ASIA NEWS: Good asset, bad structure

When The Blackstone Group inherited a junior piece of mezzanine debt backed by Tokyo’s Shinagawa Grand Central Tower as part of its wider acquisition of ¥100 billion (€848 million; $1.2 billion) of performing and nonperforming loans from Morgan Stanley last year, it likely envisaged the possibility of a default by the office’s owner, Morgan Stanley Real Estate Investing (MSREI).

My guess is that this building is worth between 80 percent and 100 percent of what MSREI paid for it in 2004
Unamed GP source

Well before the firm’s ¥278 billion securitised debt matured last month, Tokyo commentators and analysts predicted MSREI might relinquish the keys to the 32-storey building, which was acquired for approximately half that amount in December 2004 on behalf of its fifth global opportunity fund, the $4.2 billion MSREF V. Their predictions were indeed realised.

In the biggest single-asset CMBS default in Japan’s real estate history, MSREI ceded control to Blackstone, the CMBS structure’s most junior noteholder. Blackstone now has seven months to propose a future for the asset, as is customary in Japanese CMBS transactions.

Any proposition must be approved by the other noteholders, in this case, believed to be between 15 and 25 parties from various backgrounds and geographies and across seven tranches of seniority. Mizuho Corporate Bank is the most senior lender in the capital stack, but its involvement is expected to be minimal as its position currently is well serviced, according to PERE sources. Moreover, pivotal to any decision is the authorisation of noteholders at or near the breakeven point of the capital stack.


Near term, an outright sale is unlikely. As one advisor said: “On a very good day, that asset is worth ¥160 billion…far from ¥278 billion.” One GP source was less optimistic still: “My guess is that this building is worth between 80 percent and 100 percent of what MSREI paid for it in 2004.”

Accordingly, it is understood that the CMBS noteholders have told Blackstone they would reject any attempt to sell the property today in favour of waiting for more favourable market valuations. With Class A office rental values for 2011 expected to be jolted by three to five percent following March’s Tohokyu earthquake, meaningful capital appreciation appears unlikely in the near term. That being so, one of the noteholders told PERE that further debt restructuring would be the preferred option: “The focus now is to restructure or extend.”

Reputational, not material

On the face of it, the default appears to be the close of another sorry chapter for MSREI leading up to the global economic downturn. The default behind Shinagawa Grand Central Tower follows last October’s eleventh-hour refinancing of a 13-strong hotel portfolio acquired from All Nippon Airways for ¥280 billion in 2007 and a looming July maturity for the debt behind its ¥118 billion purchase of Shinsei Bank’s former headquarters, also in Tokyo.

However, having taken advantage of a rising market in 2007, the ¥278 billion refinancing allowed MSREI to cash out its equity and resulted in “a big multiple,” according to a GP source. “The default hurts its image, not its bottom line,” he added.

“It was a highly successful refinancing for MSREI,” another GP said. “It’s probably worse for Morgan Stanley the lender because it sold paper to banks and other institutions that are now losing money.”

All sources agreed, however, that the asset is of high quality and, but for its capital structure, would sit proudly in any portfolio. Shinagawa, considered a “Class A submarket,” currently is subject to an influx of office supply, but the tower’s position above Shinagawa’s subway, its near 90 percent occupancy rate and Microsoft as its main tenant mean the asset is far from distressed. As PERE’s noteholder source surmised, Shinagawa Grand Central Tower is a case of “good asset, bad capital structure.” For now, it is Blackstone’s duty to address the latter of those two elements.

From Mitsubishi to Blackstone

PERE presents a brief timeline of key events in the history of Shinagawa Grand Central Tower:

2003 – Three years after developer Mitsubishi Estate breaks ground, the 32-storey office is completed for occupation by Mitsubishi Motors.

December 2004 – The building is sold by Mitsubishi Corporation and subsidiary Mitsubishi Motors to MSREI on behalf of its MSREF V fund for approximately ¥140 billion.

2005 – MSREI completes its first debt refinancing on the tower via a CMBS structure for ¥125 billion.

2007 – MSREI refinances the building again, this time for approximately ¥278 billion.

June 2010 – Blackstone acquires Morgan Stanley’s ¥100 billion Japanese real estate loan book for a reported 35 cents on the dollar. The book contains 11 loans, including the mezzanine piece backed by the tower.

February 2011 – MSREI lets approximately 45 percent of the building to Microsoft as its Japan headquarters.

April 2011 – MSREI defaults on its debt obligation, resulting in the firm handing over the keys to the CMBS structure’s most junior noteholder, Blackstone.