Oaktree Capital Management and Patrizia are to finance their £245m purchase of IQ Winnersh, a business park in Reading, with a five-year whole loan for around £175m from Barclays Bank, CoStar News can reveal, concluding a hugely-competitive financing mandate capped by the shallowest mezzanine pricing in recent years.
Barclays Bank is still finalising where exactly the senior and mezzanine splits: a final settlement for the senior tranche is expected between mid-to-high 50s LTV, at between £135 and £140m; and the mezzanine tranche is expected to fall between £35m and £40m.
This would take the total financing to 72% LTV, based on Oaktree and Patrizia’s £245.1m purchase price from SEGRO back in July.
CoStar News understands that the Barclays senior pricing is around 220 basis points over three-month LIBOR, while the mezzanine loan is priced at an internal rate of return (IRR) of around 6%.
While Barclays is expected to retain the senior loan, it is not yet known whether Barclays plans to hold or syndicate the mezzanine tranche.
In an unexpectedly protracted financing process, Oaktree, the 95%-majority equity partner in the joint venture with Patrizia, extended its own decision time-frame, in part due to the surprising volume of competition and unexpected tightening in lending terms which emerged during the process.
The two pairings of underbidders comprised Deutsche Pfandbriefbank (PBB) and Pramerica Real Estate Investors, with PBB offering a 60% LTV senior loan, at around £147m, priced at circa 215 bps, while Pramerica’s circa £24.5m mezzanine loan was priced just under 8% IRR.
In the second pairing, ING Bank and BAWAG offered senior and mezzanine terms up to 70% LTV, respectively, with ING’s senior at 235 bps and BAWAG’s mezzanine around an 8% IRR.
Lloyds Banking Group, Deutsche Bank and Blackstone Real Estate Debt Strategies also offered whole loan terms, while the Royal Bank of Scotland offered solely senior terms and LaSalle Investment Management offered only a mezzanine facility.
The competition to finance IQ Winnersh reflects the present supply of debt capital, relative to deployment opportunities, as well as the pressure to invest ahead of fast-approaching year-end targets.
Margin tightening may just be starting to get ahead of the fundamentals, as the need to deploy debt is prompting ever-more competitive bids from an increasing number of willing lenders all locked in the global search for yield.
Two-sides of the acquisition saga
SEGRO, the industrial REIT which brought IQ Winnersh to market in March, put an asking price of £225m on the 1.27m sq ft Reading business park.
The asking price reflected the carrying value of IQ Winnersh, with a valuation dated to the end of December 2012.
Over the first half of this year, values rose, with a momentum building in secondary locations, such as Reading, which perhaps, at least in part, explains Oaktree and Patrizia’s pricing.
The Oaktree-led joint venture paid £245.1m back in July, which was £20m, or an 8.9% premium to the asking price, reflecting a 5.8% net initial yield.
Cover bids by Harbert with XLB Properties and Apollo Global Management both came in around £225m.
Oaktree and Patrizia’s IQ Winnersh purchase is through a limited partnership, called Winnersh Holdings.
Patrizia, whose 5% stake amounts to just over €3.5m of committed equity, reported in its second quarter results that the joint venture partners consider the average rents across the portfolio are low, relative to the recovery in rental values.
At the time of the acquisition, in a prepared statement, Rob Brook of Patrizia, said: “We believe we are entering a point in the cycle where rental growth appears to be gaining momentum with an increase in occupier activity, and so believe we can benefit from the property’s existing vacancy and re-gear opportunities to drive future income.”
IQ Winnersh has a vacancy rate of 9.7%, and a weighted average unexpired lease term of 8.3 years.
Furthermore, the sale also includes four hectares of adjacent development land, providing opportunity to add value over the long term through developing new space to expand the tenant mix.
IQ Winnersh is a multi-let industrial and warehouse, data centre, offices and retail park developed over a 40 year period with an on-site train station, four-star hotel, conference space and retail amenities.
The park is expected to benefit from Crossrail, the new East to West railway line across London and the suburbs, which will be completed by 2015.
All parties declined to comment.