Oaktree Capital Management and Patrizia have received wide interest from across the spectrum of lenders for the circa £352m financing of the three-strong MEPC UK business park portfolio, in what has become the summer’s most competitive financing mandate.
Just under two weeks ago, Oaktree Capital Management and Patrizia won the competitive blind auction to acquire three business parks from MEPC – in a process dubbed Project Aviemore – for a price now believed to be £440m.
The three regional business parks are spread over 4m sq ft of mixed-use space leased to 510 tenants. They comprise:
- the 2m sq ft Hillington Park in Glasgow;
- the 1.2m sq ft Birchwood Park in Warrington, 20 miles east of Liverpool; and
- the 820,000 sq ft Chineham Park in Basingstoke, 17 miles south west of Reading, which includes MEPC as a tenant.
The weighted average unexpired lease term (WAULT) is 5.3 years to expiry and 4.1 years to break clause, while the portfolio occupancy levels is 91% and the annual rent roll is £33m.
CoStar News understands Oaktree and Patrizia have already received terms sheets from investment banks, UK clearing banks as well as debt funds at a requested 80% LTV, which implies a whole loan financing ticket of £352m.
There is a range of financing strategies under consideration, including slicing the £352m whole loan into a 65% LTV senior loan, of £286m, and a £66m junior loan up to 80% LTV detachment point.
A number investment banks are understood to have submitted term sheets for the whole loan which a CMBS exit strategy in mind for the senior loan along with a syndication of the junior loan.
Citigroup, Morgan Stanley and Deutsche Bank are understood to be among the investment banks which have already submitted initial term sheets. The most relevant comparable for this financing solution is, of course, Deutsche Bank’s £580m Chiswick Park whole loan refinancing for Blackstone in June last year.
The £380m senior loan, originated at sub 250 basis points over three-month LIBOR, was securitised in the unrated DECO 2013-CSPK CMBS, while a £200m mezzanine loan was placed with a separate account of Qatari Investment Authority (QIA) capital managed by Apollo Global Management. Based on the revaluation at the time of the refinancing, the whole loan was 81.35% LTV.
An alternative strategy is for one lender to write a whole loan and hold and syndicate according to their business models.
CoStar News understands that, inter alia, term sheets have been submitted by three UK clearers all with an originate-to-distribute strategy in mind – Royal Bank of Scotland, Lloyds Banking Group and Barclays Bank – in addition a financing offer by originate-and-hold insurance lender, M&G Investments.
Mezzanine lenders in the mix are thought to include DRC Capital, LaSalle Investment Management and Pramerica Real Estate Investors.
While comparables have been made between Project Aviemore and Oaktree’s £245m iQ Winnersh acquisition last summer, which was financed by Barclays Bank and a Korean pension fund on the mezzanine, in a separate account managed by Europa Capital Mezzanine, the recent Mall refinancing is also a relevant reference point.
The location of the assets – Glasgow, Warrington and Basingstoke – is likely to preclude interest from Far Eastern mezzanine lenders, CoStar News understands.
Like with Project Aviemore’s three business parks, the six regionally spread UK shopping centres owned by Capital & Regional’s the Mall Fund require ongoing intensive asset management to maintain occupancy levels and sustain – and improve – the rent roll.
Capital & Regional refinanced the Mall Fund with a £350m two-tranche five-year Morgan Stanley senior loan at a blended initial margin of 1.9%. While there is no junior loan, the initial senior LTV was 75%.
The Project Aviemore financing is one of two UK commercial real estate transactions which the broader debt and investment markets will follow closely – alongside Credit Agricole and Deutsche Bank’s £750m single-tranche AAA Westfield Stratford City CMBS.
In respect of Project Aviemore, the question is how comfortable will lenders be financing non-traditional regional assets at pre-crisis leverage points in which the sale price was bid up 10% on the initial guide price while debt margins continue to tighten.
Seven years on from the peak of UK commercial property values, lenders will be calculating the probability of a market correction within the five-year duration of the requested debt facility and what the appropriate return for that risk now is.
Oaktree, the majority equity partner in the Project Aviemore joint venture acquisition, is expected to achieve a senior margin of between 175 and 200 basis points, while the mezzanine loan is likely to price on an internal rate of return of between 7% and 8%, CoStar News understands.
Another peripheral consideration is the currency risk associated with a potential break-up of the United Kingdom in September’s Scotland referendum. Lenders could either insert market flex clauses to manage the risk that Scotland left the UK, and with it, the currency union or originate a separate loan secured by Glasgow’s Hillington Park.
All parties declined to comment.