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The Distressed Deals Have Started

Walker & Dunlop CEO Willy Walker and Starwood CEO Barry Sternlicht at a 2018 Bisnow event.

Starwood Capital has agreed a deal to put as much as $325M of new equity into a mortgage REIT managed by TPG, in one of the first significant distressed real estate deals to be completed since the beginning of the coronavirus pandemic.

In an announcement, New York Stock Exchange-listed TPG RE Finance Trust said it reached an agreement with opportunity fund manager Starwood to put an initial $225M into the company, with the option of putting a further $100M in before the end of the year if required.

Earlier this year, the REIT issued a going concern warning, saying it might be forced to sell assets at low prices to meet calls for cash from its own lenders, and that the impact of the coronavirus could cause the loans it made in sectors like hotels to go into default. 

TPG is selling Starwood preferred shares with a coupon of 11%, and warrants to buy shares at $7.50 a share, which is 10% higher than TPG RE’s average share price over the past 30 days, but less than half the price before the pandemic broke out. Starwood saw off competition from Oxford Properties to recapitalize the company, Bloomberg said.

The company had 65 senior mortgages and one mezzanine loan as of 31 March, totalling $5.8B. Its shares have dropped 59% to $8.19 since the beginning of March. In April it hired Houlihan Lokey to advise it on bolstering its capital position. 

The mortgage REIT sector had been earmarked as one to watch in terms of early signs of distress in the real estate sector, primarily because it has to mark the value of the loans it has made to market, which means they are revalued more rapidly than the loans made by traditional banks or unlisted lenders. As early as March, Colony Capital’s Tom Barrack said the sector would experience significant distress. 

The deal shows that Starwood chief executive Barry Sternlicht is good to his word: He said in April that the firm was “on offence” and looking for opportunities to buy that might be thrown up by the pandemic.