Inside Propertize’s complex €5.5bn Project Swan corporate sale

Bidders have approximately two weeks to submit first round indicative bids for Propertize, the Dutch State-owned real estate bad bank, for which the floor price for a viable trade looks to be around €3.1bn.

PropertizeThe proposed private auction sale of the shares in Propertize, in a process dubbed Project Swan, is complex and a successful trade is far from certain.

Propertize was born out of the nationalisation of SNS Bank’s troubled property finance division with a 10-year wind-down mandate. The decision was based on a Cushman & Wakefield report commissioned by the Dutch State, which estimated the total expected loss on the portfolio at €2.8bn.

Propertize has since reduced the expected loss down to €2.1bn, of which €1.9bn of losses have been incurred to date.

Following record capital flows into European real estate, for the purchase of real estate loans and assets, as well as rising valuations and improving fundamentals, the Dutch government sanctioned a fast-track sale in December. Lazards in Germany and Holland was appointed to run the process, after an initial exploratory mandate last August.

The motivation for Dutch State is easy to see: the quicker the trade the lower the discount the bad bank has to take to sell its loan book, which will only deteriorate further over time as more and more loans hit maturity and fall into default.

Several small income-producing portfolios have already been sold, including the Woningportefeuille Nederland 976-unit multi-family portfolio to Round Hill Capital for €89m in December 2014. Such deals have increased the proportion of NPLs over its brief life as a bad bank.

First round, non-binding bids are due 15 February.

NL Financial Investments (NLFI), the Dutch State-owned financial entity which owns Propertize, will be seeking a 100% repayment on the approximate €2.6bn in outstanding Medium Term Notes (MTNs) and Euro Commercial Papers (ECPs) which financed the acquisition of the Propertize loan book.

In addition, the Dutch State will be expecting the return of the €500m equity capital injection provided to Propertize, through NLFI, at the end of 2013.

Any discount on this capital structure would make a trade non-viable, it is believed.

Propertize is comprised of €5.5bn split across performing loans, non-performing loans and Real Estate Owned (REO) entities, which own direct real estate, secured by more than 14,000 properties. The breakdown is as follows:

  • PERFORMING SEGMENT: €1.9bn in performing loans across 11,215 properties over 698 facilities with an appraised real estate value of €2.7bn, reflecting a blended LTV of 70% and an average size of €2.7m per loans. The weighted average maturity is August 2018.  Within the performing segment, approximately €305m of loans are above 100% LTV, while another €821m are between 75% and 100%.  By appraised value, the collateral sector split is: €927.9m (34%) residential investments; €848.7m (31.1%) retail; €403.9m (14.8%) offices and €349.3m (12.8%) industrial. Almost 84% is in the Netherlands. 
  • NON-PERFORMING SEGMENT: €3.26bn in non-performing loans across 2726 properties over 310 facilities with an appraised value of €1.86bn, reflecting a blended LTV of 175% and an average size per loan of €10.5m. The weighted average maturity for the loans is December 2015. Approximately 85% of the loans are above 100% LTV, including 54% above 150% LTV.  By appraised value, the collateral sector split is: €720.9 (38.7%) offices; €383.8m (20.6%) retail; €257.1m (13.8%) residential investments; €231m (12.4%) industrial and €137.9m (7.4%) land. Almost 82% is in the Netherlands.
  • €300m in REOs, the vast bulk of value comes from the largest eight REOs which account for €285.4m in appraised value, delivering €14.4m in annual rent. Almost 50% is in retail assets and 43.7% is in offices. Nearly 60% is in the Netherlands.
  • Approximately 178 full time staff, comprising management, the loan servicing, asset management, portfolio management as well as operations and back office functions.

The issue of staff retention, under new ownership, could be contentious given that the number of employees far exceeds the need under private equity ownership. Bidders are likely to seek bilateral talks with the Dutch State regarding these ongoing legal liabilities in the event of a sale.

Lazards has stipulated that the first round indicative bid stage must not include joint venture partnerships. However, partnerships are already being prepared in anticipation of progression to the second round.

CoStar News understands that early stage expected bidders and partnerships include:

  • Cerberus Capital Management with Goldman Sachs and Valad Europe;
  • Lone Star with JP Morgan and Mount Street;
  • Apollo Global Management;
  • TPG with Patron Capital;
  • Davidson Kempner and CR Investment Management.

In addition, there are several other bidders interested in part of the book that could well form joint ventures in future.

These include: NIBC, which is expected to bid for the residential book; and CR Investment Management, which is thought to also be separately bidding for the loan servicing platform on a standalone basis, leaving it largely intact.

In addition, private equity funds such as Oaktree Capital Management, Colony Capital and Kildare Partners all are thought to remain interested.

Fundamentally for prospective bidders, this trade centres on the purchase and refinancing of a balance sheet of real estate loans. The residential portfolio could, at least in part, be refinanced as a securitisation, through an RMBS.

The appraised value of the residential book, across performing and non-performing, is approximately €1.2bn, reflecting 26% of Propertize’s €4.6bn property portfolio. The winning bidder or bidders may seek to refinance just the performing residential book which is sufficiently below 100% LTV, for best price execution.

The remaining book, including €1.2bn in retail properties by appraised value, €1.1bn in offices and €0.6bn in industrial properties, would likely require medium term finance to support the winners’ business plan.

This would include executing discounted purchase offers (DPO), targeted asset management strategies to increase exit sale prices as well as wholesale-to-retail disposals of individuals’ loans and underlying property portfolios to smaller investors across the risk spectrum.

All parties declined to comment.

About CoStar News

Finance Editor, CoStar News
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