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Starwood's capital raise may signal attractive investment opportunities

Barry Sternlicht in early November made clear the circumstances under which Starwood Property Trust Inc. would raise equity.

"We [were] consistent from the start: Bigger is better, bigger is better, bigger is better," the mortgage REIT's chairman and CEO said during a Nov. 2 earnings conference call. "Will this company be better as a $10 billion company than a $5 billion company? Absolutely, but we have to have good reasons to deploy capital accretively in order to raise any additional capital."

So when Starwood Property Trust made a series of announcements regarding funding initiatives during the week of Dec. 5 that included news of a sizable equity issuance, it appeared to represent an upbeat sign for investment prospects in the commercial real estate arena.

The mortgage REIT priced a 17.8 million follow-on offering of common stock Dec. 5, then announced three days later that the underwriters had exercised their overallotment option in full, bringing the total size of the deal to 20.47 million shares. Aggregate net proceeds from the transaction totaled $448.1 million, Starwood Property Trust said.

At the same time, the mortgage REIT disclosed the private issue of $500 million of unsecured senior notes due 2021 and negotiations toward a new credit agreement for a $300 million four-year secured term loan and a $100 million four-year secured revolving credit facility.

Starwood Property Trust said it plans to use proceeds from the equity raise to originate and purchase additional commercial mortgage loans and other target assets and investments. The mortgage REIT includes preferred equity interests, CMBS and other commercial real estate-related debt investments among its target assets, alongside floating-rate first and mezzanine commercial mortgage loans.

It plans to draw the $300 million term loan in its entirety. Those funds, as well as proceeds from the unsecured debt offering, would be used to repay in full an outstanding term loan that had a balance of $653.2 million as of Sept. 30. Remaining term loan proceeds would be used for general corporate purposes, which the mortgage REIT said may include investment in commercial real estate-related assets and debt obligations, the payment of liabilities and other working capital needs. To the extent it enters that agreement, Starwood Property Trust said it does not intend to immediately draw upon the new $100 million revolver, for which it said it had yet to obtain any financing commitments or execute definitive documentation.

The mortgage REIT further disclosed that it was in negotiations for a unit to obtain a five-year secured term loan facility of up to $579 million to finance the proposed purchase of a stabilized portfolio of 38 medical office buildings that primarily affiliated with major hospitals or located on or adjacent to major hospital campuses across the United States.

Starwood Property Trust said its amount of unencumbered assets had increased on a pro forma basis to approximately $3.3 billion from $1.2 billion as of Sept. 30. The increase contemplates the impact of the issuance and sale of the unsecured notes in the private placement, the use of net proceeds from that offering and from certain of the term loan borrowings to fully repay the existing term loan, and the other term loan borrowings the mortgage REIT plans to make under the expected credit agreement.

It had been since October 2014 that Starwood Property Trust had issued unsecured debt and since April 2015 that it had raised common equity, according to S&P Global Market Intelligence data. The latest equity raise stands to be the largest for the mortgage REIT since it generated gross proceeds of $564.7 million in an April 2014 follow-on offering. It also represents the largest follow-on offering for any publicly traded mortgage REIT under S&P Global Market Intelligence coverage, excluding at-the-market and best-efforts transactions, since a $500 million New Residential Investment Corp. deal in June 2015.

The April 2015 offering came as Starwood Property Trust inked a deal to acquire a portfolio of 12 office properties and one multifamily property in the central business district of Dublin for a total purchase price of €452 million.

Company officials said the $8.9 billion in maximum on-balance-sheet debt capacity that Starwood Property Trust possessed as of Sept. 30 provided it with adequate liquidity to execute its core business strategy. As Sternlicht said during the November call, "We got plenty to do with our existing cash and availability today."

In the month that followed, however, circumstances may have changed.