the watch list - CoStar

MARK HESCHMEYER, EDITOR

AUGUST 26, 2013

WWW.COSTAR.COM

A WEEKLY NEWSLETTER FOCUSING ON CHANGING MARKET CONDITIONS, COMMERCIAL REAL ESTATE, MORTGAGES AND CORPORATIONS PUBLISHED BY COSTAR NEWS

IN THIS WEEK'S ISSUE: Is Single-Family Rental Market Poised for Consolidation? ................................................................................................................ 1 Strengthening Economic Activity Seen Offsetting Investor Concerns Over Interest Rates ............................................................... 4 Midyear Surge: CoStar Repeat-Sale Index Shows Strong Growth in CRE ....................................................................................... 7 Could Proposed On-Balance Sheet Lease Accounting Rules Throw CRE Investors Off Balance? .................................................. 9 Facility Closures & Downsizings...................................................................................................................................................... 10 $5 Billion MetLife, SunTrust Mortgage Pact Reflects Growing Confidence in Property Markets ..................................................... 11 Oaktree Capital Securitizes Non-Performing Loans ........................................................................................................................ 12 Boost in Foreign Capital Expected for NYC CRE ............................................................................................................................ 12 Digital Realty Completes $3 Bil. Global Refinancing ....................................................................................................................... 12 Starwood Property Trust and Fortress Co-Originate $285 Mil Loan ................................................................................................ 13 Capital Markets Round-Up .............................................................................................................................................................. 13 Rapidly Growing Canadian REIT Gains Another Foothold in the U.S. ............................................................................................ 14

Is Single-Family Rental Market Poised for Consolidation? Rapidly Appreciating Home Prices, Search for Profits Has Players Ready To Pounce on Roll-Ups It‟s safe to assume that when renowned real estate dealmaker Barry Sternlicht says “hang on to your chairs” that some excitement is afoot. And that is just what Sternlicht said about the single-family rental market in his company‟s earnings conference call this month. Sternlicht was talking about the potential for consolidation within the nascent industry as institutional entrants in the arena vie for scale - and thus profits. Already, that growth among the publicly held entrants in the field is beginning to show some tapering as housing prices rise and profits have yet to materialize. One of the smaller players in the market, Sternlicht‟s Starwood Property Trust (NYSE: STWD), with 3,150 homes at the end of the second quarter, still is a factor in the market. The number of homes in the REIT‟s portfolio doubled in the second quarter and it still considers itself in the ramp-up stage. Starwood has built its portfolio largely by acquiring nonperforming loans and then converting the loans to REO rentals. When asked by a stock analyst whether the company would consider combining its portfolio with another company in order to accelerate the size and scale of the operation, Sternlicht answered, “possibly.” But then he added: “I mean, you could also see us be a consolidator, we'd do the opposite.” Starwood has purchased its portfolio with all cash and carries no debt on its properties. As such, Sternlicht said: “I think you're going to like [what] we're going to do there, so hang on to your chairs.” Right now, there are three public U.S. REITs focused on single-family rentals and a handful of others in the formation stage registered for future public offerings. Two of three other current public REITs in the market matched Starwood‟s acquisition pace in the second quarter. American Homes 4 Rent acquired about 1,500 homes, giving it 19,825 properties. American Residential Properties acquired about 1,560 homes, giving it 4,089.

THE WATCH LIST NEWSLETTER

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However, the third such REIT -- and the first one to go public -- Silver Bay Realty Trust, has put the brakes on expansion. “We plan to decrease in the pace of acquisitions towards the end of the quarter and continuing to beginning of the third quarter with the objective of absorbing our inventory,” David Miller, president and CEO of Silver Bay, told investors on his earnings conference call. “This has the added benefit of allowing us to avoid new inventory coming online in the low season of November to January.” Silver Bay owns approximately 5,600 homes but acquired only about 30 new properties in the second quarter. “During the quarter, we focused our acquisition activity in markets for the opportunities that was most compelling,” Miller said. “Our top markets for acquisitions were Phoenix, Atlanta and Columbus, OH, which collectively comprised approximately 53% of total acquisitions.” While it is currently focused on stabilization of its existing portfolio, Miller also noted in his call that the opportunities for acquisition have decreased as market prices have appreciated more rapidly and sooner that had been expected. He noted California and Las Vegas markets specifically. “Despite the rising of rates, we believe the housing market will continue to strengthen and our business is positioned to perform well under a variety of rate scenarios,” Miller said. “The impact of rising rates on housing is complicated as evidenced by previous cycles. Rising rates are likely to affect sales volumes and affordability, although housing affordability still remains quite strong in historical contexts. While higher rates could moderate the pace of [house price appreciation] in the near term, this may have a positive impact on our leasing operations as the relative cost of renting becomes more attractive.”


