EXCLUSIVE: New Investor Buys Into £120M Distressed Shopping Centre Portfolio As Shareholders Warned Of Wipeout
A South African investor has taken a stake in a company that owns a trio of distressed UK shopping centres, and is working on a plan to turn the assets around, Bisnow can reveal.
A company controlled by Johannesburg-based businessman Franz Gmeiner has taken a 29% stake in New Frontier Properties, a company listed in South Africa and Mauritius.
New Frontier has seen the value of its assets plummet in the past 12 months, with the three centres it owns now worth less than the debt secured against them. In its most recent update to shareholders, New Frontier said they are likely to be wiped out and not receive any value for their shares.
But Gmeiner told Bisnow he plans to try to refinance the portfolio and improve its income.
"I'm a value investor and I've bought distressed properties before this," he said. "They are prominent spaces in their towns, and we can give them a fighting chance, but they need work and attention.
"We have been in touch with the company and we will be presenting a strategy to it shortly. The balance sheet is underwater but the income can cover the interest, and it needs a bit of a change. Our chief investment officer is spending a lot of time doing the legwork. We are looking at a possible refinancing and new funding, and we are looking at different uses for the space."
He sees the troubles at New Frontier replicated around the globe, but thinks they are surmountable, though not easily.
"Retail space around the world is under pressure because of oversupply in certain areas and because of the negative pressure on retailers. In South Africa we have our own travails, starting with politics and then everything else in between. We've learnt how to deal with that. There is no easy fix in situations like this, if there was, someone would have found it already."
Gmeiner controls South African-listed property company Orion Real Estate as well as an unlisted property fund and interests in hotel assets. He said the investment in New Frontier had been made in a personal capacity. Orion Real Estate's website said it had assets under management of about £60M.
In a trading update earlier this month, New Frontier said the value of its three UK shopping centres has fallen in the three months to 31 May. In 2014 it bought Coopers Square in Burton upon Trent, the Cleveland Centre in Middlesborough and the Houndshill Shopping Centre in Blackpool for £284M. At the end of February, the three centres were valued at £171M, with £161M of debt from two banks secured against the assets, a loan-to-value ratio of 95%.
By the end of May the centres were valued at £123M with £160M of debt outstanding, a net liability of £37M. That is a 28% drop in just three months.
New Frontier said it had been hit hard by the number of CVAs occurring during the period, in particular those of Arcadia, Monsoon, Debenhams and Select.
The occupancy level of its portfolio actually went up from 93% to 94% during the period, but its quarterly income fell from £4.6M in the three months to 31 May 2018 to £3.7M in the same period in 2019, a 20% drop.
“It is well-documented that the UK shopping centre sector has suffered from further tenant administrations and company voluntary arrangements, resulting in reduced levels of rental income being received by the company,” New Frontier said. “The shopping centre investment market is extremely shallow and combined with there being limited debt funding available for the sector at this time, investment yields have continued to move out resulting in a negative impact on valuations.”
New Frontier’s debt is split across two loans: a £101M facility provided by HSBC secured against the centres in Burton and Middlesborough, maturing in 2022; and a £58M facility provided by German bank PBB secured against the Blackpool centre and maturing in 2020.
The two banks are letting New Frontier use cash it generates to execute its business plan and try and let vacant space, but is trapping excess cash beyond that to repay debt. The company said the banks are being supportive, but if this stops, the company will likely enter administration.
In an investor presentation in April it implied that PBB, the maturity of whose loan is nearer, was putting on more pressure than HSBC.
“HSBC Bank — positive discussions are taking place; currently reviewing options for the centres. PBB Bank — is currently supporting loan but considering all options,” the presentation said.
Other options could include a sale of assets. Earlier this year the company sold a logistics asset in Dublin for £9.4M to repay debt.
New Frontier’s biggest shareholder sold its 49% stake in the company for a grand total of just £40 (R700). South African property investor Rebosis had previously marked the value of its investment in New Frontier at £20M in May, and at more than £115M earlier this year. Gmeiner bought 29% of this stake.
"We were looking for M&A transactions and came across this deal," Gmeiner said. "It's a similar transaction to when BMW sold out of Land Rover for £5, these £1 transactions are not new in the market.
"I think South African investors still believe in the UK in spite of the Brexit clouds and the economic factors to consider."
The other 20% of Rebosis' stake was bought by self-employed property broker, developer and contractor Edwin Henry Dednam. Following a request for info on Dednam, Rebosis emailed a short résumé to Bisnow.
Projects he has been involved in include motor showrooms, small offices and light-industrial assets in South Africa, as well as a period working as contractor on the creation of the Gautrain commuter railroad between Johannesburg, Pretoria, Ekurhuleni and O.R. Tambo International Airport.
"I spoke with Robert Becker of Rebosis Property Fund who informed me that they wanted to sell their holding in NFP," Dednam wrote in the résumé. "I know that NFP is in dire troubles but thought that as my forte in life is construction and development, it could lead to contract work for myself."