DownloadBAML’s equity research team has highlighted concerns over Hammerson and Allianz Real Estate’s certainty of execution in converting the planned €1.85bn Project Jewel loan portfolio into direct property ownership.
NAMA selected Hammerson and Allianz as preferred bidders after the investors teamed up and outbid a joint bid by Hines and Kuwait Investment Authority, and Colony Capital.
Hammerson stated its confidence in securing the underlying assets by next summer consensually with underlying borrowers, with negotiations expected to be led by Joe O’Reilly’s Chartered Land, although there are a number of comlpexities which lie ahead.
Project Jewel is a portfolio of loans secured against:
- Dundrum Town Centre, the centrepiece asset, and Dundrum Phase 2 development site. (Legacy owners are: the late Liam Maye (40%), Joe O’Reilly’s Chartered Land (40%) and John Fitzsimmons (20%));
- a 50% stake in The Ilac Centre in north of Dublin City (Legacy owner is Joe O’Reilly’s Chartered Land. Seperatley, Irish Life still owns 50%);
- a 50% stake in The Pavillions shopping centre in Swords to the north of Dublin (Legacy owner was Joe O’Reilly’s Chartered Land. Seperatley, Irish Life and IPUT each still own 25%); and
- a 100% of Dublin Central, a 5.3 acre development site in the centre of Dublin close to the The Ilac Centre (formerly 100%-owned by O’Reilly’s Chartered Land).
All the loans are cross-collateralised. Chartered Land is understood to be representing all legacy owners.
BAML’s research note highlights “risks in the execution of the business plan” and “remain concerned that these risks are perhaps not reflected in the price paid”.
The risks citied are:
- the issue of capital gains liability being due on Dundrum Town Centre (DTC), which potentially could imply equity remaining in the vehicle which owns the underlying Jewell assets;
- avoiding a ‘Project Tower’-like scenario in which the existing borrowers successfully challenges Hammerson and Allianz’s loan enforcement in the Courts; and
- Irish Life and IPUT exercising their pre-emption rights over the respective equity ownership in The Ilac Centre and The Pavillions shopping centre.
Based on BAML’s analysis of Hammerson’s published rental breakdown for the Project Jewel assets, the Dundrum assets appear to be valued at €1.28bn, or €640m each, which would imply an initial yield of circa 4.7%. This is based on the Dundrum assets accounting for €29.7m of Project Jewel’s €45.1m portfolio annual rent.
The research note, authored by research analysts Mike Bessell and Samuel Warwood, states: “We see [a 4.7% NIY for Dundrum Town Centre] as clearly too low for an asset of this quality.”
The missing piece of the jigsaw, BAML writes, is the capital gains liability to be borne by the JV, which BAML assumed could be as much as €200m higher.
BAML continues: “The issue of capital gains liability being due on DTC asset begs a deeper question, as it alludes to one or more of the current shareholders still having equity value in the vehicle, certainly at higher valuations on the assets.
“In turn, this is likely to increase the sensitivity of the shareholders to the valuation being applied to the assets, thereby increasing the complexity of the negotiations to secure the underlying real estate.”
However, given that given O’Reilly’s debt on Dundrum, Swords and Ilac is all cross-collateralised, if equity value remains at Dundrum it is wiped-out by the significant liabilities outstanding at the other two centres. Therefor, arguably, overall, O’Reilly’s loan portfolio would still be under-water.
In a conference call with analysts on the day the Project Jewel acquisition was confirmed, Hammerson CEO David Atkins described the buying of distressed debt as a “fairly well trodden path to acquiring real estate,” citing the REIT’s recent acquisition of an IBRC loan interest in The Whigfit Centre in Croydon as an example.
BAML note replied to the point: “While we agree that there is a proven path to securing the underlying property assets from a distressed loan, in this instance the process is made more complex by the number of differing stakeholders, with differing economic interests and potentially differing desired outcomes.
“We note that while this is generally a proven path to securing the underlying assets, there have been high profile, well-publicised cases in Ireland earlier this year where borrowers have taken to court and successfully challenged the process.
“On the change of ownership of the two smaller shopping centres the existing shareholders have a right of pre-exemption. At some point it will be necessary for the JV to convert the debt holdings to equity, at which point Irish Life and IPUT would have the right to convert the JV’s shareholding.
“Hammerson has stated that it is confident that Irish Life and IPUT will continue to partner Hammerson, but we note the risk remains of the pre-emption rights being exercised.
“We believe that the returns to Hammerson from the transaction are extremely sensitive to potential conflicts of interest that remain to be resolved. We would highlight that this is not a done deal until Hammerson and its JV partner [Allianz] have completed the process of securing ownership of the underlying assets.”
Mike Prew, equity analyst at Jefferies, wrote that Hammerson’s deep dive into Dublin isn’t is “certainly an audacious move but we wonder if Allianz got the better part of the deal by JV-ing the super prime Dundrum centre, while [Hammerson] is also buying into the other Dublin assets with little obvious growth to net present value.
“If [Hammerson’s] core income growth doesn’t pick up then the business risks becoming this cycle’s Mapeley, i.e. an equity consumptive business which raises equity and then pays it back to shareholders a little at a time (dividends) and when that runs out it’s like Oliver Twist: ‘Please sir may I have some more’. That’s REIT Corbynomics.”
Hammerson declined to comment beyond its public statements to date, all other parties declined to comment.