If there’s something that the commercial real estate industry has plenty of today, it’s problems to contend with: problem loans, problem assets, problem portfolios or the overarching yet ubiquitously human problem of timely decision-making in a paralyzingly uncertain market.
Enter, Starwood Solutions.
Starwood Property Trust’s new third-party services business was unveiled Nov. 8 during the firm’s third-quarter earnings call, with Starwood Property Trust President Jeffrey DiModica telling listeners, “There has never been a better time to launch this vertical — one we hope will become our eighth business line.”
The platform offers both individual asset and portfolio valuations; restructuring and balance sheet consulting; collateral management and surveillance; underwriting and due diligence for equity portfolios, loan portfolios or securitizations; and a full spectrum of capital markets and investment consulting services.
“We’re opening a wide net here,” Adam Behlman, president of real estate investment and servicing at Starwood Property Trust and Starwood Mortgage Capital, told Commercial Observer. “We can help you with one loan, we can help you with your entire portfolio, we can help you with valuation for purchases, we can help you work things out with your current lenders. There are so many different things that we’re capable of doing because of the extensive history that we have here.”
When it comes to all aspects of loan workouts and resolutions, that’s quite a history. LNR — acquired by Starwood Property Trust in 2013 — has a management team with an average tenure of 30 years, with more than $88 billion in loan workouts across 7,238 loans under its belt.
Currently, LNR is a special servicer on 177 commercial mortgage-backed securities deals but it’s also an O.G. in the space, holding the title of one of the very first companies in the CMBS industry in the early ’90s.
“LNR has been active as an asset manager and special servicer since then,” Behlman said. “The heads of the team at LNR have been here for more than 30 years. Our historical experience here is extremely deep, and our history of working out loans through both the apparatus of the CMBS deal and outside the apparatus of a CMBS deal is what our systems are built on.”
“The reason [launching a new business line like this] works here and not elsewhere is because we have scale,” DiModica said. “It also works here because we’ve done it $88 billion times over 7,200 loans; it doesn’t work elsewhere, because they haven’t.”
Diego Jose Texera/for Commercial Observer
Sign(ature) of the times
The idea for Starwood Solutions had been in the works at 2340 Collins Avenue — the firm’s headquarters in Miami Beach — for a couple of years, but when the regional banking crisis hit in March, the Starwood team quickly got to work figuring out exactly how big the need, and the opportunity set, could be.
The night that Silicon Valley Bank collapsed, the first domino to fall, Starwood Chairman and CEO Barry Sternlicht stood over DiModica’s desk and said, “Help me value a bunch of these regional banks’ balance sheets,” DiModica recalls.
“We ran it on 15 regional banks, and we realized that weekend that the regional banks — except for the few that hedged rates, and for the most part, they didn’t hedge rates — were structurally insolvent to liquidation,” DiModica said.
“It was in that pressurized moment of looking at highly-levered regional banks that had a tremendous amount of fixed-rate assets with floating-rate liabilities who were not hedged for the move higher in rates,” DiModica said. “Once their loan portfolios went down below 90 percent of par, they were structurally insolvent — and we knew it’d be an opportunity set.”
“We’d love to help the FDIC,” he said. “We think there are a lot of banks with large portfolios who have originators but don’t have asset managers or workout people in the same way that we do, especially the regional [banks]. We want to be that for them, in guiding them through what this process would be, giving them the options on what a loan sale would look like, or what working out specific loans might look like. We can also give them an idea on valuations as we have a lot more data points than anybody else out there.”
“We have amazing data on what’s happened with leases, tenants, what’s happened with geographical locations, and every property type that is out there,” Behlman said. “It allows us to really dig deep locally, and, as the biggest special servicer, we’ve got all these contacts with all the brokers that are out there, and can make a phone call in three seconds to figure out and triangulate what a valuation is. That’s exactly what we do on a daily basis for ourselves and our third-party clients that we have today.”