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Our investment thesis is predicated on buying assets below replacement costs in geographies that will benefit from strong demographic and economic growth,” he added. “These factors will ultimately be the primary drivers of housing price and rents appreciation.” Stephen Schmitz, chairman and CEO of American Residential Properties, said his company continues to see “excellent acquisition opportunities.” “Our pace of acquisitions is ahead of our expectations and we continue to enter new markets and diversify our portfolio,” Schmitz said. “The vast majority of our purchases during the second quarter were individual property purchases. With individual acquisition opportunities plentiful in our identified core markets, it becomes simply a matter of determining which properties present the best investment opportunities.” “While it‟s well known that more institutions have entered the buy-to-rent market, we continue to see no shortage of attractive investment opportunities,” he added. “The inventory of properties available at favorable prices far exceeds the amount of capital supporting the institutional players in the buy-to-rent market and the overall economics of our business remain highly attractive.” And while American Residential prefers one-off deals, Schmitz added that he is beginning to see portfolios from smaller aggregators coming on to the market for sale. “We still see portfolios out there and as comes primarily from smaller aggregators, they either haven‟t achieved critical mass from a management standpoint or realize that they don‟t really have the ability to raise capital,” he said. So as some aggregators begin to focus on stabilization and markets get too pricey for new opportunities, as Sternlicht says, “hang on to your chairs.” Sternlicht said he expects there to end up being four or five large national public REITs in the sector when the industry gains its footing. “They'll take their place alongside the multi-REITs, and I think they'll be competitive from a dividend strategy and a growth perspective,” he said. “Although there may be periods of time when they're just earning the dividend and they're not appreciating, which isn't any different than commercial real estate. There are times when there's no rental growth. In fact, some markets have seen negative rental growth; real effective rents, and cap rates will pop around. So I think it can be an interesting business.”

Strengthening Economic Activity Seen Offsetting Investor Concerns Over Interest Rates Although Cost of Borrowing May Go Up, Investor Risks Appear Low Analysts believe it is becoming more and more likely that commercial real estate loans coming due in the next few years will face a higher rate environment. However, the strengthening economy is expected to offfset nearterm investor risk. Two notable commercial real estate developers and investors support the assessment that property fundamentals are catching up to the valuations created by strong capital flows into the property markets. Owen D. Thomas, CEO of Boston Properties, said, "If interest rates go up it‟s going to be because the economy is improving and, therefore, demand for real estate will go up and rents will go up.” Steve Schwarzman, chairman and CEO of The Blackstone Group, also noted in his firm's most recent earnings call that rising interest rates are not necessarily a negative, pointing out that when interest rates rise in tandem with better economic activity, the result is higher cash flows for most properties.


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Schwarzman pointed out that, in the years in which interest rates rose during the past 20 years and in each of the following years, real estate values also increased between 4% and 15% on an annualized basis, in both the private and public markets. “So the premise of investors and their concerns on the real estate side are basically belied by the facts,” he said. “Our business returns benefit from strengthening economic activities.” CMBS 2.0 DEFAULTS UNLIKELY From a term-risk standpoint, CRE loans originated since 2007 appear to be in a fairly strong position because the loans were underwritten in times of distress. At the same time, loans made prior to the Great Recession are coming due at a time when rates are still lower than in 2006 and 2007, according to recent analysis from Fitch Ratings. “CMBS 2.0 term defaults are unlikely so long as the economy continues to strengthen,” said Huxley Somerville, managing director structured finance at Fitch Ratings. In addition, “should the broader economy reverse direction, any downgrades to CMBS 2.0 loans would be purely a byproduct of the economy‟s downturn.” That‟s not to say there are not associated risks, Somerville said, adding there are substantially more variables at play that could determine the ultimate success of CMBS 2.0 loans refinancing. For instance, “if income growth matches the growth in debt service required by the new mortgage rate environment, the chances of successful refinancing are much better for CMBS 2.0 loans,” said Somerville. “However, an interest-only (IO) loan may require a fall in underwriting standards to refinance on the same metrics but for the higher mortgage rate.” “Counter-intuitively, the number of IO loans has increased significantly in the past 12 months as mortgage rates have dropped. Making IO loans in a low interest rate environment makes far less sense than making them in a high interest rate environment. In the latter, interest rates have a greater propensity to fall from their highs


