Oaktree’s Marks: “We had hoped for a deluge”

While distressed real estate continues to create some of the firm’s best investment opportunities, Europe has been a lesser source of deal flow than anticipated.

For Oaktree Capital Management, the pipeline remains strong for real estate and real estate debt investments. The Los Angeles-based investment manager, however, isn’t expecting a rush of deals to come from Europe.
“The investment flow in Europe continues to be moderate at best,” said Howard Marks, Oaktree’s chairman, during an earnings call yesterday. “We had hoped for a deluge, but European Central Bank actions and statements precluded that. We have deal flow and, depending on the area, the country and the time, it ranges from a trickle to moderate.” 

Marks’ sentiments were the opposite of comments made by Apollo Global Management president Marc Spilker at his own firm’s earnings call last week. Indeed, Spilker said Apollo was seeing more real estate opportunities in Europe than initially anticipated, primarily because of greater availability of financing in certain markets in the region.

Oaktree made a number of real estate investments in Europe last year, including its first major UK shopping center investment – the purchase of the Kingfisher Shopping Centre in the English town of Redditch for £130 million (€160 million, $210 million) – in partnership with London-based retail real estate investor Capital & Regional. “But it’s still no deluge,” added Marks.

Overall, however, Marks said deal flow in real estate and real estate debt was strong and provided attractive returns, given soft pricing in non-trophy properties in US secondary markets and the limited ability to refinance the debt on such assets. “This situation is creating some of our best investment opportunities today as we continue to be able to buy properties and the debt on them well below peak prices,” he explained. 

Meanwhile, increased confidence in the commercial mortgage-backed securities and housing markets have resulted appreciation on related assets that Oaktree acquired over the past three years. As a result, the manager’s real estate funds saw an aggregate gain of 19.1 percent before fees and 14.7 percent after fees last year. “We remain convinced that real estate and real estate-related debt offer the best combo of quality and quantity at this time,” Marks added.

Oaktree’s latest real estate fund, Oaktree Real Estate Opportunities Fund (ROF) VI, has raised $436 million toward a target of $1.5 billion, following its second and most recent close in January. The firm launched ROF VI during the second quarter of 2012, shortly after the final close of ROF V in early 2012. ROF V raised a total of $1.3 billion and now is fully invested.

“We’re actually at a faster pace for this newest fund than our last fund,” said John Frank, managing principal, during the call. “We’ll have another closing in another couple of months, and I feel very good about what that closing will look like.”

Additionally, Oaktree has raised $200 million in commitments to date for its new real estate debt fund, which it launched last year. Frank said the firm expected the new strategy “will be particularly appealing to offshore investors looking for exposure to real estate without the tax drag imposed on direct real estate investment.”