Plus, “we’ve worked out loans in every state in this country, from Alaska to Wyoming,” Behlman said. “We’ve done it all, so we understand each of the legal jurisdictions and what it takes to get things done. So I think that’s a big advantage.”
In an especially challenged market, the consequent challenge in Starwood Solutions’ launch is: If you’re a private equity sponsor and competitor of parent company Starwood Capital Group, you may not want to show Starwood the deep, dark problems in your book.
“This is a Chinese wall business,” DiModica said. “We’ve always operated LNR separately from the public investment side of our business, and Starwood Solutions has nothing to do with Starwood Capital Group. We take this extremely seriously, and are not going to put clients in any sort of harm’s way in terms of Starwood Capital Group knowing what their assets are.”
Indeed, LNR was historically known in the CMBS 1.0 world as a buyer of B- pieces and only being a special servicer for its own portfolio — which a lot of the other special servicers are. Today, however, “we’re a bigger third-party business than we are a special servicer to ourselves,” Belhman said. “So, we already have a team that’s used to dealing with clients and figuring out their problems and our solutions over the years.”
“It’s something that has resonated very well,” Coyle said. “Jeff mentioned the FDIC bank loan portfolios, and a lot of funds out there that have billions in capital to deploy [and may be interested in buying those portfolios] may only have three or four folks in their commercial real estate group. So, to hear that there’s a comprehensive, one-stop shop that you can bolt onto your team and help you with diligence is very empowering.”
A stitch in time
We’re now more than halfway through the fourth quarter of this annus horribilis in terms of market dislocation, and so some may ask why Starwood Property Trust pulled the trigger on the launch now, as opposed to last quarter or, heck, even last year.
“We’d been thinking about it for most of two years, but we wanted to make sure that it was a real business with real legs and didn’t end up being a small business that couldn’t grow,” DiModica said. “We started really trying to put this business together when the Signature Bank pool came out. It’s just taken us until now.”
The team believes that this period of strife could, unfortunately, last a decent amount of time, however.
“Workouts tend to take a long time,” DiModica said. “The average workout in special servicing is probably close to 18 months today — none of these workouts are getting done in a matter of a couple of months. So, we feel like there’s a good runway over the next couple of years. Even if things repair on the credit side or on the interest rate side, we think this cycle will last for a couple of years.”
“There is a prescribed methodology that’s already there [for CMBS],” DiModica said. “This platform is really for everything that isn’t that, and that’s what we’re going after here today: floating loans, transitional loans, large single assets, insurance companies loans, FDIC pools — all these portfolios are going to come up.”
“We think we’ll be very hands-on,” Behlman said. “We can go from providing data to helping people solve problems. We have this capability through working with borrowers and lenders for over 30 years. We understand what the process is to get things across the finish line, to evaluate portfolios or evaluate individual loans, and we can be as big or small as the client.”
“If you look at BlackRock solutions, they made a tremendous amount of money in the beginning of the GFC when everybody was trying to get a handle on things, but it’s still a very profitable business today,” DiModica said, referring to the financial crisis 15 years ago. “A lot of people are looking for the expertise to be able to value difficult, highly structured securities. For them, that business was built to last and we’re building this business to last for decades.”
Robert Khodadadian has long had a simple philosophy about selling real estate. The way he sees it, there are approximately a million buildings in the city, and the broker that gets to sell any one among the multitude that will hit the auctioning block at a given moment is, sometimes, simply the person who happens to pitch their services to the right seller at the right time.
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Channel, Finance, Adam Behlman, Adrienne Coyle, Jeff DiModica, Starwood Property Trust, Starwood Solutions, National Read MoreCommercial Observer“Every problem has a solution. You just have to be creative enough to find it,” Uber co-founder Travis Kalanick once said. If there’s something that the commercial real estate industry has plenty of today, it’s problems to contend with: problem loans, problem assets, problem portfolios or the overarching yet ubiquitously human problem of timely decision-making