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making a refinance more likely on the same balance. In the former, interest rates can only go higher making the refinance potentially more difficult on the same balance,” Somerville added. CURRENT UNDERWRITING APPEARS TO COMPENSATE FOR RISK FROM RISING RATES At the same time, in the current low rate environment many loans have been originated with high debt service parameters. If interest rates are higher at refinancing, the new loan may still refinance smoothly because the new debt service, while lower than that in the current loan, is still within the lenders‟ guidelines. One question investors and lenders face is the impact higher interest rates may have on property values and how that corresponds to the future lender‟s loan-to-value (LTV) guidelines. As rates rise, typically so too do capitalization (cap) rates. Higher cap rates effectively reduce the value of a property if it continues to generate the same or lower level of income. New loans written for properties in that scenario may still be within the lenders‟ debt service guidelines but fall outside the lender‟s LTV guidelines. Marielle Jan de Beur, managing director and head of CMBS and real estate research at Wells Fargo Securities, said it has found that LTV ratios are low enough to withstand significant increases in cap rates even under conservative income growth assumptions. Similarly, the debt service cushions built into the most recent loans, on average, are sufficient to withstand significant increases in loan coupon rates by maturity. “On the whole, 2013 vintage underwriting metrics are holding up well. While the average loan coupon of 4.2% is the lowest on record for any CMBS vintage, the [net operating income debt service coverage ratio] ratio of 2.07x is the highest. The average LTV ratio of 62.9% is low by historical standards and is down from 2012,” Jan de Beur said. “Finally, although the proportion of interest-only loans is on the rise, these loans are being made at lower LTV ratios.” “Our analysis suggests that, on average, current underwriting does in fact compensate for the risk of low interest rates that are embedded in new production loans,” she said.

Midyear Surge: CoStar Repeat-Sale Index Shows Strong Growth in CRE By: Randyl Drummer Pricing for "average" commercial properties outperformed institutional-grade assets while price gains in secondary U.S. markets eclipsed the top markets as buyers of commercial real estate increasingly expanded investment activity outside the handful of prime markets and core properties during the second quarter, according to the midyear CoStar Commercial Repeat Sale Indices (CCRSI) release. The gains in the CCRSI's repeat sale index are an inversion of trends earlier in the economic recovery when the best properties in primary markets dominated commercial real estate investment activity, signifying a further broadening and deepening in CRE fundamentals and property prices across the nation and among all product types. "The leap in [CRE] pricing in the second quarter was seen across all four major property types. Double-digit annual gains in nearly every property sector demonstrate the depth of the recovery," noted Dr. Ruijue Peng of CoStar's Property and Portfolio Research (PPR), author of the CCRSI. The value-weighted U.S. Composite Index, influenced by larger transactions and generally tracking high-quality core real estate transactions, gained 5.9% in the second quarter, its best quarterly showing since 2011. The equal-weighted Composite Index, comprised of smaller, more numerous deals in the lower end of the market, jumped by an even more impressive 9.1% in the second quarter, its strongest three-month gain on record. Within the Composite Index, the Investment Grade segment, which broadly encompasses upper-middle tier properties, continued moving steadily upwards, increasing 7.9% above the first quarter.


