Part II: Excalibur unmasked

In the second part of a CoStar News insight into Europe’s most beguiling structured real estate finance structure, the underlying borrowers that lay behind the remaining positions are unmasked, which is a reminder of how convoluted Lehman’s real estate strategies were, and just how active the bank was until its very final months.

Excalibur’s senior, mezzanine loans and B-notes

Project Octopus – €209.29m senior and €8.0m mezzanine outstanding (Jan IPD)

Barg Group, the former German asset management firm, bought a 41-strong commercial real estate portfolio from Sireo, the asset management arm of Deutsche Telekom, for around €250m in March 2007.

The portfolio comprised predominantly West German assets, with an original 55% weighting to offices, 23% technical-focused tenants and 9% storage properties.

Project Octopus was financed with 10% equity from Barg, at €25m, a €219.2m four-year senior loan from Lehman Brothers, which also provided a €8.04m mezzanine loan, taking the whole loan LTV to around 94%. Project Octopus has an undrawn €2.9m capital expenditure loan.

Both the senior and mezzanine loans were transferred to Excalibur, which matured at last year’s April IPD.

Lehman initially intended to sell the portfolio within 12 months of the March 2007 deal closing, through the sale of sub portfolios, after which the investment bank contemplated debt syndication. After the failure of both exit strategies, Project Octopus was spun into Excalibur.

Over the subsequent near five years, three properties have sold, taking the 38-strong portfolio to €175.37m at last valuation and a 16.68% vacancy rate. At origination, Deutsche Telekom represented 76.7% of the annual rental income.

At the October interest payment date (IPD), the annual total net income was €16.2m, while the portfolio has a weighted average lease length of 8.3 years.

The portfolio has begun liquidation.

Goodwater – €206.89m senior loan outstanding (Jan IPD)

Lehman Brothers Real Estate Partners (LBREP), the bank’s equity investing subsidiary, and Atos, the Hamburg-based asset management, bought two German office portfolios from different sellers for circa €327m.

The combined 89-strong predominantly office portfolio comprises principally assets in the central business district of Germany’s major cities, including Dusseldorf, Frankfurt, Cologne, Munich and Hamburg.

The Goodwater loan had an LTV of 86.8% on the interest-only basis, priced at 5.05% over three-month EURIBOR on 27 April 2007.

LBREP II was the 85% equity owner in the joint venture, reflecting Lehman’s double bet on both real estate debt and equity.

Lehman’s original exit strategy for the Goodwater loan was in what became the €1.4bn Windermere XIVCMBS, but was instead spun into Excalibur.

In the subsequent almost five years, the portfolio has shrunk by 23 to 66, and at last valuation 12 months ago, the Goodwater portfolio was worth €239.14m.

The loan matured at the July IPD and has been granted successive standstill agreements since, with the latest, a six-month standstill having been granted at last month’s IPD.

Reva and Reva Mezz – €98.77m senior and €21.34m mezzanine outstanding (Jan IPD)

Reva Land, a Spanish land-owning company controlled by LIanera, refinanced a maturing development loan, secured by an orange grove near Valencia, with an €87m loan from Lehman Brothers.

The four-year development loan LTV was 83.5% at origination on 3 January, 2008. Reva Land also took out a €21.34m mezzanine loan, which was ring-fenced as a VAT facility for the Spanish development company.

The 3.3m sqm of securing land was last valued at €24m, however, the outstanding combined €120.11m Reva senior and mezzanine loans are secured by a 50% stake of this land, equating to €12.05m.

This would take the LTV to 996.76%. The senior and mezzanine loans matured last month, on January 3.

Last summer, Hatfield Philips, the special servicer on behalf of Excalibur, proposed two possible workouts: a €2.5m loan sale or the insolvency route. After considering both options, it was decided that insolvency would deliver a better return on the original combined €110.96m whole loan.

Hatfield filed a petition for Reva Land’s insolvency before the Mercantile Courts of Valencia on 1 September 2011.  While the Court accepted this petition on 21 September, Reva Land opposed the petition the following month, arguing, among other things, that there was an absence of plurality of unpaid creditors.

JER Eagle Loan – €118.38m outstanding at Jan IPD

JER Partners bought an 18-strong portfolio of Berlin commercial and residential properties in May 2007, financed with a loan from Lehman Brothers.

The two-tranche outstanding €118.3m JER Eagle loan was fixed at 4.45% on Tranche A and floating over three-month Euribor on Tranche B. On August 24, 2009 the loan was transferred into special servicing as a result of breaching its interest cover ratio (ICR) covenant.

Subsequently, on September 1, 2009, the portfolio was revalued at €75.3m.

The German portfolio had a vacancy rate of 31.88% and an unexpired weighted lease length of just 1.7 years, at the time of the October IPD.

Halverton, Project GOP – €92.19m senior loan outstanding (Jan IPD)

GPT Halverton, the once European subsidiary of Australian REIT GPT Group, took out a Lehman Brothers senior loan to finance the German Offices Partnership (GOP).

