FEATURE: The big thaw

Refinancing activity in 2015 should at least match last year, according to experts.  

Indeed, a combination of increasing property values and also a potential rise in interest rates in the US is leading some of those active in the market to suggest volumes might even rise this year. 

Certainly all the signs are of a strengthening market for property owners wanting or needing to reengineer loans attached to their investments. After all, 2014 itself was a year of increased refinancing activity. Following a protracted dry spell post-financial crisis, liquidity has accelerated significantly. Of particular interest to fund sponsors is the fact that some of the most high-profile assets owned by private equity real estate investors – including Brookfield Asset Management’s Atlantis resort in the Bahamas and the Equity Inns portfolio, which had been owned by Goldman Sachs’ Whitehall funds until late last year – were  refinanced in 2014.

Two main factors were responsible for the increase last year, and that could play into 2015 as well: rising valuations amid renewed demand for real estate and the potential rise in the cost of borrowing, according to Joel Rothstein, an attorney who specializes in real estate and structured finance at Los Angeles-based law firm Paul Hastings. “First, there’s the thaw in the market,” he says. “But you also have concerns about what the future might hold. If you have pent-up demand and concerns about the future, that creates incentives to refinance now.”

Indeed, refinancing has already become one of the most active areas of the commercial real estate lending market if last year’s figures are anything to go by. “Refinancing could be the easiest type of a loan to do for a lender, because you have an asset that has already been underwritten and has an operating history,” explains Rothstein. “With refinancing, if you have income-producing, stabilized assets with the right valuation, it’s much easier to obtain financing than it was just a few years ago.”

Three types of refinancing deals were prevalent in 2014. In the first type, the refinancing is a necessity, as the existing loan may be coming due and the existing debt must be paid off. In the second type, the refinancing is opportunistic, such as where the property owner takes advantage of higher valuations by refinancing at a higher principal amount than the existing loan and using the excess loan proceeds to make new investments or further renovate the existing property. In the third type, the refinancing is recycling, where the property is sold to a new owner, and the acquirer either assumes and restructures the existing financing or takes out new financing with the existing lenders or other groups of lenders. 

To be sure, given the relatively short-term life of closed-end funds, many private equity real estate firms typically harvest their assets and therefore don’t have a need to refinance. But in some areas of the world, the global financial crisis has made it difficult for firms to exit their fund investments. “In certain parts of Asia, some observers believe that there is a large pipeline of potential deals that will need to be exited by funds that are reaching their maturity within the next few years,” said Rothstein. “There may not be sufficient private equity capital to take up all of these deals. Some funds may need to hold onto assets longer than originally intended, and that would mean you’d have to refinance them.”

One notable change in refinancing activity from previous years is the rise of alternative lending sources. Prior to the global financial crisis, capital for refinancing came primarily from traditional banks and the commercial mortgage-backed securities market. Now, a growing percentage of refinancing transactions are being done by non-bank lenders that weren’t active three or four years ago, such as insurance companies and real estate debt funds. 

“In the overall scheme of things, the traditional big bank lender is decreasing in importance,” said Rothstein. Indeed, among the refinancing deals that Paul Hastings has worked on in the past year, the majority were not funded by traditional, big bank balance-sheet lenders, but rather through alternative financing sources including non-bank lenders and originators of securitized loans. 

“The financing market is now a more diverse market than it was, with a lot of miscellaneous participants,” he added. “Part of the reason why you have all these participants may be because post-financial crisis, there’s been so much movement with people that have moved around to different lending sources. That contributes to the broadening of financing sources for deals.”

Rothstein expects refinancing activity in private equity real estate to remain stable or accelerate slightly in 2015, as well as alternative lenders to continue to stay active in refinancing transactions. “It’s a change in landscape,” he said. “As an attorney, it used to be that you could spend your entire career working with just one or two institutional lenders. That’s not what it is anymore.” 

