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AMERICAS NEWS: Going for gold

As first deals in the US go, Antarctica Capital Real Estate may have broken all records. In a venture with Hines and other equity investors, Antarctica last month closed on the purchase of 11 office buildings from the State of California for $2.3 billion.

The Golden State portfolio, as broker Richard Ellis dubbed the transaction, involved the sale-leaseback of 7.3 million square feet of government-leased space in metropolitan markets in San Francisco, Sacramento and Los Angeles.

More than 300 bids were submitted for the partial or full acquisition of the portfolio, 11 of which bid more than $2 billion for all 11 properties. It was, as CBRE vice chairman Kevin Shannon said at the time, “a stiff, multiple-offer competition that generated favourable pricing for the state”.

For Antarctica though, the transaction represented the Irvine, California-based firm’s foray into US real estate. With a main office in Mumbai and an existing India-focused property fund, Antarctica launched its US real estate arm specifically to close the Golden State JV – known as California First – with Hines. As part of its real estate debut, Antarctica also joined forces with a number of veteran property investors, including Spyglass Realty Partners’ Rich Mayo.

For Antarctica managing director Chandra Patel, the golden state portfolio is the start of things to come for the firm. It is now eyeing other US states and muncipalities looking to sell real estate assets in sale-leaseback and public-private partnership-style deals.

“You are talking about generic-use buildings to the states and muncipalities, but for us these assets are trophy assets from a credit perspective,” Patel said.

For California, the Golden State portfolio sale was a way to fill part of its massive budget deficit. The transaction included the disposition of the San Francisco Civic Center, which has a projected net operating income of $22 million in the first year [see chart below], and the 1.5 million-square-foot Capitol Area East End Complex in Los Angeles, which has a projected first year NOI of $35.5 million.

Structured as a 20-year sale-leaseback, with six five-year options to renew and 10 percent rent step-ups every five years, the deal allows the State of California to buy back the assets at any time. The going-in cap rate is 6.4 percent, according to California’s Department of General Services.

As a core deal, targeting traditional core-type returns, Patel said the $2.3 billion price paid for the portfolio would never represent a “killing” for the investors involved, but it was “an attractive price for great stable assets that are generating cash flow”. The California First JV, which also includes unnamed LPs and other investment firms, is investing 40 percent equity in the transaction. “This is conservatively underwritten,” he said of the deal.

“We believe there will be additional opportunities in the US for the privatisation of public sector real estate,” Patel added, stressing that Antarctica was betting on whether a state or region’s future credit would be positive or negative. “We see this deal as a template for what we want to do in the US, whether it be through sale-leaseback transactions or more of a public-private partnership, where the state continues to perform some function.”