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Pricing in the General Commercial segment rose by a very strong 9.2% from the previous quarter and increased 11.7% over the last 12-month period, gaining momentum as investors comb secondary markets and property types in search of better pricing and yields. In a significant shift, both retail and office pricing growth vaulted past multifamily in the second quarter, reflecting the cyclical slowdown in fundamentals for the apartment market, which has led the recovery for several years. With more consumer spending and virtually no new development in the pipeline, the CCRSI Retail Index led all four major product types, rising 10.2% from the previous quarter and 16% for the 12 months ending at midyear. It's the first double-digit annual price increase in the retail index since the sector's recovery began in 2011. In a departure from previous periods, the overall retail market index outperformed the Prime Retail Metros Index, comprised of higher-end malls and retail properties in top markets, as investors appeared to branch out beyond core assets in the primary markets and malls. The retail sector‟s recent pricing rebound is encouraging because it suggests that the housing recovery may finally be spilling over to the broader economy, the CCRSI report stated. The Office Index advanced by 11.4% during the same period, while the Multifamily Index fell to third with a more modest 11.1% gain. While surpassed this past quarter by retail and office, the multifamily sector continued to post strong results, with overall pricing at midyear 2013 just 13.4% shy of the previous peak reached in 2007. Pricing in the other major property types, by comparison, is still more than 20% below their pre-recession highs. While the strong investor interest in multifamily has been attributed to relatively stronger fundamentals, the August CCRSI release also noted that the hot apartment investment market has benefitted from plentiful debt financing available for this property type following the downturn, led by the government-sponsored enterprises (GSEs). However, the CCRSI report also notes signs of a deceleration in multifamily fundamentals, mainly from a growing supply of new apartment units, especially in the primary markets where vacancies are at, or near, prerecession lows and pricing has already surpassed its prior peak level. The CCRSI Multifamily Prime Metros Index notched gains of 9.9% over the last year, which was lower than the 11.1% gain for the broader multifamily index. Among U.S. regions, the CCRSI Midwest regional index recorded the largest gain in the previous 12 months at 16.5%, helped by solid multifamily and retail pricing. The Northeast regional index continued to reflect the largest cumulative pricing gains since the recovery began. The percentage of commercial property selling at distressed prices dropped to just 13.6% in June 2013, down from nearly 24% a year earlier, the lowest level of distress recorded since the end of 2008. However, the recovery is still a work in progress since the long-term average for distress trading is less than 1% of total volume, but the recent declines have helped to boost liquidity and pricing by giving lenders more confidence to make deals. In other CCRSI results: The CCRSI Industrial Index rose by a solid 9.5% year-over-year in the second quarter. The warehouse property recovery began later than in the other major property types, however, big-box distribution facilities in primary distribution hubs have led the recovery, reflected in the stronger 22% gain in the Prime Industrial Metros Index over the last year. The CCRSI Land Index picked up modest price gains over the past four quarters on the strength of continued demand for multifamily development sites and the recovering single-family market. The Land Index gained 1.8% in the second quarter from the earlier three months and gained 5.1% over the previous 12-month period.


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Hotel demand correlates closely with the macro economy, and with average room rates on the rise in most markets, the CCRSI Hospitality Index made promising gains over the last year, increasing by 6.1% from the same quarter of the last year.

Could Proposed On-Balance Sheet Lease Accounting Rules Throw CRE Investors Off Balance? By: Randyl Drummer Even as new accounting rules propose to bring property and equipment leases onto company balance sheets, the new rules will leave certain other financial obligations, namely service contracts and leases with terms of 12 months or less, as off-balance sheet items, according to a report from Fitch Ratings. In some cases, Fitch reports, extension options and variable lease payments may also be excluded from being capitalized as a lease liability under the new proposed accounting rules. While the proposed rules are intended to more accurately reflect the economic substance of leases, the value of the rules hinges on whether they are successful in increasing - or at least not further obscuring -- financial transparency for investors and analysts, said Fitch analysts John Boulton, Alex Griffiths and Frederic Gits. With the Sept 13 deadline fast approaching for public comments on the new proposal, CRE groups and other stakeholders are weighing in, and in some cases doing battle in the court of public opinion, over what they believe will be the dramatic effects the new accounting rules will have on landlords, tenants and the broader CRE market. While almost all parties agree that it is vital for companies to divulge information about cash payments and the nature of leased assets in ways that allow investors to make judgments in asset financing decisions, how best to do so remains a point of disagreement. Corporations often adjust their balance sheets in an attempt to reflect a fair estimation of implied debt from leases, however, critics claim that these adjustments are inconsistent, and frequently understate the lease obligations. Companies implementing the proposed standard will face a heavy administrative burden since they will have to collect and input a substantial amount of data and perform complex calculations to determine the amount to be capitalized. Most companies have not developed a corporate strategy to address the issue or have been slow to start their transition plans, according to a recent white paper by Boston-based tenant representation firm Cresa. "The bottom line is the need for transparency, and the biggest hurdle is how companies will maintain comprehensive, comparative and valid information in order to perform this analysis," said Michael Hetchkop, senior vice president of lease auditing at Cresa Washington D.C. "It‟s going to be more of a challenge for companies to make sure the information they have is complete." Reaching a solution has proved difficult for accounting standard setters, who are faced with conflicting and sometimes contradictory definitions of what exactly constitutes a lease, defining the lease term, and measuring payments, the Fitch report said. "Add political sensitivity due to the size of the lease market and you have a potent mix. It is no surprise that progress towards a solution has been slow," Fitch said. Cresa's Hetchkop agreed. "This has been a gut wrenching process since it started four years ago, with 800 comment letters [for the previous exposure draft], then going back to square one. And now, another comment period, and who knows what will happen at the end?"


