Blackstone Win in CWCapital Sale Shows CMBS Strength

The largest auction of troubled assets in the commercial mortgage-backed securities market is showing the strength of investors' appetites for real estate as more distressed properties from the crash come up for sale.

Four months after CWCapital Asset Management LLC put properties with $2.57 billion of unpaid loan balances on the block, Blackstone Group LP, Starwood Capital Group LLC and CIM Group are completing deals for offices and malls in Southern California, a Dallas resort and a Los Angeles skyscraper. About 700 bidders registered interest in the auction, which includes foreclosed loans, according to Morgan Stanley.

Rebounding property values are prompting special servicers—firms that negotiate with delinquent borrowers on behalf of bondholders—to unwind holdings from the real estate collapse at higher than estimated levels. Commercial property prices have rallied 71% from their 2009 low, surpassing 2007 highs in some areas, according to an index from Newport Beach, Calif.-based research firm Green Street Advisors Inc.

"The depth of investor interest demonstrates continued demand for various types of real estate across the country," Richard Hill, head of U.S. CMBS and commercial real estate debt research at New York-based Morgan Stanley, said in a telephone interview. "We expect there will be other special servicers that will take similar action to take advantage of investor demand, coupled with rising property valuations."

Blackstone yesterday completed two purchases totaling about $315 million of the third- and fourth-largest assets from the sale. The New York-based firm bought the Four Seasons Resort and Club Dallas at Las Colinas and a senior mortgage on 119 W. 40th St., a 22-story office building in Midtown Manhattan, according to a person with knowledge of the transactions.

Blackstone paid about 86 cents on the dollar for the Dallas hotel. It bought the New York loan for about 75% of the investment by the previous owner, a venture including L.H. Charney Associates Inc., George Comfort & Sons Inc. and Fortis Property Group LLC, according to the person with knowledge of the deal, who asked not to be named because the details were private. The property had been appraised at $200 million at underwriting and $135 million in September, signaling Blackstone paid a premium to the last appraisal, according to Barclays Plc analysts in a note today.

CIM is poised to buy 2 California Plaza, an office tower in downtown Los Angeles that's the largest asset in the auction. The Los Angeles-based investor is set to take ownership later this year, according to a person briefed on the purchase, who asked not to be named because the transaction hasn't been completed. The property had an unpaid mortgage balance of $468 million, according to Morgan Stanley.

CIM also is buying Montclair Plaza, a shopping center in the Southern California city of the same name, GlobeSt.com reported two days ago. CIM is under contract to pay about $170 million for the property, GlobeSt.com said. That price is "substantially higher" than the appraisal of $150 million a year ago, Barclays Plc said in a note.

"Appraisals have improved, so it's a good time to sell some of this off," said Christopher Bushart, senior director at New York-based Fitch Ratings. Auctions are "an efficient way to get rid of a lot assets in one fell swoop."

Other buyers from the CWCapital auction include Starwood, which said last month that it paid $191 million for seven office properties and four retail centers. The Greenwich, Conn.-based private-equity firm, led by investor Barry Sternlicht, plans to sell some of the assets.

CWCapital, a unit of Fortress Investment Group LLC based in Bethesda, Md., is the largest special servicer of soured mortgages, overseeing about $17 billion of delinquent loans, according to data compiled by Bloomberg. They include the $3 billion loan on Stuyvesant Town-Peter Cooper Village, Manhattan's largest apartment complex, which CWCapital took over in 2010 after the second-biggest CMBS default in history.

"CWCapital feels that the market is in prime position to leverage the fluid capital markets and the recovering real estate market," President Dave Iannarone said in an Oct. 10 statement announcing the sale, which concluded bidding in December.

Spokesmen for CIM, Blackstone and CWCapital declined to comment.

The auctioned properties came from 13 CMBS pools created from 2004 to 2008, according to Morgan Stanley. More than 90% of the assets were tied to deals made in the boom years of 2006 and 2007 when real estate values were peaking. The $160 million senior mortgage on 119 W. 40th St, bought by Blackstone, was packaged into securities in 2007.

Investors paid about 30 cents to 90 cents on the dollar for the assets, according to Morgan Stanley, which estimates Starwood Capital paid about 60 cents per dollar of unpaid loan balances.

Comparing prices of real estate auctioned since the financial crisis is difficult because properties vary in types and degree of distress. JPMorgan Chase & Co., Wells Fargo & Co. and Lone Star Funds paid about 80 cents on the dollar in August 2011 for Anglo Irish Bank Corp.'s $9.65 billion portfolio of U.S. real estate loans, two people who were told of the auction results said at the time.

There were about $66.6 billion of distressed CMBS loans as of the end of 2013, or almost half of all the outstanding distressed commercial real estate loans by all lender types, according to Morgan Stanley.

Individually, the purchases from the CWCapital auction provide glimpses of the recoveries in cities beyond primary markets such as New York and San Francisco, where the rebound in real estate values has been the strongest.

Downtown Los Angeles has attracted increasing interest from investors and developers from the U.S. and abroad. New York developer Joseph Moinian sold a 4.6-acre site in the area designated for a retail, hotel and residential complex to Chinese developer Oceanwide Real Estate Group Co. for $180 million last month, and Shanghai-based real estate company Greenland Holding Group Co. bought 6.3 acres in downtown for $144.8 million on Jan. 29, according to Jones Lang LaSalle Inc.

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