Colony Capital completes £311m all cash Gemini swoop after Värde Partners’ exclusivity period expires

Colony Capital exchanged contracts on Friday night to acquire the remaining Gemini UK commercial property portfolio for £311m, after Värde Partners’ exclusivity period expired 10 days ago, CoStar News has learned.

Colony Capital logoColony, in partnership with asset manager Quidnet Capital Partners, has acquired the 24-strong regional secondary property portfolio all-cash, closing the deal in five days after the private equity firm’s revised offer was accepted on Monday.

CoStar News understands that Colony marginally raised its offer beyond its original and even Värde – which had offered £310.5m – to conclude the deal.

The anticipated recovery for noteholders in the Gemini (Eclipse 2006-3) PLC loan is, therefore, marginally improved as a result.

The sale is expected to be confirmed as early as this afternoon.

The 11th hour win for Colony came after a protracted due diligence period by Värde, and its asset management partner APAM.

Financing risk was also a hurdle. The portfolio was well known to prospective lenders given its status as one of the case studies in UK real estate of pre-crisis financial over-engineering.  Among potential financers, the Gemini portfolio certainly carried some baggage.

Lenders’ cautious attitude to the portfolio was also compounded by the receding of finance liquidity and bank appetite to lend, which has risen significantly in the period since Värde was selected as preferred bidder at the end of August.

Just under two weeks ago, CBRE, mandated by CBRE Loan Servicing and Deloitte to sell remaining underlying property portfolio security of the Gemini CMBS loan, pulled the proposed deal with Värde and re-offered the portfolio to underbidder, Colony.

Colony is expected to seek to finance Gemini at a later date.

The sale to Colony reflects a sub 9% net initial yield and reflects around a 10% premium to GVA’s £278.6m valuation in March 2015. The asking price was for offers in excess of £300m.

For Colony, this reflects its fifth UK deal, including the £97m Silberbird portfolio from RBS’ West Register.

Underbidders also included Fortress Investment Group with M&M Asset Management and Ardstone Capital which both bid around £300m, CoStar News understands. Ardstone is believed to have partnered with Sherman Financial Group on the bid. CMBS restructuring proposals were strictly not considered.

The four-strong finalists were selected at the end of July after CBRE which secured 10 indicative bids, with the lowest bid around £270m.

The Gemini (Eclipse 2006-3) PLC loan has an unpaid balance of £850.4m. Value in the securitisation breaks in the class As, which had an unpaid balance of £569.2m.

The Gemini portfolio includes several challenging assets, due to expiring leases and rising vacancy rates.

Difficult assets include:

  • the 135, 712 sq ft Callendar Square Shopping Centre in Falkirk, which has a vacancy rate of 27%;
  • the adjoining The Galleries, and Marketgate and Makinson Arcade shopping centres in Wigan, across 438, 540 sq ft, which has a vacancy rate of 22%;
  • and the 130, 874 sq ft Renfrew Retail Park near Glasgow, which has a 37% vacancy rate.

Certain other assets in Gemini have expected further lease run-offs. The remaining portfolio has an annual rent roll of £29.25m, however, there is currently a rental shortfall of £3.37m. The average weighted unexpired lease term to break and expiry is 6.06 and 6.98 years, respectively. The portfolio level vacancy rate is 6.87%.

To put into context the portfolio’s fall in value since its 2006 pre-UK commercial property crash valuations, the 24 assets parcelled up for a portfolio sale were valued nine years ago at £823.67m.

According to the August quarterly investor note, published on Friday, the interest rate swap mark-to-market (MTM) increased by £8.3m to £90.0m, in the month to 17 August, as calculated by CBRE.

The net proceeds after costs and liabilities will be distributed to class A noteholders which are believed to include the non-core unit at Deutsche Bank and HSBC, CoStar News understands.

Proceeds from the sale of Gemini assets will only go to class A noteholders, following a ruling by the High Court of Justice Chancery Division at the end of September.

In his draft judgement, Mr Justice Henderson said: “I accept the submissions of the class A noteholders that the consequences of treating sale proceeds and surrender premiums as principal are well in line with what the parties might reasonably be expected to have contemplated when the securitisation was put in place and the notes were sold to investors.”

All three major rating agencies, Standard & Poor’s, Moody’s and Fitch Ratings, awarded the class A notes – as well as the Bs – AAA ratings for investment grade level risk in November 2006.

All parties declined to comment.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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