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A recent letter to the FASB and IASB from a diverse group of more than 30 trade organizations, including the Roundtable, International Council of Shopping Centers (ICSC), CCIM, American Trucking Association and Equipment Leasing and Finance Association expressed their displeasure with the latest proposed leasing standard. “In its current state, it is our opinion that the proposed leasing standard may result in substantial costs to businesses, lack any benefits for investors … will increase complexity, drive economic activity rather than reflect it and will create adverse unintended consequences and pressures upon financial reporting systems. Further, the proposed leasing standard will not result in more decision-useful information compared to that currently available. If our concerns cannot be addressed, then it is our belief that the proposed leasing standard should not be finalized.” FASB/IASB will begin a month-long series of public roundtable discussions on four continents on Sept 10, starting in São Paulo, Brazil. After weighing the feedback, a final standard is now expected to be issued in early 2014. The new standards would be effective no earlier than annual reporting periods beginning on January 2017, but would include a two-year look back provision.

Facility Closures & Downsizings Cisco Systems Inc. is rebalancing its resources with a workforce reduction plan that will eliminate 4,000 employees or 5% of Cisco‟s global workforce. Cisco expects to take action under this plan beginning in the first quarter of fiscal 2014. Cisco currently estimates that it will recognize pre-tax charges to its GAAP financial results in an amount not expected to exceed $550 million consisting of severance and other one-time termination benefits, and other associated costs. Orchard Supply Hardware Stores identified nine additional stores for closure. In addition to the 17 stores that are being closed as part of the Chapter 11 process, two stores have closed in the normal course of business since June 17, 2013. The company expects to continue operating its remaining 72 stores at the completion of the sale process. Sequenom Inc. plan to reduce its workforce as part of an overall cost reduction effort. The reorganization affects 75 employees. The San Diego-baseed company anticipates a reduction of $10 million in compensation-related expenses in future operating expenses on an annualized basis. Company Cummins West Cummins West Valley Crest (Estate Gardens) International Paper Co. Bayer Healthcare Palomar Health Palomar Medical Center Cummins West Lifescan Cablofil

Address 5150 Boyd Road 4601 E. Brundage Lane

City Arcata Bakersfield

State CA CA

Closure or Layoff Closure Closure

24151 Ventura Blvd.

Calabasas

CA

120 E. Rose Ave. 5650 Hollis St. 1817 Avenida Del Diablo

El Centro Emeryville Escondido

2185 Citracado Pkwy 5333 North Cornelia Ave. 1000 Gibraltar Drive 9415 Kruse Road

Volcano Corp. Cummins West Silgan Containers

2370 Kilgore Road 5125 Caterpillar Road 3250 Patterson Road

Herrick Corp.

