A link-up with US REIT manager American Realty Capital has given the dealmakers behind Moor Park Capital Partners access to a deep pool of US retail investors’ money, reports Jane Roberts
A single McDonald’s fast-food restaurant in Carlisle is not your typical Moor Park Capital Partners acquisition. The sale-and- leaseback specialist, set up in 2006 by a trio of former Nomura International dealmakers, usually tilts at much bigger targets.
However, the McDonald’s in question is just the start of something more ambitious. It is the first European asset bought for a US investment vehicle managed by American Realty Capital (ARC), which has hired Moor Park as its exclusive European operating partner.
While ARC’s investors may not have heard of Carlisle, they doubtless will be familiar with Ronald McDonald.
ARC runs private REITs in the US and its link-up with London-based Moor Park is for its first foray into investment outside the US. Called ARC Global Trust, the REIT will acquire a portfolio of sale-and-leaseback properties, diversified by credit risk, industries and sectors, and countries.
Half of the portfolio will be in the US and 40% in Europe, with the balance invested elsewhere internationally (as measured by net operating income).
Like Moor Park, ARC is a new business also founded in 2006. It specialises in raising large sums from retail investors and in six years has become one of the largest, if not the largest, source of unlisted retail capital in the US (see panel below).
Gary Wilder, who co-founded Moor Park with Shemeel Khan and Jagdeep Kapoor, is very positive about the ARC strategy. He says ARC raised around $3.5bn last year for other property investment products and aims to raise $400m-$500m this year for Global and another $1bn next year.
“It’s an incredibly professional process and I think it is the future,” Wilder says. “Others, for example KKR with Charles Schwab, are reaching out to retail capital. For us, it is an extension of our platform into a very exciting area in terms of investor base.”
Before clinching the ARC mandate and adding a new pool of capital to its armoury, Moor Park’s strategy was to match non-discretionary equity capital with sale and leasebacks, on a deal-by-deal basis.
A focus on finding deals
The partners eschewed large funds, mainly, Wilder says, “because raising private equity capital in this market for a discretionary fund is very time-consuming and not something we want to spend time on.
We would much rather focus on finding and executing deals. Plus these are very big-ticket transactions and you would need a very significant fund to be able to meet the diversification issues.”
Instead, the business has worked with a tight-knit group of investors, some of whom have participated in multiple deals. They are thought to include New York hedge fund Och-Ziff and Anthony Lyons’ and Simon Conway’s Matterhorn Capital, as well as London & Regional, London-based Ombeter Properties and Fortis Fund of Funds.
“The investors we have relationships with want to deploy their capital, be close to underwriting the transactions – to ‘kick the tyres’ – and keep the pool of investors in a particular deal to a handful,” Wilder says.
“We maintain a constant dialogue with them and when we identify a deal that fits their strategy, we present it to our pool of non-discretionary investors.”
Since leaving Nomura, Wilder, Khan and Kapoor have structured three large sale-and-leaseback deals and two smaller transactions as Moor Park. The firm’s first two deals, in 2007, were portfolio sale and leasebacks, of Max Bahr’s German DIY stores, for €766m, and later that year, of 86 German and Dutch Accor hotels, for €797m.
The third large sale and leaseback was of 378 Banco Sabadell branches in Spain, acquired in 2010 for €403m. The smaller deals, with Matterhorn, were the purchase in 2009 and sale a year later of the O2 leisure development on London’s Finchley Road, and of three Spire private healthcare centres.
Moor Park will continue this mainstream business, seeking more large, bespoke sale-and-leaseback deals and is tipped as a bidder for the Malmaison and Hotel du Vin UK hotels, which MWB’s administrator is selling.
But the complex nature of such deals means that about 90% of the potential opportunities Moor Park looks at fail to come to fruition.
However, last month, it ended a deal drought with a fourth big portfolio purchase, with Spire Healthcare. The £700m sale and leaseback of 12 hospitals is also notable because the backer is a new, blue-chip investor for Moor Park: Malaysian pension fund Employees Provident Fund.