Signature refinancings

Here is a sampling of transactions from 2014 that involved taking out new financing for an asset with an existing mortgage.

BORROWER: Brookfield Asset Management

PROPERTY: Atlantis Paradise Island, The Bahamas

Last July, Brookfield Asset Management refinanced its Atlantis resort in The Bahamas with a new seven-year $1.75 billion mortgage from a lending group consisting of banks, pension funds and sovereign wealth funds, including a $1 billion CMBS issuance underwritten by Deutsche Bank, Morgan Stanley and Citi. The refinancing, in which Brookfield invested an additional $200 million of its own capital, effectively reduced Atlantis’ debt load by $400 million to $500 million. Brookfield was the holder of approximately $175 million of junior debt on the Atlantis when it was owned by South African hotelier Sol Kerzner and took over the property as part of a 2012 debt restructuring.

BORROWER:American Realty Capital Hospitality Trust

PROPERTY: Equity Inns portfolio, US

Last June, American Realty Capital (ARC) Hospitality Trust agreed to buy the Equity Inns lodging portfolio for $1.925 billion from The Goldman Sachs Group’s Whitehall Real Estate Funds. As part of the financing for the transaction, Goldman Sachs and Deutsche Bank served as underwriters for an $865 million CMBS issuance. ARC Hospitality assumed $976 million in existing financing that was backed by 106 hotels in the portfolio, while the remaining 20 hotels delivered free of any debt. In November, the deal was revised to $1.8 billion for 116 hotels. The Whitehall funds, W2007 Grace Acquisition I and WNT Holdings, previously purchased Equity Inn for approximately $2.2 billion in 2007.

BORROWER: SL Green Realty 

PROPERTY: 388-390 Greenwich Street, NY, US

Last May, SL Green Realty completed the refinancing of 388-390 Greenwich Street in New York, securing a new seven-year, $1.45 billion mortgage from a lending group led by Citigroup and that also included the Bank of China, Wells Fargo and Barclays. Simultaneously, its joint venture partner in the building, Ivanhoé Cambridge, a real estate subsidiary of Canadian pension plan Caisse de dépôt et placement du Québec, sold its stake in the property to SL Green. The new loan, which bears interest at LIBOR +1.75 percent, replaces the former $1.138 financing. SL Green originally purchased the 2.6-million-square foot office complex, which also serves as Citigroup’s headquarters, in 2007 in a partnership with SITQ, a predecessor entity of Ivanhoé Cambridge.

BORROWER: Kyo-ya Hotels & Resorts

PROPERTY: Kyo-ya Hotels & Resorts hotel portfolio, Hawaii, US

Last April, Kyo-ya Hotels & Resorts refinanced the debt on its five-property hotel portfolio in Hawaii. Deutsche Bank reportedly beat out rivals such as Credit Suisse Group, JPMorgan Chase and Citigroup to underwrite the transaction, which included the bank issuing a $1.4 billion in commercial mortgage-backed securities in June. Cerberus Capital Management had been a part-owner in the Hawaiian resorts until early last year, when the firm sold its stake in Kyo-ya back to Tokyo-based operator Kokusai Kogyo. Cerberus previously secured a $1.8 billion loan from Goldman Sachs Group in November 2012.

BORROWER: The Blackstone Group

PROPERTY: Mint Hotels portfolio, UK and the Netherlands

In November, The Blackstone Group chose JPMorgan as the bank for the early £550 million (€703 million; $830 million) refinance of its Mint Hotels portfolio. The mortgage replaced the previous financing package on the property, which comprised a £300 million senior loan from Deutsche Bank and £75 million in mezzanine debt from DRC Capital and was set to expire in 2016. Blackstone acquired UK hotel operator Mint and its eight hotels in the UK and Amsterdam for approximately £600 million from Lloyds Banking Group in 2011. Lloyds had taken over the assets after a breach of covenant on its £450 million loan to the previous owner.