Kennedy Wilson Sells $2.1B Loan Portfolio to Fairfax

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Good morning. Beverly Hills’ Kennedy Wilson sells majority of PacWest loan portfolio to Canadian insurer Fairfax for $2.1B. The industrial sector sees a 38% YoY drop in new constructions. Meanwhile, Wells Fargo gets less than half of the original price for its San Francisco office tower. Ouch.

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Fairfax Financial to Buy Majority of PacWest Loans Sold to Kennedy-Wilson

After acquiring a 74-loan portfolio from struggling regional bank PacWest (PACW) last month, Beverly Hills-based Kennedy Wilson (KW) is selling 63 loans to Toronto-based insurer and longtime partner Fairfax Financial for $2.1B.

Deal details: Kennedy Wilson completed the acquisition of a portfolio comprising 74 loans from PacWest last month, obtaining it for $2.4 billion at a discounted price of $200 million. The agreement with Fairfax is valued at $2.1 billion, with Fairfax providing 95% of the funding while Kennedy Wilson contributes $100 million and retains a 5% stake. Additionally, Kennedy Wilson will earn asset management fees. As part of the deal, Fairfax will invest $200 million in preferred equity in Kennedy Wilson, allowing the insurer to acquire perpetual preferred stock with a 6% annual dividend. Fairfax anticipates a loan portfolio’s average annual return to surpass 10%.

The portfolio: The 63 loans have floating rate interest and carry an average rate of 8.6%, with more than 70% of the loans secured by multifamily or student housing development projects. The remainder of the loans includes industrial, hotel, and life science office properties. Kennedy Wilson also sells 10 loans valued at $500M to an undisclosed institutional investor. They won’t hold an investment in that portion of the portfolio but will earn a management fee.

Partners in crime: This deal isn’t the first for the two companies, as Fairfax and Kennedy Wilson’s relationship began in 2010 when they partnered to acquire $250M of real estate. In 2020, the partners launched a $2B debt platform, with Kennedy Wilson as the asset manager. Fairfax also made a $300M preferred equity investment last year in Kennedy Wilson, expecting to use the proceeds to fund its development pipeline and investments while paying off its unsecured bank borrowings in full. This latest acquisition is expected to close in multiple tranches before Q3 ends.

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Big picture: This move comes at a time when regional banks, including PacWest, have been selling off loan assets to strengthen their financial positions following the banking crisis earlier in the year. Despite the challenges faced by the industry, investors are showing renewed confidence in regional banks, as reflected by the recent rebound in share prices, signaling optimism that most of these lenders are fundamentally sound.

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Industrial Sector: Slowdown or Return to Normal?

Many industrial investors are proceeding with caution as economic uncertainty, high interest rates, and new construction trickle down to the otherwise strong industry.

Favorite child: Industrial has been a Wall Street darling for years, with strong rent growth and recession-proof qualities. While there was an initial drop in activity at the onset of the pandemic, industrial sales volumes shot up in late 2020 through 2021, exceeding 2019 levels by nearly 3x. Sales volume continued to enjoy double-digit increases through 1H22, reaching $42B. Before market conditions changed in 2H22, industrial investors could borrow at 3% and buy at a 3.5% cap rate while realizing improved cash flow through rent growth.

Changing landscape: Industrial is showing signs that it’s not immune to the high interest rate environment and general economic uncertainty facing the rest of CRE. Industrial sales volumes have fallen over the past 3 quarters, down 52% YoY in 1Q23. In addition to high rates, other factors are impacting industrial. A post-pandemic slowdown in online shopping has led to declining demand for warehouse space while new industrial products are entering the market. A record 138M SF was delivered in Q1 alone.

Temporary troubles: New construction starts dropped 38% YoY in Q1, and further limits to starts are expected as lending standards stay tight. Fortunately, the softening in the sector may only be temporary. Demand may not be at 2022 levels, but it’s still very strong. Assets are still pre-leasing, but some markets are taking longer than others. Not surprisingly, the largest vacancies are occurring in markets where land is available with few barriers to entry, whether due to permitting, topographical, or other factors.

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Shifting strategies: Many industrial investors are shifting away from large properties with investment-grade tenants and long-term leases to smaller, multi-tenant facilities and short-term leases, where it’s easier to achieve lease-ups and raise rents. There’s a lot of competition for these properties in infill locations, though. Smaller properties are trading at fairly low cap rates, while cap rates for industrial properties in core markets went up 75 to 100 bps from their lows in early 2022 as higher rates force investors to bring more equity into transactions.

