Former Deutsche Bank property debt specialist Brian Sedrish has led US developer Related Companies’ successful move into real estate lending, initially in the mezzanine field but more recently offering whole loans.
At the peak of the last real estate cycle, two developers with no experience building in New York City dreamed up a soaring condominium tower offering unsurpassed views of Manhattan: One Madison Park.
Buoyed by the thriving market, lenders and investors salivated, shelling out more than $300m to back the project, including
a $150m construction loan from Credit Suisse and a refinancing from iStar Financial.
The building rose 600ft, but equally lofty plans to sell its condos crashed with the recession. Mired by troubled debt and lawsuits, a shell of the building sat unfinished and mostly vacant for years.
But in 2012, Related Companies, Deutsche Bank and its partners scooped up the property and its troubled loans, turning the asset into a success. By this February, sales at the building peaked when Rupert Murdoch, head of News Corporation, agreed to buy its top four floors for $57m.
“We took it out of bankruptcy and completed the business plan and today it is selling remarkably well,” says Brian Sedrish, managing director of Related Fund Management, who at the time of the acquisition headed Deutsche Bank’s special situations commercial real estate group.
The partnership at One Madison, as Related renamed it, moulded a fateful relationship between Related Companies and Sedrish, who joined the firm in September 2013 to head a three-month-old debt business within Related Fund Management, which manages around $3bn of capital.
The One Madison deal gave Sedrish a glimpse of a powerhouse developer like Related Companies’ abilities, using its market expertise and reputation, to turn around a highly troubled asset. He thought he could harness Related’s US connections and would feel at home teaming up with former University of Michigan fraternity brother Justin Metz, who had become Related Fund Management’s managing principal in 2009.
Related Fund Management has 40 staff and other leaders of the eight-strong debt team include senior-vice presidents Michael Fleischer in Los Angeles and Alfred Trivilino in New York. Fleischer previously held senior positions at Gibson, Dunn & Crutcher and Canyon Capital, and Trivilino at Gramercy Property Trust, BayNorth Capital and Apollo Real Estate Advisors.
“The first foray of any formalised nature was when Justin Metz jumped from Goldman Sachs and began raising Related’s first, $825m, private equity fund,” Sedrish says.“When I came on board the decision was made to focus more on the high-yield debt opportunities.”
In a glass-enclosed office on the 20th floor of Related’s 60 Columbus Circle offices, near Manhattan’s Central Park, 41-year-old Sedrish enthuses about the group’s progress. Since forming a joint venture with Highbridge Capital in June 2013, leading to Sedrish’s arrival, the Related fund management debt team has deployed two-thirds of an initial $800m raised purely for debt.
“Part of the attraction to investors was that we formed the business at a time of massive distress and a lot of [sponsors] had not completed their business plans,” Sedrish says. “We had a lot of success in sourcing those and then finishing the business plans.”
Recent deals, typical of the group’s loans, include a $60m predevelopment bridge financing to Atria Builders and Marx Development Group for a planned 400-
room Courtyard by Marriott hotel in Manhattan’s North Chelsea neighbourhood.
The group also partnered with a US bank to originate a $90m construction loan for the development of a 79-unit luxury condominium project in Vail, Colorado.
In Chicago, Related originated a $16.5m mezzanine loan in March for the development of a luxury, high-rise, multi-family housing project in the River North area, comprising 310 units ranging from studios to three-bedroom apartments and with a development cost of $107.9m.
Sedrish says: “The investment gave us the ability to invest in a market with attractive supply and demand dynamics and a growing urban core at an attractive loan basis.”
In January, Related provided a $142.2m preferred equity investment for the acquisition and renovation of a 13-property, multi-family portfolio comprising 4,852 units in North Carolina, Florida, Houston, Texas and Georgia.
Loans have ranged from one to five years, with predevelopment bridge financing typically shorter in duration. The lender targets ‘transitional’ asset investments above $30m, usually holding a mezzanine portion representing the 65-85% leverage slice in the capital stack, behind a senior lender.
“When we thought about forming this vehicle, the real opportunities were in providing junior tranche loans and we were able to
take advantage of that,” Sedrish says. “But as you would expect in an improving market, a flood of capital has filled the void and the market has gotten tighter and tighter. The number of opportunities has dried up and lowered returns.”
SEIZING THE OPPORTUNITIES
Sedrish’s career has almost mirrored the high-yield opportunities in commercial real estate. At Deutsche Bank he originated balance-sheet loans and CMBS, but also bought large distressed loans and loan portfolios from banks and special servicers mandated to move them off balance sheets.
As well as the One Madison venture, this included Deutsche Bank buying $218m of troubled loans backing the landmark John Hancock tower in Chicago.
But those opportunities have dwindled, unless the upcoming “wall of maturities” presents new ones. Meanwhile, “a flood of competition” has entered the mezzanine and preferred equity lending space. As recently as a year ago, the group was pulling 15% returns on mezzanine loans, while today they are closer to 12%, Sedrish says.
