PROPERTY COMPANY FINANCE
Successful players can tap wide range of non-bank debt and equity sources, reports Jane Roberts
These are golden times for well-run, listed property companies looking for capital. With share prices in the EPRA index up by 187% since 2009, according to JP Morgan, and many familiar names trading at a premium, they can issue equity, or onvertible bonds at advantageous pricing, or spread risk and crystallise profits by inviting in joint- venture equity partners with deep pockets.
There are plenty of the latter. As the market has improved, property companies large and small have been laying the ground for selected new development by bringing in partners. Small business landlord Workspace, for example, has just finished investing £100m with joint-venture capital from giant US investor BlackRock.
Segro put its European logistics portfolio into a €1bn joint venture with Canadian pension fund Public Sector Pension Investment in June, while Great Portland Estates’ latest partnership is with the Hong Kong Monetary Authority. This month GPE said it had sold 50% of its prime West End development at Hanover Square to the authority for £101m, realising gains on site assembly and planning permission.
It isn’t a new model, but the liquidity in the market now, particularly for London and the south east, is a far cry from 2009, when the biggest UK REITs had to launch emergency rights issues at deep discounts.
Diversifying debt sources
Furthermore, debt capital is also plentiful and cheap. Bank debt still plays a significant part for listed property companies, but the trend last year and this has been to diversify funding away from banks to new debt sources, preferably while reducing costs and maximising financial flexibility or sometimes in pursuit of longer-term finance than is generally available from banks.
Smaller and medium-sized REITs and property companies have joined the big boys in raising capital on the public and private bond markets.
“Public property companies are capitalising on their range of debt financing options better, as they should be,” says Mark Titcomb, head of UK lending at DekaBank. “They can borrow massively more flexibly and much more cheaply, particularly for actively managed property, which is where the market is today.”
‘Vanilla’ corporate bonds are just one of the funding tools in the box. This year convertibles, retail bonds and private placements have all been successfully issued, both fixed and floating rate, secured and unsecured (see table) – but not CMBS.
Being a public company is not a prerequisite to successful deals. Private property company Bruntwood issued a retail bond in July, a source of finance that doesn’t – so far – require ratings. Goodman and Prologis both got investment-grade ratings for their unlisted European logistics funds on the back of their listed external managers, to extend their financing options.
Grainger has just announced £200m of seven-year, secured notes in its continuing drive to reduce leverage and financing costs. Several property companies set up special- purpose vehicles to issue debt this year.
Intu taps bond markets
Intu Properties launched Intu (SGS) Finance in March and refinanced £1.15bn, a third of its borrowings, with a mix of £800m of bond and £350m of bank finance. This month it went to the bond market again to refinance its largest asset, the MetroCentre.
Student housing specialist UNITE has had a busy 18 months refinancing its bank debt. It issued £185m of bonds this year through a new financing platform called USAF Finance, to pay down the £280m maturing CMBS and bank debt secured on its UNITE Student Accommodation Fund.
Chief financial officer Joe Lister has also steered through from UNITE’s own balance sheet a £51.2m summer share placing, a retail bond that raised £90m of 7.5-year money and, last month, a convertible bond to raise another £90m. With the convertible, all UNITE’s planned development is now fully funded: “all required equity and debt finance is in place”, the company says.
Lister and other CFOs must be quietly satisfied that they have brought their companies through busy restructuring and refinancing periods, leaving management – at least until the next time – free to concentrate on asset management and take advantage of improving property markets.
Primary Health Properties goes private for innovative refinancing operation
Primary Health Properties issued an innovative private placement earlier this month, raising £70m of low-cost, 12-year money to refinance existing debt, while avoiding paying swap breakage costs. The secured, floating-rate bond, paying a 220 basis points margin over six-month Libor, was issued to an institutional bond investor and Independent Debt Capital Markets was the arranger.
PHP issued a floating-rate note rather than fixed-rate bond, keeping in place long- term swap liabilities against the underlying assets and ensuring that it is hedged against future interest rate rises. The company said the total mark-to-market liability of its swaps has already fallen slightly due to small rises in long-term interest rates, from £34.8m in June to £32.8m in September.
The proceeds will repay: a Clydesdale Bank facility due to expire early next year; Aviva Commercial Finance loans acquired with a company called PHCC in July, for which provision for early repayment fees was allowed by the vendor in the price; and a tranche of an RBS/Santander club facility, where the margin was to rise in March.
Stuart Bell, a partner at IDCM, says: “Longer-dated, floating-rate funding is unusual, as banks typically limit lending to tenors of five years or less. This allows PHP to lock in funding certainty for 12 years while leaving their swaps position unchanged.”
John Edwards, a director of debt and hedging adviser JC Rathbone Associates, says: “It’s an example of MD Harry Hyman being innovative in how he runs this company. I’d be surprised if other property companies are not considering the same thing.”
Green REIT floats on wave of interest in Irish recovery
Green REIT was the first flotation of a newly incorporated Irish property investment firm for over five years, says Mark Lloyd- Williams of law firm Norton Rose Fulbright, adviser to joint sponsors Davy and JP Morgan Cazenove on the €310m deal. Green is also Ireland’s first REIT, listed on the London and Irish stock exchanges.
Demand from investors for exposure to Ireland’s property recovery played out in an oversubscribed initial public offering that raised over €100m above its original €200m target.
The offer was an institutional placing in the UK, Ireland, Australia and the US.
The company is managed by Stephen Vernon and Pat Gunne’s Green Properties and the management subscribed for ordinary shares alongside cornerstone investor PIMCO. After listing in July, the shares went to a premium: “Essentially Green REIT was just a listed cashbox, yet was trading at a 20% premium to cash,” says Harm Meijer, property equity analyst at JP Morgan.
Last month, Green REIT won the bidding for a portfolio of 10 mainly Dublin properties sold by Danske Bank. It also bought an office and print works let to Independent News & Media and a property let to Allied Irish Banks. It has now spent €178m.