Advisory and Equity - Case Studies

Texas O&G Hotel Portfolio: Acquisition Financing

 

 

Transaction Summary:

Target Rock Partners was retained to source bridge financing and preferred equity to fund the acquisition of a portfolio of 7 limited service hotels (470 rooms) located in the Eagle Ford and Permian Shale Basins in Texas and New Mexico.  The properties all had very strong cash flow due to the heavy demand generated by the oil and gas exploration and drilling occurring in the markets.   Increasing investor interest was continuing to drive asset values higher in these markets on a monthly basis.  However, vast land and limited barriers to entry coupled with the high demand generators insured that these assets will receive competition through new supply.  Therefore, the current cash flow is likely to be unsustainable in the mid to long-term.

 

Target Rock Partners arranged a $42.0 million first mortgage bridge loan plus $3.9 in preferred equity, which totaled to 87% of the capital stack, to fund the acquisition.

 

Challenges:

  • High risk properties subject to commodity risk.

  • Limited competitive barriers to entry within the markets of the portfolio.

  • Aggressive appraisal required to achieve the required 1st mortgage proceeds.

  • Exit strategy requires the value of the properties to continue increasing over the 12 months following the acquisition.

 

Strategy:

  • Target lenders familiar with and bullish on the oil & gas activity occurring in the Eagle Ford and Permian Basin.

  • Target lenders that could provide short term financing plus a small preferred equity investment.

  • Emphasize the strength of the hotel management company.

  • Highlight that the investment by the hotel management company along with sponsor signals strong support for the thesis.

  • Identify hospitality appraisers that understood the market fundamentals within the shale regions.  

 

Results:

  • TRP arranged and closed on a $42.0 million first mortgage bridge loan and $3.9 of preferred equity all from a real estate hedge fund.

  • TRP contributed capital as preferred equity, aligning interests with the sponsor and further giving comfort to the lender. 

 

Illinois Grocery Anchored Center: Acquisition Financing/Note Sale/Restructure

 

Transaction Summary:

Target Rock Partners was retained by the developer of a grocery and theater anchored shopping center located in the Midwest to negotiate the discounted payoff of the construction loan and to recapitalize the property.   Despite the complete disbursement of the $42 million construction loan, only half of the center was developed.  When the developer defaulted, the property was taken over by a receiver and the management and leasing lapsed. Occupancy leveled out at 70%.  The collateral also included 12 outparcels that were available for sale, lease or development. Despite the borrower’s offers to restructure the loan, the bank opted to market the note for sale.  Target Rock Partners procured a note buyer at the highest price offered.

 

Challenges:

  • Tertiary market.

  • Non-credit anchors.

  • Below market occupancy.

  • Abbreviated transaction timeline due to the fact that the bank holding the note was being sold.

  • Developer wanted to stay on for management and leasing and a back-end profit participation.

 

Strategy:

  • Target investors with a preference for value add opportunities, the ability to close quickly and willingness to partner with an existing developer.

  • Emphasize the value of the 12 undeveloped outparcels and the vacant in-line space.

  • Identify lenders that could accommodate a quick note closing timeframe and post-closing release of collateral.

  • Highlight developer’s management and leasing expertise.

 

Results:

  • Produced an investor that purchased the note for $18 million.

  • Closed a $15.3 million note acquisition loan (85% of the purchase price) from an institutional lender.  Flexible prepayment structure allowed the borrower to refinance a significant portion of the loan within the first 12 months at a lower rate.

  • Structured a new JV partnership between the developer and the new investors that enabled the developer to maintain management and leasing of the property and a back-end profit participation.

Grocery Anchored Shopping Center Portfolio: Recapitalization

 

Transaction Summary:

Target Rock Partners was engaged by the developer of six grocery anchored shopping centers located in Florida, Georgia and North Carolina to provide a capital solution for the financial repositioning of the portfolio. The shopping centers were completed in 2007 and 2008 and reflected the latest anchor prototypes.  The opening of the shopping centers during declining economic conditions in the U.S. resulted in delayed stabilization of the shop space.  Additionally, development of the surrounding and supporting residential areas was postponed.  Also, the properties were located in secondary and tertiary markets which compounded the lack of local tenant leasing.  Overall occupancy of the portfolio was 87%, but the local shops were 37.5% vacant.

 

While the developer was current on the debt payments, there was an urgent need to lower debt payments and free the developer of its recourse obligations. With limited developer capital available to contribute to a new financing, the transaction required maximum new financing proceeds and discounted payoffs from the existing lenders.

 

Target Rock Partners structured and negotiated a commitment from a capital source for $30.55 million.  Additionally, with the new non-recourse proceeds committed, Target Rock and the developer negotiated discounted payoffs of the loans from the nine existing lenders.

 

Challenges:

  • Secondary and tertiary locations.

  • Limited developer capital to contribute to the transaction.

  • Timing and logistics of negotiating and coordinating discounted payoffs with nine first mortgage and mezzanine lenders.

  • Appraised value issues due to a lack of sales comparables reflecting recently improved market conditions and cap rates.

 

Strategy:

  • Target capital sources with ability to lend at all levels of the capital stack (e.g. first mortgage, mezzanine and equity).

  • Structure new debt on a cross-collateralized basis to minimize risk to lender.

  • Emphasize the strength of anchor tenants sales and credit support of investment rated anchor.

 

Results:

  • Procured financing from a single capital source for 97% of transaction cost in the form of a first mortgage loan, mezzanine loan and participating equity.

  • New non-recourse financing relieved borrower from the recourse obligations of its existing loans.

  • Obtained discounted payoffs from existing lenders.

  • Developer’s out-of-pocket expense was limited to 3% of the total transaction cost.

  • Developer retained management, leasing and ownership of the properties.

Michigan Power Center: Advisory

 

Transaction Summary:

Target Rock Partners was retained by a developer to negotiate the discounted purchase of a $54 million construction loan secured by a 348,068 sf power center and to arrange new debt and equity.   Although the property was 90% occupied by strong national tenants such as TJ Maxx, Bed Bath and Beyond, Best Buy, Dick’s Sporting Goods, and JC Penney (NAP), the NOI of the property was significantly below projections because the second phase of the project, 87,500 sf of shop space and 20,500 sf of outparcels, had not been completed. 

 

Target Rock Partners assisted the owner in identifying an equity partner that purchased the note at a discount and took title to the property while leaving the developer in place for management and leasing.  Additionally, the developer received a back-end participation above an IRR hurdle.  

 

Challenges:

  • Defaulted mortgage on a power center located in Michigan.

  • Multiple co-tenancy issues.

  • Majority of national tenants not required to report sales.

  • Local tenants were requesting rent reductions.

 

Strategy:

  • Target Midwest investors that could understand the Michigan market.

  • Highlight the upside in both future leasing and future development.

  • Enhance transaction returns by procuring favorable debt.

 

Results:

  • Assisted the owner in identifying an equity owner to purchase the note.

  • Structured and negotiated a deed in lieu of foreclosure.

  • Existing developer stayed in place for management and leasing and a back-end participation.