The portfolio, which was dubbed Project German Offices Partnership (GOP), was structured as a seven-year closed-ended limited partnership, comprised of seven multi-leased office assets in regional German markets, which at the time, were invested to offer a comparatively high income yield at a time of economic recovery in Germany.

Jones Lang LaSalle Corporate Finance (JLLCF) provided investment advisory services on the fund.

Halverton’s €116.5m portfolio was financed with a €92.19m seven-year fixed-rate senior loan on September 29, 2006 at an LTV of 82.5%. The two-tranche senior loan was priced at an all in cost of 4.8% for the €87.56m tranche and 5.1% on the €4.53m second tranche.

By the time Project GOP was spun into Excalibur, the portfolio had been revalued in December 2006, at €114.3m.

The loan matured last month, on January 15, but a one-year extension was written into the agreement, so long as the loan was not in special servicing.

The 82,011 sqm-sized portfolio has a 26.5% vacancy rate, at the time of the October IPD, with annual gross rent of €6.65m and an unexpired average weighted lease length of three years.

Halverton’s Project GOP was part of a wider plan to build up a deep European commercial real estate portfolio. But, as with so many real estate investors, the timing proved fatal.

Assembling the highly-leveraged €1.7bn portfolio, at virtually the top of the market, left Halverton exposed when the market turned. GPT Group decided to cut its losses and sell the Halverton real estate platform to Jos Short and Andrew Thornton’s Internos Real Investors for the nominal sum of €2 and €7m working capital in December 2009.

Landmark Loan – €27.70m senior and €11.20m mezzanine outstanding (Jan IPD)

Kenmore Property Group, the former Edinburgh-based European property investor with a €1bn portfolio, bought a 14-strong Netherlands office portfolio for €135m from White Estate Investments’ MK Capital fund in April 2007.

The 57,743 sqm Landmark portfolio, which comprised properties mainly in the Randstad area of central Holland including Amsterdam, Utrecht, Breda and Amersfoort, was financed with a five-year €114.5m whole loan from Lehman Brothers. The loan is set to mature on July 15.

Lehman syndicated the majority of the senior loan and transferred €27.70m into Excalibur along with €8m mezzanine loan.

The senior loan was priced at an all-in rate of 5.47%, while the mezzanine loan was priced on an all-in rate of 12%. The outstanding mezzanine loan has risen to €11.20m, due to successive shortfalls in interest payments.

One asset has been sold in the subsequent years, reducing the Excalibur debt security to 13 properties. The portfolio had a 23.9% vacancy rate and provides €7.36m in annual rent, as at the October IPD.

Mitco Portfolio Loan and Mitco III – €12.55m senior and €8.74m mezzanine outstanding (Jan IPD)

Resolution Property, the UK and European commercial property investor, assembled a German mixed-use portfolio from a variety of vendors, financed by two separate Lehman Brothers facilities.

Excalibur retains the junior loan in both Mitco whole loans.

The first facility, a five-and-a-quarter term €67.1m whole loan, is secured by a 30-strong German retail portfolio. Three months after Excalibur was securitised, Excalibur sold the €53.3m senior loan to HSH Nordbank, leaving the €13.4m B-note in Excalibur.

The loan, priced at a fixed rate of 4.01% plus a margin of 135 bps, matured last month on January 15, but was transferred into special servicing six months earlier due to a payment default. At the October IPD, the partial debt repayment on the Mitco Loan was €593,759.89 short.

The total outstanding balance on the whole loan is €62m, which based on a €45.18m September 2011 valuation, put the LTV at 72.8%, at the October IPD, at which it did not meet its covenant.

Resolution was negotiating with the senior lender, HSH Nordbank, to refinance or extend the loan ahead of last month’s IPD.

The 57,743 sqm portfolio is spread across 29 cities in Germany.

The second facility, Mitco III, is secured by 18 mixed-use properties across Germany valued at €46.68m in June 2007.

Lehman provided a €39.88m five-year whole loan, of which just the €8.74m junior loan, priced at an all-in rate of 7.25%, is retained by Excalibur.

A September 2011 re-valuation revealed a reduction of €18.5m on the previous portfolio value, in May 2008, at €43.7m, putting the new value at €25.16m, which triggered an LTV covenant breach at the October IPD.

Mitco III matures this year, on July 15. On January 13, there was a shortfall on the B-note’s quarterly interest payment of €65,662.41, triggering an event of default.

The annual rent was €3.28m at a weighted average lease length of three years.

Boultbee Sikupilli and Boultbee Sikupilli Mezz – €29.93m senior and €6.60m mezzanine outstanding (Jan IPD)

Boultbee Land, the UK and European real estate investor ran by brothers Steve and Clive Boultbee Brooks, bought the Estonia’s Sikupilli shopping centre from ELL Real Estate in April 2007 for around €41m.

Boultbee’s acquisition was financed with a five-year €31.05m whole loan from Lehman Brothers, based on valuation of €41.05m, which put the original LTV at 75.6%.

The whole loan included a two-tranche €4.91m mezzanine loan. The senior loan was priced at an all-in fixed rate of 5.34%, while the €876,300m Class A mezzanine tranche was priced at 7.75%, and the €4.04m Class A tranche was priced at 10%.

