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Blackstones European property trust

Blackstone Real Estate Debt Strategies (BREDS) has enforced over the Invista European Real Estate Trust (IERET) after an unsuccessful portfolio sale or refinancing and the material deterioration in the rental forecast for the remaining mixed-use Continental property portfolio.

IERET’s property portfolio, 26 mixed-use secondary commercial properties managed by Internos Global Investors, is secured by an outstanding €168.7m whole loan which has been in default since May.

BREDS, as the mezzanine lender, has agreed to standstill agreements during this near four month period to provide IERET with time to pursue a portfolio sale or refinancing, aided by Eastdil Secured which was appointed by IERET last November.

The property portfolio has fallen by five properties to 26 and valued at €226.15m as at 30 June, according to Savills. This implies a current whole loan LTV of 74.6%, but IERET is in breach of interest cover and debt yield ratio covenants – and the outlook for the portfolio is about to worsen.

In July, IERET confirmed a tenant default had occurred as well as “the unexpected exercise of lease breaks”.

The consequence of these two post-quarter events had “led to a material reduction, in the absence of new lettings, in forecast rental income in 2016”, as reported this morning in IERET’s interim results which accompanied a notice stating BREDS loan enforcement.

IERET’s forecast annual gross rental income is expected to fall by €4.8m, or 26%, from 30 June 2015 to 1 January 2016, while portfolio vacancy is expected to rise to rise to 26%.

IERET’s successive standstill agreements expired at midnight last night with BREDS this morning enforcing over its security which extinguishing the outstanding level of debt and leaving the company without any borrowings and solvent, but without any expected value for shareholders.

As a result, IERET’s intends to seek the approval of ordinary shareholders for a voluntary liquidation.

IERET reported in a statement to the Stock Exchange this morning: “Although the mezzanine lender actively supported the company’s efforts to conclude a transaction, those efforts were ultimately unsuccessful and consequently, in the light of (amongst other things) increasing projected cash shortfalls, it decided to enforce its security by way of sale in a manner which left the company solvent, but without any value to distribute to shareholders.”

Under the terms of its loan agreement, BREDS could have alternatively opted to the right to apply a default margin which would have increased IERET’s whole loan margin by 538bps to 13.08%.

The loan enforcement by BREDS involves the transfer of the shares and all debt interests held by the IERET in each subsidiary. Prior to enforcement, BREDS issued IREIT default interest in the amount of €790417.97, as at the end of June.

Earlier this summer, in the second quarter, IERET had confirmed in its half year results just under four months ago that Eastdil has sourced “serious expressions of interest” – ranging from a refinancing of a portion of the outstanding mezzanine loan and the sale of the underlying property portfolio.

BREDS agreed an IERET in May 2014, concluding in the December of the same year, initially extending a €222m whole loan, priced at 770 bps, and subsequently tranched a €100m senior loan and sold it to BAML.

IREIT’s refinancing with BREDS extricated the loan from the Project Charlie loan portfolio sold by Lloyds Banking Group to Cerberus Capital Management in November 2014.

Since the refinancing in, IERET has pursued a business plan centered on consolidating the portfolio around core logistics and enhancing the value of the German retail properties through selective capital expenditure.

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