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TIAA And Partners Pay Off Big Chunk Of WeWork Loan That Came Close To Breach

Devonshire Square

A joint venture involving U.S. pension giant TIAA has prepaid nearly one-third of a loan secured against a campus of buildings where the biggest occupier is WeWork. The properties had been heading toward a loan covenant breach

According to loan servicing documents, £88M of the £275M of debt secured against the 637K SF, 13-building Devonshire Square complex in the City of London has now been paid off. The figure includes £23M that was put up to cure a loan covenant breach in December. 

The loan servicing documents did not say why the owners had chosen to pay down a bigger portion of the debt than was necessary, but the performance of the asset has been troubled for the past year and more. 

The borrower is a consortium of TIAA, Danish pension fund PFA Global Real Estate and WeWork. TIAA and PFA own 45% of the estate apiece, and WeWork owns the remaining 10%. The trio paid Blackstone £580M for the complex in 2018, putting up £345M of equity and taking £275M of debt, £40M of which was a capital expenditure loan.

The £23M put up in December was to avoid breaching the debt yield covenant on the securitised loan. The debt yield covenant in loans measures the net operating income of a property against the outstanding principal balance of the debt secured against it. Income is not allowed to fall below a certain proportion of the loan, or the borrower can face penalties or administration/foreclosure. Because the cure payment was made, no breach occurred, the servicer said. 

The performance of the estate was suffering even before the coronavirus crisis. In March 2020, before lockdown, the Devonshire Club, a members’ club installed at the estate by previous owner Blackstone and backed by Tory peer Lord Ashcroft, went into administration. It occupied 58K SF. 

But the virus has also had a significant impact, and the borrowers restructured the loan last year. 

In a note in October, Fitch said rent collection from the property had dropped to 40%, and that figure rose to 80% if credit on the account of WeWork was taken into consideration.

As well as being an owner, WeWork is the largest occupier at the scheme. 

When the consortium bought the building, the coworking firm occupied 20K SF, but that grew to 236K SF over the next 18 months. The company operates the space on a management agreement rather than a standard lease, so the owners and occupier shared the risk and reward of the flexible space.

Fitch said WeWork occupied 36% of the estate, but there was no transparency on how much of the rental shortfall was attributable to the company. It has handed back some of the space it was due to occupy. 

As a result of that and the administration of the Devonshire Club, the vacancy rate on the estate had risen to 20% as of October.