Mezzanine loan interest payments were missed which, along with default interest, has taken the outstanding balance up to €6.60m, as at the January IPD.

Both loans, which mature in two months’ time, on April 15, are in Excalibur.

A full red book re-valuation in May 2011, put the value of the shopping centre at €23.8m, which against the loan’s €30.36m outstanding balance as at the October IPD, put the LTV at 126.4%.

Both positions were transferred into special serving at last July’s IPD.

The 15,349 sq m Sikupilli shopping centre is close to Estonia’s Tallinn city centre, which opened in October 2000, and comprises a supermarket and 29 retail units within a covered mall, and delivers an annual rent of €2.24m.

Unagi Karstadt Loan – €26.78m outstanding (Jan IPD)

Arcandor, which used to own Germany’s largest department store chain Karstadt, sold a €4.5bn real estate portfolio of its stores to a joint venture partnership with Goldman Sachs Whitehall Funds in March 2006, as the retailer sought to stave off insolvency.

The portfolio spin-off, which was 51% purchased by Whitehall and 49% by Karstadt, comprised 85 department stores, 12 sports stores, 29 multi-storey car parks, 15 office buildings and 33 other properties, and was rented back to KarstadtQuelle for €259m per annum.

Lehman Brothers retained a €26.77m position in the senior debt structured to finance the transaction, which was transferred into Excalibur.

Kwiksave Loan– £4.76m outstanding (Jan IPD)

Back To The Future (BTTF), an investment fund managed by Paul Nicklas, financed the purchase of 77 Kwiksave grocery stores from The Somerfield Group with a senior loan from Lehman Brothers.

BTTF is understood to have paid around £90m for the 77 stores, reflecting a discount to a £111.6m with Lehman providing a £79.1m three-year senior loan on October 26, 2006, priced at 2.25% over three-month LIBOR, which matured on October 15, 2009.

The business plan has been to re-let the heavily-vacant portfolio and carry out piecemeal disposals.

BTTF’s acquisition was part of a wider 171-strong portfolio of Kwiksave stores that Somerfield, which itself was subsequently bought by the Co-operative Group on 2 March 2009 for £1.57bn.

The portfolio has since shrunk to 22 stores, including the sale of a store last month which enabled a £550,000 prepayment on the Kwiksave loan in Excalibur. The loan was transferred to special servicing on March 11, 2010.

Following the asset sale, the remaining portfolio is thought to be valued at around £9.3m. A new standstill agreement was passed by Hatfield Philips, to 16 April 2012. As at the October IPD, the vacancy rate was 66.8%.

DT-3 Loan – €2.44m outstanding (Jan IPD)

Germavest Real Estate, the German closed-ended fund, completed a sale-and-leaseback on portfolio of six Deutsche Telekom German offices, for around €162m.

The portfolio, sold by Deutsche Telekom’s real estate arm subsidiary Sireo Real Estate Asset Management, was financed with a seven-year €120m whole loan by Lehman Brothers on June 2, 2004, which included a €2.8m mezzanine loan.

The Deutsche Telekom loan was originated at a 74.1% LTV.

Only the mezzanine loan was securitised in Excalibur, secured by the offices in Flensburg, Bonn, Freiburg, Stahnsdorf, Ansbach and Regensburg.

The mezzanine loan, priced at 121 bps over three-month EURIBOR, matured on 10 September, 2011, and was transferred into special servicing nine days later.

The portfolio is to be sold to repay the loan, however, negotiations with potential buyers are proving protracted. At last valuation on 31 December, 2007, the portfolio’s value stood at €193.1m.

Concurrently, Germavest Real Estate is attempting a refinancing with lenders.

The annual rent is €14.19m, with an unexpired lease of nine years, as at the October IPD, maturing between 2020 and 2021 with no prior break options.

The Kaufland Loan – €4.66m outstanding (Jan IPD)

ÆRIUM Group, European real estate investor, bought a portfolio of eight Kaufland stores, the discount German grocery chain, in March 2007 financed with a €149.4m whole loan by Lehman Brothers.

The portfolio was bought by the currently €600m 38-strong ÆRIUM Opportunity I fund, launched in early 2006 which targets regular cash yields and capital appreciation, applying a 4:1 leverage ratio.

The five-year loan, which has been extended by six months to December 20 this year, was comprised of a €125m senior loan and a €24.4m B-loan, of which €4.77m was transferred into Excalibur.

The Kaufland B-loan was priced at 4.47% over three-month EURIBOR. The portfolio was last valued on New Year’s Eve 2010 at €139.16m, compared to an outstanding whole loan balance of €135.46m.

The average unexpired lease term across the portfolio is 4.39 years.

The fully let 114,767 sqm-sized portfolio is comprised of eight Kaufland supermarkets in Saxony, Hesse, Berlin, Brandenburg, Saxony-Anhalt and Thuringia.

To be continued ….

Deutsche Bundesbank, Lone Star, Hudson Advisors and Hatfield Philips all declined to comment.

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