Solutus to begin Beta portfolio sale process after C&W’s £191.4m new valuation

Solutus Advisors will begin marketing the 16-stong Beta UK regional property portfolio, which includes Reading’s Microsoft Campus, this summer after a new Cushman & Wakefield valuation reveals a 42.5% value increase to £191.4m, the special servicer will announce shortly.

Solutus is expected to re-tender for up to two investment sales agents to sell the Beta portfolio in its entirety with an asking price of £200m, reflecting a blended net initial yield of 6.29%, based on a current net income of £11.9m.

However, this net income is expected to rise over time as rental step-ups kick-in, rent-free concessions end and new rent reviews are concluded.

This £200m asking price reflects a £8.55m premium for the sale as a portfolio, according to Solutus.

The 1.18 sq ft Beta portfolio, formerly owned by the Mapeley, has risen in value by £57.15m in the two and a half years to February 2015, according to C&W’s valuation, commissioned by Solutus.

Over this period, however, there has been mixed success in the improvement of the portfolio’s individual asset values.  Full details will be published shortly.

The Beta portfolio’s net income has declined from £14.7m to £11.9m, between approximately October 2012 and January 2015, according to the Situs’ quarterly investor notes for the DECO 8 ‐ UK Conduit 2 CMBS, in which this specially-serviced Mapeley II Loan is included.

A proportion of this £2.8m net income run-off has been redirected as capital expenditure programmes within certain assets in the Beta portfolio. On a gross rent basis, there has been a £3.44m decline to £14.48m, according to the C&W valuation.

Concurrently, vacancy rates have risen from 6.3% to 17.7%. However, FI Real Estate Management (FIREM) has negotiated leases for seven new tenants, accounting for an additional £520,000 in net annual rent as well as re-gearing three existing lease which will improve occupancy.

In a statement, Tim Knowles, managing director of FIREM, said: “We now have deals in solicitors’ hands and ready to complete in the next three months which this valuation cannot include.  This shows that talking to tenants and understanding their needs is how to work property returns.”

Solutus Advisors, indirectly founded by Tim Knowles, appointed FIREM as LPA receiver on the portfolio in January 2013, for which Knowles is also managing director.

Microsoft’s UK headquarters in the Thames Valley, known as Microsoft Campus, is the Beta portfolio’s star asset, representing almost 57% of the portfolio’s value, based on C&W’s new valuation.

Three of the five buildings which make up Microsoft Campus are security of the Mapeley II loan – the 108,942 sq ft building 1; the 80,956 sq ft building 2; and the 56,555 sq ft building 3.

C&W’s revaluation reveals the three buildings are now valued at £108.75m, reflecting an eye-catching 3.95% net initial yield, which is a 32.6% increase on DTZ’s £82m valuation in August 2012.

This valuation is also above the £104.3m price Mapeley paid for the three assets for from a British Land and Teachers Insurance and Annuity Association of America joint venture in December 2005.

C&W’s bullish yield for Microsoft Campus is based on pricing in future increases in net income, particularly over the next 18 months.  Microsoft is committed to two retail prices index (RPI)-linked cap and collar adjustments of between 2% and 4%, in January 2017 and January 2021.

In addition, there is a rent review scheduled for January 2016 while the existing rent-free concessions across the three leases, negotiated in September 2010, end in December 2016.

As a result, Microsoft’s annual rent is expected to rise from its current level of £4.54m to £5.63m by January 2016 and further to £6.48m by January 2017, based on C&W’s assumptions around movements in RPI.  

All in, C&W’s £108.75m valuation – and 3.95% net initial yield – prices-in £1.94m, or 42.7%, in future net income increases over the next 20 months. Microsoft’s leases expire in September 2025.

In September 2013, Solutus began a tender process to enlist an investment sales agent for Microsoft Campus with BNP Paribas ultimately appointed, but Solutus declined to sell instead preferring to burn off the long-dated swap held against Mapeley II Loan, for which the Beta portfolio is collateral security. 

According to Solutus, this swap mark-to market has fallen from circa £24m in November 2012 – almost a year prior to the previous sales trajectory for Microsoft Campus alone – to around £7.5m now.

James Bannister, managing director at Solutus Advisors, added in the statement: “We appointed FIREM to the role of asset and property management of these 16 office assets in 2012. We worked closely with them to retain tenants through re-gearing leases, incentives which have made the tenants invest themselves in refurbishing their office buildings and through taking back leases, refurbishing and re-letting the vacated space.  

“So, it is much more than market forces that has brought us to this point and to a change in the fortunes of Mapeley Beta.  It is strategic teamwork between the special servicing function and the asset and property management operation which effectively provides one platform to drive this portfolio forward.”

About CoStar News

Finance Editor, CoStar News
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