Real estate investing in the US in the next few years will focus very much on the three Rs: recapitalisation, restructuring and refinancing. For better or worse the reality is that the industry is overleveraged. As a result, many of the opportunities we will be looking at in the coming year will, in some way, shape or form, be related to debt. John Klopp, head of Americas real estate investing and global real estate debt investing, Morgan Stanley Real Estate Investing Klopp
As roughly $2 trillion worth of commercial real estate mortgages mature between now and 2013, attempting to access real estate assets through debt positions is a strategy many property professionals are adopting. Morgan Stanley Real Estate Investing can certainly be counted among them, following the appointment of former Capital Trust co-founder John Klopp.
Klopp took up his position as head of Americas real estate investing and global real estate debt investing at the bank at the start of February. The role comes after more than a decade as chief executive officer at listed-investment firm Capital Trust – a firm Klopp founded with Sam Zell and Craig Hatkoff in 1997 – and 10 years starting and building Chemical Bank’s real estate investment banking platform.
With an estimated $450 billion shortfall between the value of outstanding loans and available financing, according to a recent Deutsche Bank briefing, Klopp said most opportunities in the US today were related to debt. “Today, the value is in many cases found through the debt rather than the equity,” he explained, adding the “know-how” of debt restructuring and loan workouts would be a “common theme” for a majority of investors going forward. “The next few years will be about accessing the equity through the debt. It will be about recapitalisations, restructurings and refinancings. In essence investors will be trying to peel back the layers of the onion to get to the core, to get to the equity value.”
One area of focus of late for many real estate investors has been partnering with the US banking regulator, the Federal Deposit Insurance Corporation, in taking over portfolios of distressed loans from failed banks.
Last month, the listed homebuilder, Lennar Corporation, acquired 5,500 distressed residential and commercial loans with a face value of $3.05 billion from the FDIC for $243 million. Lennar said the deal – which saw the development firm take a 40 percent stake in the venture against the FDIC’s 60 percent interest – represented a return to its distressed debt investing roots. Klopp agreed. “MSREF cut its teeth and got started in the early 1990s by investing in portfolios of non-performing loans from the RTC,” he said. One notable deal from the RTC days was MSREF’s joint venture with Lennar in 1992 in acquiring a large pool of loans of the failed bank Amerifirst Federal Savings Bank.
Klopp’s responsibility, however, will not just be focused on future possible investment. With MSREF funds widely reported to have suffered write-downs of up to 60 percent amid declining property valuations, Klopp accepted much of his role would be focused on managing legacy assets within Morgan Stanley Real Estate Investing’s existing portfolios.
“We take the legacy funds very, very seriously,” he said, adding the firm had “every intention of doing the best job it can to resolve those problems and produce the best results we can for our partners. It’s a very important part of what I’m doing.”
MSREF was an active buyer during the peak years of the property boom, particularly in Asia, but as Klopp noted “we have all, as an industry, learned that leverage cuts both ways. In a market where values can deteriorate very rapidly, having too much leverage and unstable leverage severely exacerbates the pain.”
In response, Morgan Stanley Real Estate Investing is “de-risking” its investment and management model. “The vetting and focus on underlying risks is key,” Klopp said. “It’s about taking a step back and looking at the overall context of the potential investment, the risk exposures, the leverage being used. It’s a very focused exercise.”
For better or worse the reality is that the industry is overleveraged. As a result, many of the opportunities we will be looking at in the coming year will, in some way, shape or form, be related to debt.
John Klopp, head of Americas real estate investing and global real estate debt investing, Morgan Stanley Real Estate Investing