Kennedy Wilson wins single Project Avon tranche with final bids for balance in a fortnight

Kennedy Wilson Europe Real Estate (KWE) this morning confirmed an agreement to acquire a six-strong non-performing senior loan portfolio secured by five UK regional high-tech fire control centres (FCCs) from Lloyds Banking Group for a maximum total consideration of £93.5m.

KW logoThe FCC matured loan pool is a single tranche in Lloyds’ £649.3m Project Avon UK loan portfolio, which in total is comprised of 49 separate loans extended to 24 borrowers and secured by 273 commercial properties.

For a detailed analysis of the remaining Project Avon, please see below.

KWE’s FCC matured loan pool comprises six tranches amounting to £115.9m, implying a discount of 19.3%, assuming the full £93.5m is paid which is subject to “satisfaction of certain conditions in the underlying agreements”, according to a statement by the LSE-listed closed ended investment fund.

A mark-to-market interest rate swap position of £22.8m matured in March.

The 154,079 sq ft five-strong FCCs portfolio, four of which are let to the Secretary of State and one to an arm’s length government organisation, carry a market value of £125.9m, implying that KWE’s maximum price would reflect a 25.7% discount to the latest real estate value.

The FCCs, which are located in Cambridge, Wolverhampton, Wakefield, Derbyshire and Durham, have an average 17-year unexpired lease term and currently deliver aggregate net operating income of £7.15m.

Deloitte, which is selling Project Avon on behalf of Lloyds, has sold this tranche separately from the remaining loan portfolio because the FCC portfolio, which was placed into administration in March 2012, had live fully funded offer prior to the launch of the loan portfolio sale process.

Separate to this external existing offer, Cerberus Capital Management was also an underbidder through the Avon loan sale process.

Final bids for the remaining £533.4m Project Avon, including most recently calculated swap liabilities, are due on 2 June with the final three down to Kennedy Wilson, Oaktree Capital Management and Cerberus Capital Management.

“Today’s announcement is further evidence of the strength of our acquisition pipeline and is consistent with our strategy to invest in real estate and real estate loans with strong fundamentals in our target jurisdictions,” said Mary Ricks, director of Kennedy Wilson Europe Real Estate in a prepared statement published this morning.

“The acquired loan portfolio is secured against assets with attractive yields on long term leases to a strong covenant, and represents a great opportunity to complement our growing European portfolio.”

Two weeks ago KWE, which raised £1bn through an IPO in February, completed the discounted purchase of £119m B-loan, from lenders including French investment bank Natixis, secured by 21 commercial properties throughout the UK consisting of a mix of office, car showroom, leisure, retail and distribution properties.

The junior loans were subordinate to a £258m the Fordgate Commercial Securitisation No. 1 CMBS, for which the Fordgate borrower is the UK privately-owned property company of Moises and Mendi Gertner.

Inside Lloyds’ remaining Project Avon UK loan portfolio

Following the six loan-strong non-performing loan tranche sale to KWE, Project Avon has remaining gross unpaid balance of £533.4m, against a remaining current real estate value of £400.4m across 268 properties.

However, Avon includes two syndicated tranches over four loans which reduce Lloyds’ share to £369.4m, which reflects a portfolio LTV of 144.4%.

The remaining Project Avon, comprised of 43 loans over 23 borrowers secured by 268 UK-wide commercial properties, generates an annual net operating income of £22.2m.

By geography, Project Avon’s assets include 89 properties in Scotland, 66 in London, 29 in the North West, 18 in the South West, 15 in both the East of England and East Midlands, 12 in the South East and a balance of 25 spread throughout the remaining regions.

Within the regional segments, the 170 properties across Scotland, London and the East of England represent £233.4m of Project Avon’s remaining £369.4m real estate value, after factoring in syndicated loan reductions.

By sector, Project Avon’s assets include 187 residential properties, valued at £118m; 24 offices, valued at £72.9m; 17 mixed-use properties, valued at £32.7m; 13 retail properties, valued at £19.5m, eight industrial properties, valued at £29.7m, with the seven remaining assets comprising the £32.1m balance.

Kennedy Wilson, Oaktree and Cerberus submit final bids on 2 June.

About CoStar News

Finance Editor, CoStar News
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