Cornerstone raises $1.75bn core mortgage fund

The Hartford, Connecticut-based firm has raised a fund and separate account from a ‘handful’ of US pensions and sovereign wealth funds. The two vehicles will originate mortgages for cash-flowing US properties, backed by substantial cash equity.

Cornerstone Real Estate Advisors has closed a $1.75 billion mortgage fund and separate account, targeting the origination of mortgages for core US properties.

The Hartford, Connecticut-based firm attracted commitments from a “handful” of pensions and sovereign wealth funds after launching the two vehicles in early 2009, Rob Little, Cornerstone chief investment officer, finance, said in an interview.

Although raised in parallel, Little said the two vehicles will not “overlap” in relation to loan originations. The 10-year core mortgage fund will be limited to a certain deal size, while the separate account will target mortgages above that level.

Little said though both vehicles would target mortgage originations backed by “very high quality sponsorship” and with roughly 35 percent cash equity invested in the asset. “We are looking for stable, underlying and predictable cash flow, where you are not taking any lease-up risk and no repositioning risks,” he said. “We are looking for sleep comfortably at night properties.”

The fund and separate account will primarily invest in the US, across all real estate sectors, but can invest up to 10 percent of its equity in Canada. Little said the vehicles’ returns were comparable to fixed income products.

More than $1.4 trillion of commercial real estate debt is set to mature over the next three years, however available equity financing is expected to fall short, leaving a debt funding gap that many investors are eying as an opportunity.

Little said a number of borrowers had simply “lost their lenders”, including in the CMBS arena, and were looking for new sources of capital to refinance existing loans. “The mounting level of debt maturities, although masked by the 'pretend and extend' phenomenon, may well overwhelm commercial mortgage debt capacity in the coming months. It's a good time to have capital to invest in core mortgages.”

Last November, Cornerstone – part of Massachusetts Mutual Life Insurance – acquired London-based Protego Real Estate Investors and merged its operations with Babson Capital’s real estate finance group to create a $30 billion real estate investment platform employing around 250 people. Babson was also a wholly-owned subsidiary of MassMutual, focused on commercial real estate loans.

At the time, president and chief executive officer of Cornerstone, David Reilly, said: “The forging of this new entity will better position Cornerstone and Protego to continue to achieve in an even more comprehensive manner, and to satisfy the increasing needs of our clients to provide a wide array of investment opportunities, whether they be in debt, equity or REIT securities.”