After Missing Payments, Starwood Forced To Relinquish $1.6B Mall Portfolio

Starwood Capital Group has surrendered control of seven U.S. shopping centers to a partnership between Pacific Retail Capital Partners and Golden East Investors after it defaulted on debt associated with the properties.

Starwood, which acquired the malls in 2013 for $1.6B, issued CMBS bonds in Israel related to the properties, and began defaulting on the bonds earlier this year. A ratings firm downgraded the debt, thus enabling bondholders to seize the assets under the terms of an accelerated payment clause, The Wall Street Journal reports.

A bidding contest followed, with Pacific Retail and Golden East winning for an unspecified price. The malls are in California, Indiana, Ohio and Washington state, with JCPenney and Sears as anchors of many of them.

The new owners say they will reposition the properties into mixed use. "There is great familiarity with these assets and we see value,” Pacific Retail Managing Principal Steve Plenge told the WSJ.

The pattern of delinquency on real estate debt among investors who presumably have the wherewithal to stay current is increasingly common in the retail sector, as well as in the hospitality sector. It appears to be a tactical retreat from those sectors, which have been the hardest hit by the coronavirus pandemic, to focus resources on more lucrative properties.

"I think you'll see us stick to our knitting with some fairly conservative product types and probably not doing much, if anything, in retail, which we haven't done in the last few years, or other sectors that could be considered a little bit more volatile," Starwood Property Trust President Jeff DiModica said during the company's most recent earnings call in August.

As of late August, Starwood Group, which has about $60B in assets under management, including other malls, was behind on payments for more than half of the 30 malls it owned at the time, representing about $2B in CMBS debt, even as the company amassed an $11B war chest for other investments.

Likewise, Blackstone Group had put together $46B for real estate as of the end of June, while behind on payments on a $274M mortgage associated with four Club Quarters hotels, and Colony Capital has quit paying on many of its hotel bonds while amassing $6B to buy data centers and cellphone towers.