Redefine International (RDI) has agreed to purchase the Weston Favell Shopping Centre out of receivership for £84m financed with a 25-year fixed rate £50m senior loan from Aviva Commercial Finance.
In addition, Aviva has agreed to write-down £88m of debt secured by two UK regional shopping centres currently owned by RDI, the Grand Arcade Shopping Centre in Wigan and West Orchards Shopping Centre in Coventry.
Aviva has financed RDI’s £84m purchase of Weston Favell, in Northampton, with a £50m 25-year priced at 5.7% per annum fixed cost of debt, over the Sterling UK 2020/2028.
Marginal amortisation kicks in after year five, although is marginal, with the loan maturing in November 2038. The balance of the purchase cost, £34m, will be funded by internal cash resources.
Weston Favell comprises 307,763 sq ft of retail accommodation anchored by a 156,987 sq ft Tesco Extra supermarket which pays £3.4m per annum and has a 14.3 years unexpired lease term.
The centre, which produces a net rental income of £6.4m per annum, was acquired on a net initial yield of 7.2%, after acquisition costs.
The key investment attractions include the centre’s dominance in the wider catchment, the lack of supermarket competition in the north east of Northampton and the strength of the Tesco covenant which accounts for 53% of the net passing rent. The current void rate is 3.4% by ERV and 2.2% by area.
Aviva’s loan will fund on 6 December, aligned to the closing date for the write-down of two existing loans securing Wigan’s Arcade Shopping Centre and Coventry’s West Orchards Shopping Centre.
RDI has negotiated to pay £37m in cash for West Orchards, the negotiated current market value of the shopping centre, from Aviva, which will see the long-dated insurance lender write off £18.6m, reflecting a discount of 33.4%
As a result, RDI increases its ownership in West Orchards from 50% to 100% with the shopping centre now entirely ungeared, saving Redefine £1.7m per annum in interest charges.
Separately, Aviva has agreed to write-off £68m of the outstanding £141.7m senior loan securing RDI’s Grand Arcade Shopping Centre, in return for £7m in cash from RDI and a 50% share of the income and capital generated by the asset.
The carrying value of Grand Arcade is now £73m.
“This £7m effectively gives RDI a £1.7m/50% equity interest resulting in a small £5m/0.5p NAV hit, but importantly save £2m per annum in debt interest costs, allowing RDI to receive £0.8m profit per annum instead of a £1.2m loss,” writes Kate Barlow, an analyst at Peel Hunt.
Effectively, Grand Arcade is now 100% levered but RDI is expecting to be able to lower the LTV over the coming three years materially, driven by a programme of lease re-gearing. Around estimated three-quarters of Grand Arcade’s £7.38m annualised rent roll is up for review in 2016.
In addition, RDI has negotiated five incremental valuation-linked hurdles at which stage the investor can exercise a call option to purchase back further equity stakes in Grand Arcade, at 10% equity stake increments.
Greg Clarke, chairman of Redefine International, said in a statement: “This transaction not only produces a reduction in the company’s see through leverage ratio, but is expected to be earnings accretive from day one.
“The Weston Favell Shopping Centre is dominant in its local area and will benefit from our long term focus on delivering income through focused asset management activity.”