Mortgage Observer

Debt Pioneers: Starwood Property Trust’s Brain Trust

Once at Starwood Property Trust, the debt team acquired its fifth member. Originally from Upstate New York and with a law degree from the University of Pennsylvania, Mr. Sossen had primarily practiced mergers and acquisitions and securities law in New York for almost six years. Since 2006, he had been general counsel for the REIT KKR Financial Holdings, based in San Francisco. In 2009, Mr. Sossen heard through the grapevine about a position with Starwood Property Trust’s senior management team. “I flew to Greenwich to meet with Barry [Sternlicht], and four to six weeks later I quit my job and I was moving back to New York. Barry is a pretty persuasive,” Mr. Sossen said. “I got very intrigued, because it was never the understanding that this was going to be a small little player. This was going to be a significant player in the real estate finance industry—a big operating company.”

The original four members of the team agree that Mr. Sossen’s strong corporate background added a lot. “It can be very difficult and quite intimidating having four guys who have worked together for such a long time coming in as your partners,” Mr. de Haan acknowledged. “But Andrew had a very open mind when we came in, and accepted very well the fact that we have so much history together.”

A self-defined East Coast guy, Mr. Sossen said that living in New York cuts down on his ability to ride and ski. But when they are all in the same city together, the five will get together for dinner or drinks.

At work, the roles are well-defined. “I handle anything legal, capital market activity, raising capital, interacting with the Street—everything kind of M&A or strategic,” Mr. Sossen said, rattling off team members’ various strengths. “Chris is a phenomenal credit mind—all deals run through him. Warren knows everybody there is to know in the real estate business—he has a call in to every borrower. Stew is wickedly smart. He brought a quantitative approach to the business that wasn’t here prior his arrival. Boyd is a great partner and face for the organization. Warren and Boyd as a team going to meet potential borrowers is a pretty deadly combination.”

But just as important as the debt team’s relationship is its synergy with the equity team at Starwood Capital Group. “What makes the REIT truly unique is that we have excellent debt skills and excellent property-evaluation skills,” Mr. Sternlicht asserted.

The deals over $125 million have to be approved by Starwood’s board, and the investment committee consists of an equal number of equity professionals and debt professionals. “It’s a huge strategic advantage, the Starwood equity guys understand the equity risks really well in this market,” said Mr. Fellows. “We go back and forth with them getting their input on the lending, how to structure the loan and how to make sense. It’s a really powerful synergy. But that’s easy to say. At the beginning, you have to get everybody to start to trust and respect each other and work together and feel good with each other. That integration process took time. Now, the morale is great and people work together very well, and it feels like a cohesive machine.”

In one of the most recent examples, in early November 2012, Starwood Property Trust originated a $126 million first mortgage and mezzanine loan on 100 Montgomery, a 25-story building in San Francisco, which Blackstone had just bought. While the building was on the market, Marc Perrin, Starwood Capital Group’s managing director who supervises the investments on the West Coast, had visited the property, done the underwriting and come to know it intimately. “When the deal was ultimately awarded to Blackstone, we called Marc and had a discussion with him about the building,” said Mr. de Haan. “We closed the deal in 25 days.”

Mr. Sternlicht said that he often sources the transactions and then puts the deal in the hands of the debt team, with which he stays in constant contact. He added that they are currently working on large transactions in New York that could close by the end of the year.

“We have another approximately $500 million [of new investments] in due diligence now,” said Mr. Fellows. “As we have grown and become bigger, we have become able to take down large complicated transactions in which we rarely have any competition.” Compared with banks and insurance companies, which often co-originate the loans, Mr. Fellows added, Starwood Property Trust has the ability to be the only lender on large and complex deals and to make the negotiation process more simple and certain. “We’ll just say [to the borrower], ‘We’ll take the whole thing, simple, with no noise. You don’t have to talk to all these people. One contract. Done.”

“We are on everybody’s short list of lenders,” added Mr. Sossen. “We’ve proved that we can transact quickly, we can underwrite complex situations—and when we say that we are going to close, we are going to close, and I think borrowers appreciate that certainty.”

“We’ve been successful because we have been transparent with our shareholders, have laid out a clear plan as how we wanted to grow the business and haven’t deviated from that plan. And I think shareholders appreciate that transparency and predictability, which is what we have really delivered over the past three years.”

In the third quarter of 2012, net income attributable to the company jumped to approximately $50.2 million from $14.5 million for the same period in 2011. Profit per share was $0.43 compared with $0.15 in the prior year. Core earnings were $58.8 million, or $0.50 per share, up 49 percent from $39.3 million, or $0.42 per share, in the third quarter of 2011.

“We’ve all faced other opportunities from time-to-time for sure,” said Mr. de Haan. He added that the team’s uniqueness and differing skills sets make the sum total more powerful than the individual components.

“So,” he mused, “we could create something bigger, more scaled and probably more fun by working together.”