SVPGlobal, which last month completed the restructuring of troubled US retail-focused real estate investment trust Washington Prime via a major debt overhaul, is expecting to see similarly distressed opportunities occur in the UK and continental European office and leisure sectors.
Victor Khosla, founder and chief investment officer, told Real Estate Capital Europe that the more than $18 billion alternatives manager is working to diversify its portfolio globally. This includes biding its time as distress emerges in the office and leisure sectors due to the covid-19 pandemic.
The company, which is headquartered in Connecticut and specialises in distressed debt and private equity opportunities, has invested around $1.7 billion in real estate over the past 18 months, most of which is in the US, and has a general idea of where it will increase that activity. “Going forward, we think the private opportunity is bigger in Europe than it is in the US. It has just been slower to take off,” Khosla said, noting that the firm has expanded its team on the ground in the region.
The UK and continental European office sectors are an area that SVPGlobal will be watching closely.
“The office sector will take a little time to crack because [owners] have long-term leases. It’s only when vacancies start to climb and rents start to come down that you see the opportunity,” Khosla said. “Our sense is that you’re going to see some major breaks in the biggest cities in the US and Europe on the office side.”
Washington Prime, the Columbus, Ohio-based REIT, which owns a portfolio of roughly 100 open-air and fully enclosed US shopping centres, filed for bankruptcy protection in June. SVPGlobal, a major debt holder, negotiated a deal that allowed it to take control and privatise the company.
At the time of the bankruptcy filing, the REIT had $2.3 billion of debt, consisting of a mix of term loans and bonds. This level has been reduced to around $1.2 billion, with the transaction also improving the REIT’s overall liquidity, Khosla said. Next steps include improving its portfolio and strengthening relationships with tenants, lenders and other partners.
SVPGlobal targets opportunities by investing as either an equity or a debt investor. It has a bench of around 55 investment professionals, split between the US and Europe, with a similar divide for its real estate portfolio. Real estate fits within the company’s hard assets bucket, along with infrastructure and aviation.
“The real estate platform is a broad platform where we invest in debt, provide financing, as well as make minority and majority equity investments in real estate businesses. Washington Prime is a good example of a majority control deal,” Khosla said. “If you look at what we’ve done historically or what we’ve done in the last three months, it gives you a sense of our broad capabilities and what we will be doing over the next five years.”
After making a significant retail play, SVPGlobal is looking at other sectors.
“In the retail sector, Washington Prime is our main focus,” Khosla said. “With about 100 retail centres, it’s big. And when we look at other retail opportunities, we are not sure if any offer that kind of scale. I don’t think we will see anything comparable as an opportunity in terms of size or scale in retail in the near-term.”
But there are other sectors that have been hit as hard as retail – and these sectors are likely to also have a strong recovery. They include leisure, in both the US and European markets.
“The travel and leisure businesses are going to come roaring back, but they’re not going to be roaring back in 2022. I think it will be closer to 2023 or 2024,” Khosla said. In the interim, there are opportunities for the company to step in and recapitalise companies in the way it worked out a deal with Washington Prime.
One area where Khosla isn’t expecting to see opportunity is the industrial sector. “The industrial sector is still red-hot and it’s hard to be a value buyer. But I also say, ‘Never say never’. Over the next year or so, there will be a few deals that we are watching closely.”