DEALWATCH: Cap Rates, Daiwa Re-Emergence Key In New City Spat
August 21 2009 - 5:44AM
Dow Jones News
Japanese residential property developer Daiwa House Industry
Co.(1925.TO) has been trying to derail the efforts of America's
Lone Star Funds to bag the mandate to restructure failed REIT New
City Residence Corp. (NRC), triggering a showdown between the two
over the REIT's fate.
Attention should focus on the implied cap rates thrown out by
the affair, which should set the benchmark for cap rates -
essentially the ratio of earnings before interest, tax,
depreciation and amortization to enterprise value expressed as a
percentage for real estate transactions - on other high-quality
diversified portfolios of distressed Japanese residential real
estate. As entertaining as the bidding war over the delisted REIT's
debt and equity is, it's ultimately a sideshow - the difference in
enterprise value between the two bids is minimal.
As important: pay heed to the re-emergence of Daiwa as the rival
suitor for New City in what was meant to be the closing lap of its
rehabilitation process.
That Daiwa has the backing of NRC's creditors suggests not only
are lenders getting more assertive but also that strong domestic
companies are the favored sponsors to rehabilitate the highly
regulated REIT space.
Foreigners should probably stick to searching for bargains in
real estate investment and asset management in their Japanese hunt
for what CB Richard Ellis describes as the greatest array of
distressed real estate deals in Asia.
Rehabilitation
Faced with a liquidity crunch in October 2008, residential REIT
NCR filed for civil rehabilitation - the Japanese equivalent of
Chapter 11 - and NCR's managers chose Lone Star in April as sponsor
to oversee its rehabilitation. The U.S. private equity shop offered
to buy out existing holders at Y35,000 per unit and subscribe to a
Y6 billion placement for 400,000 new units/shares, which was given
the nod by shareholders.
Things were going swimmingly until July when creditors,
reportedly unimpressed with the low 0.65% rate the Texan distressed
asset investor was offering to pay on NCR's loans, rejected New
City's plan and Daiwa jumped back into the fray, proposing a rival
bid that would merge NCR into Daiwa-backed REIT BLife Investment
Corp.(8984.TO).
Currying favor with both equity and debt holders, Daiwa has
offered to buy out unit holders at between Y40,000 and Y55,0000 on
top of a Y6 billion placement, and to pay 0.9-1.% over the Tokyo
Interbank Offered Rate (Tibor) on NRC's debt on a faster
amortization schedule, according to local media reports.
Three-month Tibor is around 0.55%.
NRC's fate will probably be decided at a second creditors'
meeting on Sept. 9th. Lone Star sweetened its offer Thursday by
raising the rate it is prepared to pay on the debt to 1.25-1.5% and
with an accelerated repayment over five years.
(http://www.ncrinv.co.jp/ir/topwhats/2009-0820-00000.pdf - Japanese
language).
Cap Rates
All this is good news for the equity and debt-holders but a
closer look at the enterprise value implied by both deals shows
just Y3.6 billion difference, or $38 million, due to the minimal
value being attached to New City's equity in relation to its
reappraised balance sheet. That in turn means minimal divergence in
implied cap rates between the offers on NRC's portfolio, which
range between 7.02% and 7.23%.
The level of attention being paid to the New City case by real
estate investors in Japan suggests these implied cap rates are
likely to become benchmarks for other deals.
The sudden revival of a bid from Daiwa with creditor backing
after it was knocked out of the running earlier in the year
meanwhile suggests lenders are more comfortable with high-grade
corporates acting as sponsors for busted Japanese REITs, something
DEALWATCH suggested in March this year.
One area where foreign players have had success in making
acquisitions in distressed Japanese real estate has been in taking
on bombed-out real estate investment managers. Cushman &
Wakefield Inc. for example scooped up failed manager Pacific
Investment Corp. from the wreckage of Pacific Holdings Inc.; but no
foreign bidders have been revealed as successfully in the running
for taking over the two REITs it backed - Nippon Residential
Investment Corp. (8962.TO) and Nipppon Commercial Investment Corp.
(3229.TO).
(Jamie Miyazaki is a columnist for Dow Jones Newswires covering
Asia. He can be reached at +852 2832 2320 or by email:
jamie.miyazaki@dowjones.com. Dow Jones Newswires is enhancing its
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