5454 N. Industrial Pkwy

Escondido Fresno Milpitas Pico Rivera Rancho Cordova Redding Riverbank San Bernardino


Affected Workers 11 34

Date 9/28/2013 9/28/2013

Closure

69

9/1/2013

CA CA CA

Closure Closure Closure

110 187 122

9/20/2013 9/1/2013 9/1/2013

CA CA CA CA

Layoff Closure Layoff Closure

35 43 76 27

9/19/2013 9/28/2013 9/13/2013 9/27/2013

CA CA CA

Layoff Closure Layoff

39 12 160

9/2/2013 9/28/2013 9/1/2013

CA

Layoff

140

9/16/2013

10

7140 N. Cajon Blvd. 475 Brannan St.

San Bernardino San Francisco

CA CA

Closure Closure

108 27

9/23/2013 9/30/2013

370 W. Trimble Road 14775 Wicks Blvd. 2789 Northpoint Pkwy

San Jose San Leandro Santa Rosa

CA CA CA

Layoff Closure Layoff

72 144 126

9/28/2013 9/28/2013 9/12/2013

Sunnyvale Tipton

CA CA

Layoff Closure

163 144

9/30/2013 9/6/2013

Comcast Live Nation Entertainment

1111 Lockheed Martin Way 615 N. Burnett Road 25201 S. Schulte Road, Bldg 11 100 Universal City Plaza, Bldg SC-24

Tracy

CA

Layoff

87

9/28/2013

CA

Closure

506

9/6/2013

Cummins West

875 Riverside Pkwy

Universal City West Sacramento

CA

Closure

60

9/28/2013

Ryder Grass Valley USA Philips Electronics North America Cummins West JDSU Uniphase Corp. Lockheed Martin Corp. Mozzarella Fresca

$5 Billion MetLife, SunTrust Mortgage Pact Reflects Growing Confidence in Property Markets By: Randyl Drummer MetLife Inc. and SunTrust Banks Inc. agreed to finance up to $5 billion in CRE mortgages originated and managed by an asset management unit launched by the giant insurer last fall. SunTrust Banks, a holding company for its largest subsidiary and flagship asset, SunTrust Bank, operates more than 1,650 branches primarily in the southern U.S. and had $171.5 billion in total assets and total deposits of $127.6 billion as of June 30. The transaction, which the companies said reinforces SunTrust‟s commitment to commercial real estate, offers further evidence that banks have cleaned up their bottom lines after suffering tremendous losses on commercial mortgage loans during the recession but are now ready to again seek opportunities in the rising commercial property investment market. Compared to a year ago, SunTrust's nonperforming loan volume decreased $1.3 billion, or 54%, with reductions across all loan categories, most significantly residential mortgages, commercial real estate, C&I, and commercial construction, according to the company's second-quarter earnings statement. At midyear, the percentage of nonperforming loans to total loans was 0.94%, down from 1.21% and 1.97% at the end of the prior quarter and second quarter of last year, respectively. "As the commercial real estate market continues to regain its footing, we are actively seeking opportunities that make sense for our clients, SunTrust and our investors," said Walt Mercer, executive vice president and head of CRE at SunTrust. "This agreement with MetLife, a proven and well-respected real estate investment leader, satisfied all of our criteria and we look forward to its potential." Some insurance companies that invested conservatively during the previous cycle weathered the recession in relatively good condition. MetLife is one of the largest portfolio lenders in the industry, with $43.1 billion in commercial mortgages outstanding at the end of 2012, and with more than $9.6 billion in commercial mortgage loan originations in 2012. The insurer launched MetLife Real Estate Investors last fall to increase its capabilities for investing on behalf of institutional clients, building upon its experience in commercial mortgage origination, private placement debt and real estate equities investment. The new division has been exploring high-quality core investments that offer attractive risk-adjusted returns since its low-key launch last October. In the strategic partnership with SunTrust, MetLife found such an investment. Robert Merck, global head of MetLife Real Estate Investors, said the goal is to be "one of the top five institutional real estate investment managers, and with this mandate from SunTrust, we are confident the company is headed in the right direction."


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Oaktree Capital Securitizes Non-Performing Loans Oaktree Capital Management, has securitized a portfolio of non-performing loans, real-estate-owned properties, and performing loans LP it acquired from seven financial institutions for $340.8 million. The portfolio has an aggregate unpaid principal balance (UPB) of $739.8 million. Kroll Bond Rating Agency assigned a „BBB- (sf)‟ preliminary ratings to Class A of the ORES, Series 2013-LV2 transaction. ORES Series 2013-LV2 contains 831 NPLs (61.6% of the portfolio‟s total acquisition basis), 244 performing loans (30.8%), and 76 REO properties (7.5%). Several of the assets are backed by more than one collateral item, and there are a total of 1,906 collateral items in the pool. The transaction is structured as a liquidation vehicle that monetizes recoveries from the assets to pay the rated notes. The underlying collateral is comprised of commercial and multifamily real estate properties (60.6% of acquisition basis), land (25.3%), residential assets that are primarily commercial loans (12.3%), and other collateral (2.4%). The collateral is predominantly located in the Southeastern United States. The top-three state exposures include Georgia (22.2%), Florida (13.7%), and South Carolina (12.1%). The average balance of the assets based on acquisition basis and UPB is $296,060 and $642,704, respectively. The transaction will be managed by Sabal Financial Group, an affiliate of Oaktree.