EPF has invested around 80% of the £300m of equity in the deal, while Och-Ziff and Italian wealth manager GWM invested £30m. The £400m capital balance is a loan via EPF’s banking relationship with Standard Chartered, at a margin of about 300 basis points and a 55% loan-to-value ratio.
While others were interested in this latest acquisition, Wilder says the competition for such large deals is much reduced since the credit crunch.
“Before the credit crunch a lot of deals were driven by access to high leverage and very little equity, and a lot of people were able to play. Now only a small number can participate, given the leverage levels and quantum available.”
Early acquisitions highly leveraged
Some of Moor Park’s early deals were also highly leveraged. The acquisition of 65 Max Bahr DIY stores, with new 20-year leases to the retailer, plus 27 non-core properties, was made alongside Praktiker, which simultaneously bought the operating company.
Moor Park and its clients put €92m of equity into the €851m deal. A refinancing months later with ABN Amro increased the debt by €120m to €872m and realised a 50% gross internal rate of return on the initial investment.
Since then the stores’ value has declined sharply and last October Royal Bank of Scotland, which inherited ABN Amro’s debt, put the portfolio into administration. Wilder says only: “Our investors didn’t lose money”; the firm still manages the assets for RBS, which is said to be in no hurry to sell them.
The 2007, €766m Accor hotels acquisition was also financed with around €100m of equity, but a lot more has been invested since, with Accor, in capital expenditure, which was part of the original deal underwriting. Moor Park and its investors had originally hoped to exit this investment in 2012.
“We have had quite a lot of enquiries about acquiring the portfolio,” says Wilder. “We’re considering whether to sell as a whole or in parts, or to refinance.”
Investors in the Banco Sabadell portfolio are also seeking a private equity-style return over five to seven years, while the bank wanted to realise capital from real estate held below market value for tax purposes.
“That was a different deal, though,” says Wilder, “as we bought 378 branches worth around €1m a piece, all on new, long leases. It was very much underwritten on the break-up of the portfolio over time through individual and smaller portfolio sales to investors looking for a real estate-backed, fixed-income type return.”
So far, 68 have been sold and Wilder says interest has picked up since market sentiment about Spain improved a little in the last quarter of 2012.
What all the deals have in common is that they are very credit intensive: “Investors have to be comfortable with the covenant and the underlying asset class,” he says.
To extract future value from the property to boost returns, they have to be operating businesses that can grow, too – a lesson learned from the Southern Cross nursing homes collapse last year, which Moor Park was not involved in. As well as that deal being highly leveraged, the rents under the sale-and-leaseback agreements were also set too high and turned out to be unaffordable.
“As a firm, we like healthcare,” says Wilder. “With Spire, given the nature of the investor, there might be opportunities over time to add assets.
In the UK, private health-care is still a very small part of total spending and we feel there are opportunities with other companies too. We would like to do more in Europe, given its ageing population.”
ARC has REIT formula for targeting US retail investors
Moor Park’s new partner, American Realty Capital (ARC), raises capital via agreements with broker-dealers who sell the product through their financial adviser networks. Last year, the six-year-old firm raised $3.5bn.
ARC develops and manages different strategies; for example, it has a New York recovery fund, grocery and healthcare funds in the US. Each is structured as a private REIT of a fixed size and when the target capital is raised, the vehicle closes.
“The product gives investors a nice cash-on-cash yield with a monthly coupon and the principal back at the end,” says Moor Park founding partner Jagdeep Kapoor. The target is at least a 7% income return for investors, paid monthly in cash.
“A larger public REIT typically comes along and agrees to buy the well diversified portfolio after ARC Global has done the aggregation of individual or small portfolio sale-and-leaseback deals,” adds Wilder.
Kapoor says European assets acquired for the new Global product will range from £5m to £75m per deal, with an initial UK, French and German focus and a strong retail and industrial/logistics concentration.
To generate sufficient cash flows to support the distributions to investors, Global’s leverage will be kept below 45%, though it is likely to be higher in the initial stages of assembling the properties.