LaSalle wants to replicate European credit plays in America following Latitude buy

The Chicago-based investment firm has had an active European real estate debt business since 2010.

LaSalle Investment Management, the Chicago-based real estate investment management firm, is known for making equity investments in the asset class around the world. The lion’s share of its approximately $70 billion of assets is held in equity. But those paying close attention will have noticed that $2.4 billion of the assets are real estate loans issued by a platform emanating from Europe.

Today, the firm has its sights set on doing something similar in the US. That is what its majority stake acquisition of US real estate debt manager Latitude Management Real Estate Investors is all about.

The acquisition of the $1.2 billion real estate debt business, which was announced at the start of the month, marks the firm’s first acquisition of a North American manager platform. The deal, which sees Latitude senior management retain a minority stake, is expected to close during the first quarter of 2019, LaSalle chief executive for the Americas Jason Kern told PDI’s sister publication PERE.

The firm has had an active European real estate debt business since 2010 but, to date, has had no such offering stateside. That business has raised more than $3.75 billion for its strategies, which include mezzanine lending, whole loans and select development finance loans in the $15 million-$200 million range. It has also closed three real estate debt funds in Europe to date.

The firm raised £804 million (€901 million) in 2017 for LaSalle Real Estate Debt Strategies III, £600 million in 2014 for LaSalle Real Estate Debt Strategies II and closed on £100 million in 2010 for its maiden LaSalle Special Situations UK Real Estate Fund I, according to PERE data.

The firm has participated in some mezzanine financing transactions in the US, but without a dedicated investment vehicle or team. The transactions were one-off deals made through separate accounts or commingled funds by the US acquisitions team, according to a LaSalle spokesperson.

A US real estate debt platform would complement LaSalle’s existing investment products, Kern said, adding that existing investors have been inquiring about a US real estate debt strategy.

Enter Latitude. After raising $477 million for its fourth fund in 2017, Real Estate Capital understands the incoming team will continue to grow and expand the Latitude Management Real Estate Capital fund series following LaSalle’s acquisition. LaSalle plans to support the growth and scale of the debt business going forward by tapping into existing global investor relationships through the capital-raising team.

Kern, who joined LaSalle in 2013, said the firm considered building out a US real estate debt business in-house the way it did with the European team, but the US market was competitive. For the past few years, LaSalle has instead sought to acquire an existing platform with a proven history and established team, he explained. Kern also said since LaSalle did not previously have a US real estate debt team, there would be little overlap with Latitude, and thus, the merging of the two firms would not warrant layoffs.

“There’s only so many truly independent commercial lending firms out there,” he said. “Certainly, that list narrows very quickly when you talk about ones that have been in the market for many years and have scale.”

With a team that has been working together for 18 years, Latitude fits the criteria that LaSalle had been searching for. Latitude has taken a conservative approach to investing and stays away from high leverage loans and development lending. All loans are floating rate based on LIBOR, which is advantageous at this point in the cycle as interest rates rise, according to Kern.

LaSalle also found the platform’s mid-market strategy to be attractive. Latitude originates loans with principal in the $5 million-$40 million range and has raised four funds. Playing in the mid-market with smaller loans means the team can operate below the radar and encounter less pressure and competition, he said. Under LaSalle, Latitude will continue to focus on first mortgages on value-add and transitional assets within the US. Since launching in 2009, the firm has closed on $3.3 billion in commercial real estate financing.

Although there are already many firms participating in the real estate debt space, there may still be room in the market for real estate equity managers looking to debut their own real estate debt investment products. As real estate equity managers introduce real estate debt to broaden product offerings, those that already have a fund platform and a fundraising machine in place will have an advantage, EY Real Estate global funds leader David Frankel said. Even if a firm does not have an existing investor base that is specifically interested in real estate debt, having investors that have been interested in the firm’s equity business previously will give them somewhere to start, he explained.

A real estate equity sponsor new to real estate debt, or debuting a real estate debt fund, will have to point to a compelling strategy, a dedicated real estate debt team, a solid reputation, and unique market relationships, said Inland Real Estate Investment Corporation president and chief executive, Mitchell Sabshon. Oak Brook, Illinois-based Inland Investments creates, develops and supports affiliated companies that provide commercial real estate services, institutional investment funds, securitised 1031 exchanges, and listed and non-listed REITs. Inland Investments has sponsored public and private real estate equity and debt investments through REITs, funds and joint ventures.

Investors will not necessarily write off a firm that is new to real estate debt if it can point to a strong real estate debt team, even if it wasn’t grown in-house, Sabshon said. He added that differentiating the firm from existing real estate debt managers by paying attention to loan size, structure, term and target geographic markets will also be key.

Despite increased competition in the US real estate debt market, real estate equity firms looking to expand into real estate debt should be able to find plenty of business, especially if they can tap into solid relationships with existing equity investors, he also noted.

The real estate debt strategy has become increasingly sought after by investors over the last few years. Real estate debt funds raised nearly $35 billion in 2017, an all time high for the strategy. This represents a 35 percent increase from the $25.66 billion raised in 2016. Thus far, 33 funds have closed in 2018, raising a total of $22.7 billion.