Therefore, like many of the top names in high-yield debt – Blackstone, Starwood Property Trust, Apollo, Colony, Northstar – Related is pushing into whole loans, as the barriers to entry prevent many smaller, lesser-known firms from entering this area.
To originate whole loans, Related uses cheap financing through short-term, warehouse bank credit lines to fund the senior portion of the debt stack. A bank will charge as little as 2% for this.
“That type of more senior structure requires a lot more expertise to pull off,” Sedrish says. “If you originate the loan at 6% and borrow at 2%, and you get double-digit returns on the subordinate piece, that ends up being around 10%.”
But even that space is becoming more crowded. “We’ve seen a lot more entrants into the whole-loan space and a big reason why is because the groups that dominated before the crisis were banks,” he says. “When they ran into trouble there was a pull back to get risk off their balance sheets.”
As a result, the group has begun to target cities outside the largest central business districts; places like Seattle, Washington, and Austin, Texas – markets showing “strong, consistent population growth among educated young professionals”, Sedrish says.
EXPANDING INTO EUROPE
Related’s lending business will ultimately expand into Europe. In March, Related Companies formed a joint venture with prominent UK developer Argent, called Argent Related, to pursue or develop mixed-
use and residential projects with open-
market and affordable housing, offices, retail and leisure space, and hotels.
“We have debated Europe internally and wanted to make sure we have a strong presence on the ground to execute a business plan and make sure we understand those markets,” Sedrish says. “We feel far more confident entering that market now that we have that presence.”
Because Europe’s recovery has lagged behind that of the US, there are still significant high-return opportunities.
“Europe was significantly slower to get the banks into a more healthy position, so they are behind us in terms of evolution,” Sedrish says. “It’s a less mature market, so the whole-loan opportunities there are less advanced. They are also less efficient. But with inefficiency comes opportunity.
“Fewer groups have filled the void for capital,” he says, adding that “a lot of groups are acquiring distressed pools”, which could mark a return to the strategies Sedrish employed at Deutsche Bank.
The firm does not yet have “dedicated fund management staff [in Europe]”, but its team members will spend time on the ground for the right opportunities.
Large lenders like Blackstone, Starwood or Colony are well-known for their other business lines, making it easier for them to obtain bank funding for whole loans. “Its a very symbiotic relationship,” Sedrish says.
Related will also lean on its name and relationships to expand its presence and complete more whole-loan deals. The firm has eight US offices, in addition to those in the Middle East and China.
LOCAL KNOWLEDGE IS POWER
“That’s huge, because all real estate is local,” Sedrish says. “People aren’t going to just give us capital because we’re nice guys. You need to have people on the ground and to understand the local real estate dynamics. Investors very much appreciate that we understand those markets and how to execute on transactions.”
One example is the $60m first mortgage loan Related Fund Management and Highbridge Principal Strategies provided on the 400-room Courtyard by Marriott hotel project, which is near to Related’s 17m sq ft, mixed-use Hudson Yards development on Manhattan’s west side.
“No one knows that market better than we do and we had the valuation better than anyone else,” Sedrish says. “We do transactions where we have a presence whenever possible. Because, again, all real estate analysis is local, and having that understanding is huge. From a deal sourcing perspective, all these things are essential in fielding the deals we will lend on.
“From a partnership standpoint, we have teamed up with former competitors as capital partners. We teamed up with a private equity shop in New York on a deal. We decided that we could be helpful to each other on a heavy value-added conversion play. What we brought to the table, among other things, was the ability to understand the sponsors’ plans.”
Are there any drawbacks to being part of Related Companies?
“Once or twice we had to explain to potential borrowers that we are focused only on putting the capital out there and helping sponsors achieve their business plans; that we aren’t a predatory lender in disguise,” Sedrish says. “But that hasn’t happened recently.” n
YARDS OF POTENTIAL IN DEVELOPMENT SECTOR
Related Companies, founded in 1972 by developer, philanthropist and Miami Dolphins football team owner Stephen Ross, has undertaken extensive US developments. Its $15bn-plus real estate portfolio comprises mixed-use, residential, retail, office, trade show space and affordable properties in premier markets.
Sedrish says his team regularly taps experts in various subjects across the firm: “Our ability on ground-up deals relies on understanding business plans quickly and we have all of the intelligence we need in-house. When we get involved in a deal’s sub position, the senior lenders are very receptive to us being in the deal and they have more incentive to get involved.”
Related is developing New York’s most anticipated new neighborhood: Hudson Yards, a 17m sq ft project on Manhattan’s west side. It includes 5,000 homes, office space, a shopping mall, five-star hotel, cultural facilities, a 750-seat public school and 14 acres of open spaces.
Also in New York, Related developed MiMA, a 1.2 m sq ft, 63-storey tower featuring luxury apartments, recreation and leisure space, the Frank Gehry–
designed home of the Signature Theatre Company, and a hotel.
Other key projects Related has completed include the 72-acre, mixed-use CityPlace resort in West Palm Beach, Florida, and The Cosmopolitan, a 6.5m sq ft, luxury resort in Las Vegas.