Boost in Foreign Capital Expected for NYC CRE Despite a recent dip in the foreign capital infusion into the New York real estate market, interest from investors across the globe remains high and that this declining trend should turn around by the end of the year, according to Brookfield Financial, a New York based global investment banking and commercial property brokerage firm However, based on the on-the ground feedback from the collaborative Brookfield Financial partner offices worldwide, there‟s still an enthusiastic demand for New York commercial real estate from international investors and Brookfield believes that the recent slide will change course and veer upwards during the last six months of the year. “We are in daily contact with our global partners and their feedback suggests that the numbers do not tell the whole story. Based on first-hand conversations with the numerous foreign investors that the Brookfield offices have direct access to, overseas demand for Manhattan real estate remains as strong as ever, especially from Canadian pension funds, Asian institutions, and Brazilian high net worth individuals,” said Eric Anton, managing partner of Brookfield Financial. “It‟s clear to us that investors abroad still see the value of Manhattan real estate and remain particularly enamored with the office and retail sectors. By the end of the year, we are forecasting that this downward trend will begin to reverse itself and foreign investment numbers will uptick.” Mr. Anton added, “The one sector that we do expect to remain temporarily stalled is foreign investment in New York residential assets. Our feedback indicates that international investors are still somewhat hesitant towards making a commitment in the residential sector and we expect that trend to continue for the time being.”

Digital Realty Completes $3 Bil. Global Refinancing Digital Realty Trust Inc. completed the refinancing of its global revolving credit facility and term loan. The combined facilities total $3 billion represents the fifth largest unsecured credit facilities among U.S. REITs. The refinancing provides funds for acquisitions, development, redevelopment, debt repayment, working capital and global expansion.


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The refinancing allowed the company to reduce pricing, extend loan maturities and increase its aggregate commitments by $450 million. “We are very pleased with the strong demand we received from the international lending community to participate in the refinancing of these facilities, which were oversubscribed with commitments totaling $4.6 billion from 27 financial institutions from around the globe,” said A. William Stein, CFO and CIO of Digital Realty. “To satisfy this demand, we upsized our global revolving credit facility by $200 million and increased our term loan by $250 million.” “In addition, the improved pricing grid is equal to or better than any widely syndicated credit facility for a U.S. large cap investment grade REIT, including those with a credit rating higher than DLR‟s BBB/Baa2 rating,” Stein added. “We believe these positive trends illustrate the institutional lender community‟s view on the strength of our balance sheet and underlying business, while providing us with greater financial flexibility as we continue to expand our portfolio globally.” The $2 billion global revolving credit facility matures in November 2017, has two six-month extension options, and can be increased up to a total of $2.55 billion U.S. dollar equivalent. Pricing for the facility, based on the company‟s senior unsecured debt rating of BBB/Baa2, was reduced from 125 to 110 basis points over the applicable index for floating rate advances and the annual facility fee was reduced from 25 to 20 basis points. The $1 billion multi-currency term loan maturity is unchanged and remains April 2017, with two six-month extension options added, and total commitments can be increased up to $1.1 billion. Pricing for the term loan, based on the company‟s senior unsecured debt rating of BBB/Baa2, was reduced from 145 to 120 basis points. Funds from the combined facilities may be drawn in U.S, Canadian, Singapore, Australian and Hong Kong dollars, as well as Euro, pound sterling, Swiss franc, Mexican pesos and Japanese yen denominations.

