National Australia Bank sells £140m notes in CityPoint CMBS to Morgan Stanley

National Australia Bank (NAB) has sold a £140m slice of the class A notes in Ulysses ELoC 27, the securitisation of a loan secured by CityPoint tower, formerly owned by Beacon Capital Partners, to Morgan Stanley’s CMBS trading desk at 92 pence in the pound.

Morgan Stanley (correct)Morgan Stanley paid £128.8m for the class A slice, compared to the cover bid of 90.65 pence in the pound, which valued the class A paper at £126.9m.

NAB, which began a permanent exit from UK commercial property lending in April 2012, has sought to recoup £128.8m now, instead of waiting until CityPoint tower sells – which is widely expected to be next summer – at which point NAB would have virtual certainty of a 100% recovery on the £140m outstanding class A stake.

The preference for a sale today, crystallising a £11.2m loss on the notes, likely reflects NAB’s ‘time value of money’ – were investors are motivated to accept a palatable loss in return for quicker capital recovery.

For Morgan Stanley, this is a straight secondary CMBS trade, and will unlikely wait out the position until the 591,723 sq ft CityPoint tower sells, and is instead thought to be prepared to sell the notes again already.

Even a 0.5% increase on the sale price would reflect a £700,000 profit for the trading desk, although the current £1.9m price difference between Morgan Stanley and the cover bid suggests the bank’s trading desk is – at least for now – someway above market value for the notes.

Leasing news could yet help or hinder Morgan Stanley’s trade.

CityPoint was last valued at £407.5m, as at 20 December 2012, according to the latest quarterly investor note, implying an initial yield of 5.53% based on net rental income in the quarter of £5.6m, with an average remaining lease term of 6.34 years and a vacancy rate of 6.96%.

Subsequent to which, US law firms, Willkie Farr & Gallagher LLP and Winston and Strawn LTD recently signed new 10-year leases, with break options in year five, which represent £1.7m per annum of rental income for CityPoint and further reduce the vacancy rate down to 4.5%.

Based on the additional leases and rental income, Bank of America Merrill Lynch CMBS analyst Mark Nichol estimated a current value of CityPoint of £427.8m, assuming a static initial yield since last December.

Nichol wrote in an investor note, published on Monday: “There are two relatively large tenants with rent reviews scheduled before the legal final maturity date in 2017.

“London CityPoint Centre Limited occupies 63,471 sq ft and has a rent review in December 2015. Currently they are paying £35.8 psf by our estimate. Assuming this increase to £53.6 psf, in line with the latest new leases at CityPoint, the property’s rental income could increase by £1.1m per annum, which could create upside for the property value, in our view.

“Stemcor Holdings Ltd occupies 30,377 sq ft and faces rent reviews in May 2016 and June 2016. Currently they are paying £55.3 psf by our estimate and we see little reversionary potential from the rent reviews.”

In addition, the real game-changer for CityPoint tower’s valuation is whether Beacon and CBRE, who are have been appointed by receivers Andrew Quinn and Steven Hunt of KMPG to “enhance the value” of the CityPoint tower through re-gearing leases and selling the vacant space,  can negotiate the removal of anchor tenant Simmonds & Simmonds’ break clause.

Simmonds & Simmonds occupy 255,321 sq ft, or 43.1% of the total lettable space, at an annual rent of £11.13m, reflecting 41% of CityPoint tower’s annual £26.8m rent roll. The final maturity of Simmonds & Simmonds’ lease is March 2025, but the break clause can be triggered by five years earlier, in March 2020.

The difference between a Simmonds & Simmonds’ lease with around 5.75 years remaining or 10.75 years remaining would be considerable.

Beacon bought Citypoint tower in April 2007 for £650m from a consortium of investors – comprising Tishman Speyer, Caisse De Depot Et Placement Du Quebec, Schroders and UBS Global Asset Management – in what was then the largest City property deal. This was later eclipsed by the Citigroup tower purchase for £1bn.

The Citypoint tower loan was securitised by Morgan Stanley in July 2007, in the £429m Ulysses ELoC 27 CMBS, in addition to which there was a two-tranche £106m junior loan, of which £18m was repackaged in a B-Loan Repackaging Programme, called Hillenbrand Partners.

The securitised loan’s LTV is at 96%, while the whole loan is at 119.7%. The loan matures on 21 July 2014.

Morgan Stanley Mortgage Servicing (MSMS), the special servicer on Ulysses ELoC 27, appointed Knight Frank early last year to ascertain feasible disposal strategies of CityPoint tower. After a restructuring proposal was blocked by the junior lender, Mount Kellett, MSMS appointed KPMG’s Quinn and Hunt.

While Beacon’s equity is wiped out, its interest remains in providing a capex facility and acting as joint asset manager.

Mount Kellett has been attempting to sell its out-of-the-money £106m junior loan for several weeks.

All parties declined to comment.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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