Hedge Funds Preparing For $1 Trillion Property Bill
Hedge funds are zeroing in on America's malls and hotels.
Axonic Capital LLC, LibreMax Capital LLC and Saba Capital Management LP are among firms positioning to provide loans as more than $1 trillion in commercial real-estate debt originated before the property crash comes due over the next three years, aiming to bridge the gap for borrowers needing more cash than banks are willing to lend.
"New participants are capitalizing on that void," said Richard Hill, an analyst at Morgan Stanley, who said he's surprised by the range of investors entering the market. "The wave of loans coming due is going to create a bottleneck. The image I get is a snake trying to swallow an elephant."
About $350 billion in commercial-real estate debt comes due every year through 2017 after a borrowing binge last decade, according to Morgan Stanley. The firms are aiming to provide mezzanine loans, which are repaid after traditional commercial mortgages if a borrower defaults, making them a riskier bet in exchange for higher yields.
Axonic, a $1.8 billion investment firm run by Clayton DeGiacinto, will seek to lend on properties beyond major metropolitan areas such as New York and San Francisco, where capital from around the globe has already flooded in.
The best opportunities over the next several years will be venturing into smaller markets, even as tenant demand is harder to predict, according to Chris Seay, a managing director at Axonic's Soma Specialty Finance, the unit started last year to make the loans.
"There's always a demand for good quality real estate no matter where you are," he said. "Whether it's a Nashville, Tennessee or a Louisville, Kentucky, there's no reason those markets don't need good quality operators and good quality real estate."
Axonic's Soma is making fixed-rate loans with terms of about 10 years. It completed its first deal in November, a $5.9 million loan for shopping center Canyon Crossings in Riverside, California. The loan, which is helping to finance an acquisition, will be subordinate to a $40 million mortgage. Axonic's main fund also buys shorter-term debt.
LibreMax, the $2.7 billion investment firm founded by former Deutsche Bank AG trader Greg Lippmann, is investing in hotel debt, according to two people with knowledge of the strategy, who asked not to be identified because the loans are private.
Lippmann, who gained fame by betting against subprime-mortgage bonds before housing collapsed, has made commercial-real estate a key part of his firm's strategy as the markets recovered.
Hotel values, which decline fastest during an economic downturn, can rebound rapidly as room rates are reset on a daily basis. Prices on hotels surged 17 percent in 2013, according to a preliminary reading of the Moody's/RCA Commercial Property Price Index.
The New York-based firm had more than 25 percent of its assets invested in commercial real estate at the end of December, according to a letter to investors, which showed the fund gaining 12.9 percent last year. Lippmann declined to comment on the investments.
Boaz Weinstein's Saba, a $3.9 billion investment firm started in 2009 to trade on price discrepancies between loans, bonds and derivatives, moved into mezzanine real estate lending last year, according to people with knowledge of the fund, who also asked not to be named.
The investment ties into a broader property bet for Weinstein, the former co-head of global credit trading at Deutsche Bank. His firm was one of the first hedge funds to start digging into the riskiest corners of the $550 billion commercial mortgage bond market last year by purchasing securities that are first in line to take losses from new deals.
Investment in commercial real estate debt is incr easing as sales of securities linked to properties ranging from mobile home parks to Hawaiian resorts are poised to climb to $100 billion this year after doubling to $80 billion in 2013, according to data compiled by Bloomberg.
Billionaire Paul Singer's Elliott Management Corp. is backing a venture with Silverpeak Real Estate Partners that will originate mortgages to be parceled into CMBS, as well as make other types of loans such as mezzanine debt. In a December letter to investors, Elliott cited the "strength and growth in the new issue market," and a "significant capital hole in need of filling," as boom-era loans mature.
Separate from Silverpeak, Elliott is investing $75 million for a hotel and condominium project in Manhattan, according to a person with knowledge of the deal. The preferred equity will yield between 15 and 20 percent, said the person, who asked not be named because the deal is private.
Mezzanine debt was frequently used in real estate leading up to the crash as landlords ramped up their use of borrowed money to help pay record prices for buildings. While a boon for borrowers at the time, excess leverage was at the root of some of the most disastrous real estate acquisitions.