It was a little over three weeks ago that PERE caught up with Valad Europe at its headquarters in London.
Martyn McCarthy, the easy-going chief executive, who joined in 2003 and was formerly at GE Real Estate, betrayed no signs of what came to be announced last night – plans for a management buyout of the business.
Nevertheless, he provided a glimpse into a company that if nothing else has been one of the few in Europe to have actually taken over the management of struggling funds.
In this way, Valad Europe has been growing assets under management in Europe. Its two major successes made public to date were the assumption of the management of two European portfolios of UK-based firms. The first, Kefren Properties, saw Valad take over a €480 million Swedish portfolio of around 150 assets, mainly office with some warehouses and retail property. The second saw it take over a €250 million mixed-use portfolio of non-performing assets from Scotland’s Kenmore Group. That package consisted of 53 properties in the Nordic region, Germany and the Netherlands. Combined, these two mandates have added an additional €700 million of property, taking Valad Europe towards total assets under management of just over €5 billion.
Speaking with PERE, McCarthy said one of the factors that differentiated the company from others was that it specialised in multi-let properties. The company has 900 properties spread throughout Europe in the UK, France, Germany, Denmark, Sweden, Poland, Finland, Hungary and Romania and with corresponding offices staffed by Valad employees. “We have local people on the ground – some 250 people – making us one of the largest specific real estate fund managers in Europe,” he said. He added: “By definition, we have a lot of tenants in our portfolio. There are on average around 10 tenants per property, so roughly there are 9,000 tenants, which differentiates us from many other groups that buy big logistics assets with a single tenant.”
Valad has grown in Europe as a result of various corporate mergers, and can therefore claim to have operated for more than 40 years in the region. But the interesting point to note is that parent company, Valad Property Group, is Australian. It would therefore have seemed reasonable to assume that Valad Europe is the smaller component of the group. However, that assumption would be wrong – it is five times as big.
“Valad in Australia and New Zealand has €1 billion of assets and 50 people,” he said, “whereas Valad Europe has €5billion of assets and 250 people, so it is much larger. The only link we have is that we are listed on the Australian stock exchange. We have actually been here in Europe a lot longer in terms of infrastructure than the Australian business. We have been in this market for 40-plus years, and the opportunities here are pretty strong.”
It has a total of 15 real estate funds in the region, the vast majority of which are closed-ended, core-plus and value added vehicles. They are also lowly leveraged at up to 50 percent. The firm, according to McCarthy, does not buy prime “flashy” buildings. Instead it prefers to roll up its sleeves and use its local network to manage assets. As he prefers to say: “We are hard-working real estate people.”
Speaking of the management contracts the firm has taken over, McCarthy explains that Valad Europe had been partnering banks on “work-outs”. The backdrop to this can sometimes be that investors are dissatisfied with the incumbent management. But the fundamental problem seems to be that the assets are suffering.
“We are seeing situations in which a current management team cannot fund any capital expenditure, which is leading tenants to threaten to move to another property and another landlord. Income within the portfolio has dropped and this leads to a downward spiral, and typically the banks come to us half way down the spiral or towards the end,” he explained.
Not that Valad has been immune from challenges itself. It had a joint venture with Uberior, a part of HBOS, the bank that was taken over by Lloyds TSB in 2008. The joint venture owns 150 properties and £1.1 billion of assets and contains the majority of Valad’s directly owned UK and Continental European assets and associated debt. It had to be restructured because in 2008, Valad was in danger of a loan-to-value breach above 90 percent, so the resolution in 2009 was to restructure the JV with a waiver of the loan-to-value covenant. Both Valad and Lloyds put in more money to recapitalise it. The resultant three-year restructured joint venture called Duke continues but it is a wind-down vehicle, not a growth one. It expires in 2012 but according to McCarthy three weeks ago, it will probably be extended beyond then.
Of its closed ended funds, it has around 10 percent of existing capital left to invest. McCarthy said it had existing capital to invest in certain countries where it has full discretion to draw on. But it doesn’t have a big bucket of blind pool capital to draw upon. “We don’t have a big blind pool of capital to go out and invest tomorrow, but when we find a package of assets, we ask investors if they would like to invest,” he qualifies.
Nevertheless, it will be on the fundraising trail next year to raise fresh equity. Typically, Valad Europe’s funds are mid-sized – that is, around €500 million in scale.
“As far as new funds are concerned, we will have blind funds in the next 12 months in which the investors would tend to want to see a seed portfolio. One would be a pan Europe core, core-plus fund. We have investor support for these funds and we will have more to say about that when it is done.”
When asked what the main challenges for Valad ahead are, he said one was making sure Valad could continue to access debt for new acquisitions of up to 50 percent loan-to-value, and maintaining demand for assets, particularly in the UK.
There was no mention by McCarthy of a need or desire to buy out the business though. Asked how he saw Valad evolving in Europe, he said: “As long as we continue to do a solid job, we report accurate information every quarter on time, good things will look after themselves.”
With an MBO now tabled, presumably one of those good things could be managing a new independent business.