A shortlist of three property companies for the Lloyd’s 38-strong Flagstaff portfolio will submit second round bids tomorrow.
The mixed sector portfolio, which was initially valued at £63m and comprises secondary properties across England and Wales, is expected to sell for around the mid £50m range.
This is the first time a portfolio has been sold by aggregating different borrowers, through appointing one LPA receiver and packaging as a single sale.
The so-called Project Flagstaff is a first of kind portfolio sale and considered both a bellwether indicator for investors’ appetite for secondary property and the extent to which receivers’ are prepared to crystallise Lloyd’s losses. The structure itself could also prove to be a template for banks’ future packaged property disposals.
It is understood Jones Lang LaSalle received six formal bids last week. JLL, which was mandated to sell the portfolio by the LPA receivers, reduced it to three, including both equity-only and debt-backed bids.
Both the debt and equity purchasers are thought to be interested in managing the portfolio for a third party equity source on a management fee plus “promote basis”, where the manager delivers a return to the underlying investor to an agreed fixed IRR, likely to be more than 15%, after which additional performance is split between manager and equity investor.
The portfolio has a weighted average unexpired lease term of 8.2 years by income, with 49% of the portfolio by income is located in the South across 69 tenants amounting to £6.27m pa. The tenant profile includes 27% government, 9% Sony, 8% LA Leisure and 7% Trillium Property.
The portfolio has been structured to deliver an attractive income return, with a yield of 9.35%. If vacant space is let and fixed increase rent reviews are completed, the portfolio running yield is 9.95%. If debt is applied, plus management charge at around £200k per annum, the portfolio would deliver a return on equity of around mid-teens.
The target internal rates of return of the final shortlisted bidders depends upon their cost of capital, but thought to be looking for mid to late teens. The conclusion of the sale could take up to six weeks.
CoStar Finance 