Bank of America Merrill Lynch (BAML) has financed Värde Partners and Kennedy Wilson’s joint venture acquisition of the Britannica fund, which is a portfolio of eight secondary UK shopping centres, with a £163m five-year senior loan.
Next week BAML is to begin the sales syndication process of £63m of the senior loan, priced at just under 325 basis points over three-month LIBOR, with the US investment bank keeping the remaining £100m on it balance sheet.
Värde Partners and Kennedy Wilson’s partnership, an 69% to 31% equity split in Värde’s favour, bought the portfolio, codenamed Project Panther, out of administration in a protracted blind auction process after the initial highest bidder, Praxis Real Estate, withdrew its £250m-plus winning offer over three months ago.
This enabled underbidders, Värde Partners and Kennedy Wilson, to return to negotiations, with Malcolm Shierson and Daniel Smith of Grant Thornton UK, the joint administrators of the Britannica fund, and close the deal.
Until yesterday’s statement, it had been assumed – or understood – that it was Kennedy Wilson which was the majority equity player.
Värde Partners and Kennedy Wilson paid a total of £273m for the eight Britiannica shopping centres, including interest rate swap liabilities, not the headline £250m figure reported.
This £273m total is comprised of £76m of equity from Värde Partners, £34m of equity from Kennedy Wilson, and the £163m BAML senior loan.
Kennedy Wilson reported that the eight shopping centres were purchased for £250m, which implies that the £23m balance reflects the swap breakage costs.
What are the losses to the original Britannica Fund senior bank syndicate?
ING Real Estate Investment Management (REIM), which established the 10-year Britannica shopping centre fund in March 2005, financed the acquisition of the original nine assets, then valued at circa £550m, with around £360m of senior debt led by ING Bank, also including Eurohypo and Deutsche Hypo.
The outstanding debt had shrank to around £320m by this Spring, when the Project Panther sales process was launched by the joint administrators, approximately held: 60% held by ING Bank, or £192m; around 30%, or £96m, was held by Eurohypo bad bank, Hypothekenbank Frankfurt; while the 10% balance, or £32m, was held by Deutsche Hypo.
The total liabilities, therefore, comprised £320m plus the £23m in swap breakage costs, which rank above the senior debt on repayment, and an estimated £2.5m in costs, including agent, legal and administrator fees in selling Project Panther portfolio.
Based on the above, this implies are collective loss borne by ING, Hypothekenbank and Deutsche Hypo of £72.5m on the outstanding £320m, or a recovery of 77.3%.
Acquisition fortuitously timed ahead of 2014 retail recovery?
Värde Partners and Kennedy Wilson’s UK regional shopping centre portfolio comprises: County Square in Ashford, The Strand in Bootle, The Gates in Durham, Rivergate in Irvine, The Haymarket in Leicester, Spindles and Town Square in Oldham and Swansgate in Wellingborough.
Located throughout England and Scotland, the portfolio of properties totals 2.3m sq ft, and 85% of its gross income comes from national retailers such as Debenhams, Marks & Spencer, Asda, Tesco, River Island and Primark.
The asset management plan, Kennedy Wilson said yesterday in a statement, includes increasing occupancy, extending short term leases by attracting a broader range of retailers, upsizing key anchor stores, improving the food and leisure offering and upgrading the physical environment of the mall areas.
“In addition to asset management upside, there is the opportunity to benefit from improving economic and market conditions, including rental value improvement and yield compression to add value,” said Mary Ricks, president and CEO of Kennedy Wilson Europe in a statement.
Indeed, popular wisdom seems to imply that the London office-led recovery in capital values, which first began almost four years ago, is finally now trickling down into secondary properties and locations.
“While we leave it to others to call the bottom of the UK secondary commercial property market, we think on a number of metrics – ranging from reports on the regional property markets to sales prices being achieved in liquidations – [that] there are increasing signs an inflection point (of sorts) has been reached, with office leading the way,” wrote Deutsche Bank research analysts, Paul Heaton and Conor O’Toole, in a research note published yesterday.
Heaton and Conor O’Toole continued: “We would attribute this to a number of factors – increased lending, general increased risk appetite, an upturn in the UK economy, and recent legislation easing the planning process in converting offices to residential.
“In our observation retail is still lagging behind, but it would seem rational to assume – given the general sensitivity of secondary pricing to the UK economy, and also increasingly positive signs on consumption growth – for the upturn to also spread to retail in the coming years.
Consumer confidence is improving, Heaton and Conor O’Toole pointed out, and furthermore, inflation has started falling in the second half of the year, while employment levels are rising and household income is growing at a rate of more than 5%.
In addition, asset prices have been supported by central bank and government policies, with consequent wealth effects which are all positive for consumer spending,
“Consequently,” concluded Heaton and Conor O’Toole “we think this positive backdrop may lead to the retail sector surprising to the upside in the coming years.”