Starwood Property Trust and Fortress Co-Originate $285 Mil Loan Starwood Property Trust with an affiliate of Fortress Investment Group LLC originated a $285 million loan on a portfolio of 123 Red Roof Inn hotels totaling 14,585 rooms in 29 states. The loan is sponsored by a joint venture between Five Mile Capital Partners LLC and Westmont Hospitality Group. The loan upsizes and extends a $275 million debt package Fortress provided to the sponsors in August of 2011 to acquire the portfolio. Starwood purchased the $185 million A-note on the initial loan. The current Loan is a 50%-50% pari-passu structure, with both lenders sharing economics through the last dollar of debt. The sponsors plan to use the capital to continue to upgrade the properties. Starwood and Fortress affiliates securitized a $200 million senior A-note to increase their investment returns and retained equal portions of the loan‟s related B-Note.

Capital Markets Round-Up Crescent Capital Group LP closed Crescent Mezzanine Partners VI. Investors committed more than $3.4 billion to Fund VI, meaningfully exceeding the initial fundraising target of $2.5 billion and representing the largest private mezzanine offering in Crescent Mezzanine‟s history. KTR Capital Partners closed its third fund, KTR Industrial Fund III LP, which launched in the second quarter of 2012, raised $1.2 billion of investor capital and exceeded its target fundraising goal of $750 million. Investors in the fund include public and corporate pension funds, foundations, endowments and other institutional investors. KTR III will continue its predecessors‟ strategy of acquiring, developing and operating industrial properties throughout major population centers and key logistics hubs across North America. KTR III will invest in single


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property and portfolio acquisitions as well as development on both a build-to-suit and speculative basis. To date, 30% of KTR III has been committed. RCG Ventures closed its third value-add real estate fund. RCG Ventures Fund III (d/b/a RCG Ventures ValueAdd Real Estate Fund III) exceeded its $75 million target with a total capital raise in excess of $107 million. Fund III was significantly oversubscribed and achieved these commitments within 90 days of its launch. Fund III, similar to RCG's previous two funds, will invest in value-add shopping centers throughout the U.S. The investor base consists of high net worth individuals and family offices.

Rapidly Growing Canadian REIT Gains Another Foothold in the U.S. Looking for an expanded platform in the U.S. retail real estate market, H&R Real Estate Investment Trust, a rapidly growing Toronto-based REIT, has acquired a one-third interest in Echo Realty LP, a leading owner of grocery stores in the Great Lakes region. Since its formation in March 2000, Echo has focused on two primary areas of business: developing and owning a core portfolio of real estate tenanted by Giant Eagle Inc., a leading grocer in the western Pennsylvania and eastern Ohio; and developing and selling shopping centers anchored by other large national retailers throughout the Eastern United States. Echo is the largest landlord for Giant Eagle. Echo‟s portfolio consists of 176 properties totaling 7.4 million square feet and is expected to generate in excess of $84 million in net operating income annually with an average remaining lease term of 12.9 years. Echo‟s portfolio is comprised of five property types: 160 retail assets, four office buildings, six industrial properties, four retail development projects and two land parcels. Giant Eagle is a tenant in 161 of the properties and contributes 79% to Echo‟s total annual revenue. Giant Eagle had revenue of $9.9 billion for its fiscal year ended June 2012 and has a mortgage bond rating of NAIC 2. The average annual sales per square foot of the Giant Eagle supermarkets in Echo‟s portfolio is in excess of $600 per square foot. The portfolio value amounts to $1.165 billion at a weighted average cap rate of 7.3%. The portfolio has first mortgages totaling $410 million with an average remaining term of 10 years at an average annual interest rate of 6.1%. H&R will acquire limited partnership units in consideration for a total purchase price of $294 million. H&R REIT will have the right to appoint two of the six Echo board members. The proceeds from the transaction will be used by Echo to further expand its retail portfolio by acquiring additional retail properties in the Eastern U.S. H&R REIT also has a five-year conditional option to acquire additional units resulting in H&R REIT owning up to 49.9% of Echo at a purchase price no greater than fair market value. During the second quarter of 2013, H&R REIT acquired 100% of Primaris Retail Real Estate Investment Trust, which consisted of 26 properties valued at $3.1 billion. H&R REIT is an open-ended real estate investment trust, which owns a North American portfolio of 41 office, 112 industrial and 165 retail properties comprising over 53 million square feet and two development projects, with a fair value of $13 billion.


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