Friday, April 30, 2010

Square Mile Wins Stake in FDIC Hotel Loans

Commercial Mortgage ALERT

4.30.10

Square Mile Capital has won the bidding for a 40% stake in a $420 million portfolio of hotel mortgages from the FDIC. The New York fund manager agreed to pay about 75 cents on the dollar, or $125 million, according to people familiar with the offering. The transaction values the portfolio at about $315 million. The FDIC, which is retaining a 60% interest in the assets, will supply debt financing for half of Square Mile’s purchase, reducing the firm’s cash outlay to about $63 million.

Other bidders included Colony Capital of Los Angeles, Starwood Capital of New York and Thayer Lodging of Annapolis, Md. Deutsche Bank is the FDIC’s advisor. The FDIC inherited the loans from the $4.1 billion-asset Silverton Bank, an Atlanta institution that failed last May. A little more than 80% of the portfolio’s balance is performing.

The FDIC divided the portfolio into two pools: one with whole loans, the other with participation interests. Investors could bid on either pool or the entire slightly from the $420 million that was first marketed in mid- January, but an exact final tally was unavailable. Bidders also had an option on whether to include a senior loan on the 237-room W Atlanta-Downtown Hotel & Residences. That property was singled out because it was embroiled in a dispute with mezzanine lender Capri Capital of Chicago. Capri recently agreed to convert its $43.5 million debt position into an equity stake in the property.

The whole-loan pool contained 22 mortgages. The collateral is in 11 states, with concentrations in New York (22% of the balance), Texas (17%), Georgia (16%) and Arizona (15%). None of the properties remains under construction. Some 85% of the pool balance is performing.

The second pool consisted of participation interests in 41 loans. Some 81% of the pool, by balance, is performing. The underlying hotels are in 19 states, with large concentrations in Georgia, Texas, Florida and Pennsylvania. Six properties are still under construction. The FDIC has been selling equity stakes in commercial and residential mortgage portfolios since the real estate market peaked. In 12 sales from May 2008 through the current deal, the government stake has been in the range of 20- 40%. Winning bidders then work out the mortgages and split the proceeds with the FDIC. The stakes have sold for a range of 9-75 cents on the dollar.

Square Mile is expected to make the acquisition via its third investment fund, Square Mile Partners 3. The $806 million vehicle, which began investing in performing and distressed debt last year, had committed some $200 million of its equity as of March.

Square Mile was launched in 2006 by Jeffrey Citrin, who cofounded Blackacre Capital’s real estate group. He heads the company with Craig Solomon, a former partner of New York law firm Solomon & Weinberg.