LaSalle to Enter U.S. Debt Market by Acquiring $1.2 Billion Firm
(Bloomberg) -- LaSalle Investment Management, an arm of Jones Lang LaSalle Inc., is betting big on U.S. commercial real estate debt.
LaSalle is acquiring a majority stake in Latitude Management Real Estate Investors, which manages $1.2 billion across credit funds, said Jason Kern, LaSalle’s chief executive officer for the Americas. Latitude provides short-term, or bridge, loans to borrowers focused on commercial property in regions of the U.S. that are deemed to be growing, including San Francisco and Denver. It targets the so-called middle market, lending $5 million to $35 million to income-producing multifamily, office, hotel, retail and industrial properties that can be improved in some way.
“By being below the radar screen of larger lenders, there’s not nearly as much competition from banks or non-bank financing providers,” Kern said in an interview.
The smaller loans Latitude issues allow for greater diversification and the generation of potentially higher returns with less spread compression than found at firms dealing in larger loans, he said. Latitude’s debt typically spans three years, with the option for extensions, and has floating interest rates, meaning the Beverly Hills, California-based lender benefits when rates rise.
Terms of the deal weren’t disclosed.
Rather than building out the lending strategy from scratch -- a fallback plan, Kern said -- he’d long considered acquisitions. He sought to add U.S. debt to LaSalle’s offerings amid inquiries from existing investors in the firm’s real estate private equity funds. The firm’s entry into credit is a long-term play, and shouldn’t be viewed as an attempt to time the economic cycle, he said.
“We think having a debt business alongside an equity business is good for diversification,” he said.
Latitude President and CEO Glenn Sonnenberg, Executive Vice President Chip Sellers and managing directors Brett Mayer and Craig Oram will continue to lead the business for at least five years, and senior management will retain a minority ownership position.
There are synergies to be found in investing in both equity and debt from a sourcing, structuring and valuation perspective, Kern said. “We’ve occasionally realized there can be a better risk-return profile being in a different part of the capital structure so have chosen to limit our downside and cap our upside,” he said, referring to LaSalle’s pursuit of mezzanine financing or preferred equity deals, which have an aggregate value of almost $1 billion.
In a crowded market, Kern expects LaSalle to have a competitive advantage over some rivals who are establishing their own real estate credit arms. Latitude’s senior management, with some 18 years of combined experience, has established relationships and a reputation for closing deals, he said. Funds managed by the firm, formerly known as Legg Mason Real Estate Investors, aim to deliver annual returns of 10 percent, according to a filing from the Commonwealth of Pennsylvania Public School Employees’ Retirement System.
LaSalle declined to comment on Latitude’s return targets.
The acquisition is slated for completion during the first quarter of 2019. Latitude’s debt business will be rebranded and combined with LaSalle’s North American private equity platform, which oversees about $21 billion of LaSalle’s total $60 billion of assets under management.
Credit isn’t entirely uncharted territory for LaSalle. It has a European real estate debt platform that raised 804 million pounds ($1.02 billion) last November for its third fund. Kern said the success of that business has proven that debt is a “nice complement” to an equity business. Still, the Latitude deal will mark LaSalle’s first dedicated foray into U.S. credit investments and origination.
Its entry to U.S. real estate credit follows Morgan Stanley’s acquisition of Mesa West Capital LLC, another commercial real estate credit platform, which closed earlier this year.
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