strategically to figure out potential opportunities for GE Capital to form joint ventures, buy businesses or assets as banks deleveraged. Referring to the asset quality review stress tests being introduced soon by the European Central Bank for Europe’s largest lenders, she says: “Looking across Europe, I think there’s going to be a lot more sales and divestments as regulatory pressure changes. I think its still going to be the same story, which is banks that have exposure outside their borders needing to show some progress across asset types, and you’ll see it first probably in commercial real estate.”
Big banks are motivated to sell
She adds: “The motivation is going to be to recapitalise these banks. They are going to need to raise equity. I think that means they will be motivated to sell things in markets or underlying asset classes that they no longer want to be exposed to. Even if they take a loss on the asset trade their stock price might rise. I would be advising them: ‘do what you can do to raise your stock price, because you’re gonna have to raise equity’.”
In the UK, competition to lend senior debt is increasing, but with Postbank’s loans in the bag, GE’s balance sheet and her view that “things have got better faster than expected”, Brunsberg could hit her target to expand the UK loan book to $5bn by 2016 a year early. One experienced lender from an investment bank who now runs a European debt fund has no doubt that GE will be a force on a par with Wells Fargo, the US bank that bought Commerzbank’s Euro-hypo UK business. “They will have a greater presence and that is exciting,” he says. “They are another new, non-bank lender, and that is what we need.”
Staff reshuffle as General Electric pulls a big switch
GE has been a business and a mortgage lender for more than 40 years, focusing via its GE Commercial arm on what it calls ‘mid-market’ lending. Its specialisms include aviation, energy, equipment and retail credit financing, as well as commercial property. GE Capital Real Estate’s move back into European commercial real estate senior lending is part of a strategic decision to expand CRE lending globally and its focus now is also on Canada, Mexico and Australia, as well as the US.
In Europe, the switch from direct investing to lending meant some adjusting for staff internally and a number of job changes. Ilaria del Beato, former UK real estate MD, who helped initiate the new strategy, has now moved to a UK-based role in consumer finance. Mike Bryant, Paris-based head of asset management, is taking on the role of European risk managing director, from Richard Vliet, who is retiring.
In London, Melanie Collett was promoted to head of debt asset management when James Spencer-Jones moved from that role to heading origination; while Limor Shilo transferred from GE’s leveraged finance business to work in property origination with Spencer-Jones, alongside co-directors Jamie Younger and Nicola Free. Other key staff include: UK chief risk officer Randy Hunter, chief financial officer Panayot Vasilev and Ben Walker, head of asset management.
Brunsberg says the existing real estate direct property expertise is an asset. “One of GE’s strengths is we have strong real estate ownership and operation knowledge. As we focus on lending I don’t want our team to lose that sense of determining ‘why is this a good property?’ and to help our clients to receive the optimal funding.”
GE adds raft of property names to client list
The roster of property companies and investors that became GE Capital Real Estate borrowers through the Postbank acquisition include: London developer/investor Almacantar; Brockton Capital’s joint venture with Pradera; Gatehouse Bank; London & Stamford (now LondonMetric); Quintain and Wellcome Trust’s student accommodation iQ Property Partnership; and Stainton International and WW Advisors.
GE didn’t buy about 10 of the loans in the Postbank portfolio, either because they were refinanced before the Project Tower sale closed, were not considered good enough quality, or were development loans. One or two – such as the loan on Unilever House in Leatherhead, which LondonMetric sold to Lembaga Tabung Haji – have since been repaid.
One high-profile loan the US group didn’t take was the £100m of debt issued for the development of Finzel’s Reach, an office, residential and leisure scheme in Bristol. One of Deutsche Postbank’s specialisms was providing financing for Sharia-compliant clients, HDG Mansur in this case. When the borrower defaulted Postbank appointed Savills as LPA receiver. Since then, fund manager Palmer Capital has acquired the debt in two stages for a reported 50-60% discount and will complete the 1m sq ft project with developer Cubex Land.