intu properties plc and Cale Street Investments LP, an investment firm backed by the Kuwait Investment Office, the London office of the Kuwait Investment Authority, announced on 18 April 2019 that they were forming a joint venture that will own the intu Derby shopping centre.
The closing of the transaction was subject to completing a senior debt financing of the centre and certain other completion conditions. These conditions have now been met and the transaction has completed.
The consideration payable to intu by Cale Street was calculated by reference to the December 2018 book value of the centre of £372.5 million (100 per cent). Senior debt finance of £150 million was raised in the joint venture with Deutsche Bank. The consideration amounted to £109 million, after working capital adjustments.
The debt raised in the joint venture along with the consideration have been used by intu to repay debt, including £210 million of the SGS term loan which matures in 2021, leaving £142 million of the SGS term loan outstanding. This is in line with intu’s stated strategy to reduce its debt and focusing on the near-term refinancing activity. On a pro-forma basis, the transaction reduces debt to assets ratio by around one per cent.
intu will continue to manage the centre on behalf of the joint venture and receive asset management and brand licence fees for this, further enhancing intu’s return from the transaction.
This preferred equity transaction includes a prioritisation waterfall for distributions to the joint venture partners. This gives Cale Street priority on income and capital distributions from the joint venture, capped at a high single-digit total return per annum. While not guaranteed, this protects Cale Street to some extent on the downside but allows intu to benefit on the upside. Under the terms of the joint venture, distributions remain a decision for the joint venture board, allowing intu and Cale Street to defer dividends to retain cash in the joint venture if deemed required for capital investment or other uses.
Matthew Roberts, chief executive of intu, said: “We are pleased to complete this innovative joint venture transaction in what is a challenging investment market in the UK. Cale Street’s equity represents a flexible and cheaper source of capital than intu’s own equity and other private equity financing sources considering investing in UK shopping centres today. This reduced cost is achieved in exchange for a priority of distributions to Cale Street.
Whilst the transaction is earnings dilutive, the part-disposal of intu Derby is evidence of our strategy to reduce debt though disposals and part-disposals both in the UK and Spain and the transaction crystallises value significantly above the look-through value of intu Derby implied by the current share price.”