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The RealtyMogul Platform offers personalized service, proven business discipline and data-driven insights. Founded in 2012, RealtyMogul members have collectively invested over $1 billion into more than $5.9 billion of real estate nationwide, including over 35,000 investments made since inception and as of December 31, 2022*

Real estate companies, also known as “Sponsors” use the platform to list their real estate deals. Members can easily review, compare and invest in the deals that meet their investing criteria.

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Wells Fargo Set to Take $60M Loss on 13-Story Office Tower in San Francisco

Wells Fargo (WFC) has finally found a buyer for its San Francisco office tower at 550 California Street. But the bank will end up getting less than half what they paid for the building almost 20 years ago.

Taking the loss: Wells Fargo bought the downtown property in mid-2005 for $110M and has been the sole occupant ever since. Wells Fargo originally listed the property for $160M last year but took it off the market when bids didn’t meet expectations. The undisclosed buyer is expected to pay between $42.6–$46M. Like many other companies, Wells Fargo has been trimming its office portfolio, with plans to cut it by 15–20% before 2025. They’ll still have a significant employee presence in San Francisco but have more real estate than they need.

City up for sale: Other San Fran office towers have been on the market with no buyers in sight. CBRE Global Investors wants to sell 123 Townsend for $90M, much lower than its $140M purchase price in 2020. Clarion Partners is looking to offload 60 Spear St. for $55M, which it bought for $107M in 2014. And Union Bank is expected to sell 350 California St. for $70M, almost 75% less than it listed in 2020.

➥ THE TAKEAWAY

Troubling times: San Francisco has been hit harder than most cities by the pandemic’s changing office landscape, and the sale of 350 California St. is another big blow to the city’s office market. With demand for the city’s downtown office space at all-time lows, investors are scared to touch it as valuations keep plummeting. No major acquisitions in the city have closed since 2020, and less than $7.75M of office deals were completed last year, compared to $1.5B in 2019.

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• Less is more: A poll by Knight Frank found that 50% of the world’s largest companies plan to reduce their office space by 10–20% over the next 3 years.

• Conflict resolution: AR Global, manager of Global Net Lease (GNL) and The Necessity Retail REIT (RTL), resolved their dispute with Blackwells Capital, allowing the REIT merger to continue.

• Spa day: Ryman Hospitality Properties (RHP) is buying the JW Marriott San Antonio Hill Country Resort & Spa for $800M from BREIT, which will pocket $275M in profit over 5 years.

• Wildlife wonder: The future of the Pine Log Wildlife Management Area in Georgia is uncertain as the state failed to purchase and preserve 14K acres of forest in Bartow County.

• Stop payment: Park Hotels & Resorts (PK), the operator of two of the most prominent hotels in San Francisco, stopped making payments on a $725M loan.

• (Not so) high times: Pot farmers in NY face financial struggles as the legal marijuana market fails to take off as expected, leading to an oversupply of cannabis, lower prices, and reduced profits.

• Tenant-only attractions: The iconic Transamerica Pyramid in San Francisco has unveiled its exclusive tenant-only rooms, providing a first glimpse into its unique spaces and amenities.

• Innovation on wheels: Despite the increasing demand for EVs, charging stations and other necessary facilities remain limited in many areas, posing challenges for EV property owners.

• Irish warning: The Central Bank of Ireland warned that the global CRE market is vulnerable to global monetary policy tightening, with residential properties at risk of price corrections.

• Dual downturns: In 2014, Starwood’s hopeful multifamily venture in West Texas oil country may have become a sunburnt disappointment.

• Fundraising target: Brookfield (BN) wants to raise $15B for its 5th real estate flagship fund, which is less than the $17B they closed on for their 4th fund earlier this year.

• Texas tax tussle: Texas Governor Greg Abbot and Lt. Governor Dan Patrick can’t agree on what to do with $12.3B earmarked for property tax cuts in the Lone Star State.

• Everyday low prices: Walmart (WMT) opened its first high-tech Market Fulfillment Center to provide faster fulfillment for online pickup and deliveries.

• Viva la Mexico: With high demand for industrial space in Northern Mexico, Mexican REIT Fibra Prologis plans to invest $700M in warehouses and $500M in undeveloped land.

• Legal reversal: An NY appeals court has reversed a previous decision to allow the Howard Hughes Seaport project, which aims to transform the area into a mixed-use complex, to proceed.

• Retail demand: Restaurants, fitness centers, discount retailers, and grocers account for the majority of retail demand right now, rebounding from their pandemic-era woes.

Property owners and lenders can breathe a sigh of relief as property values finally flatlined for most subsectors last month after months of declining values. The pricing dislocation between buyers and sellers has caused transaction volumes to stay low this year, with buyers looking for a 15% discount from 2021 highs in many sectors.

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