Back in 2006, The Blackstone Group was still on a hot streak of buying operating real estate businesses. Hotel groups were figuring with stakes in La Quinta and Wyndham International, for example, as well as the Meristar REIT and the Rihga Royal in New York City.
So, it did not come as a total shock when the firm acquired leisure park operator Center Parcs UK, which it finally agreed to sell last month for a figure understood to be just shy of £2.5 billion (€3.5 billion; $3.8 billion) to Toronto-based asset manager Brookfield Property Partners. The transaction is due to complete by the end of July.
Center Parcs operates five short break destinations across the UK: Sherwood Forest, Nottinghamshire; Elveden Forest, Suffolk; Longleat Forest, Wiltshire; Whinfell Forest, Cumbria and Woburn Forest, Bedfordshire.
Blackstone acquired the operating and property businesses of Center Parcs in consecutive deals in 2006 for a total of £1.1 billion – it paid £205 million for the operating company and £900 million for its real estate, PERE reported at the time. However, the firm split the investment in Center Parcs between its real estate and buyout funds – Blackstone Real Estate Partners International (Europe) II, a €1.55 billion 2006-vintage fund and Blackstone Capital Partners V, its $21.7 billion 2006-vintage megafund – with each writing £380 million equity checks.
Despite splitting the deal a source familiar with the deal said it was Blackstone’s real estate business and in particular its hotel team that took on greater control when it came to managing the asset. One of the key decisions that the Blackstone team made was to combine the operating company and the property company. This could be described as a somewhat, unprecedented move as Blackstone had already been successful splitting up operating and property companies, for instance with Southern Cross Healthcare, a UK care home provider, which under Blackstone’s ownership was reorganized under a sale-and-leaseback strategy.
After combining Center Parcs’ operating and property companies, Blackstone invested heavily in the real estate, resulting in more than £100 million being spent on accommodation, restaurants and retail outlets, according to Center Parcs’ website. By 2009, in the midst of the financial crisis, almost 40 percent of accommodation had been refurbished, and a source familiar with the matter says that throughout Blackstone’s ownership around 80 percent of room units were refurbished.
Moreover, in 2007 agreements were signed with Tragus, SSP and The Nuance Group to manage a small number of restaurants and retail outlets on Center Parcs’ Villages and in 2009 Center Parcs signed its first franchise agreement and Starbucks Coffee Shops were introduced across all sites.
“Center Parcs used to run its own supermarket, coffee shops and had cute little brands for everything. Blackstone made changes and basically said, your coffee is no good and bought Starbucks in,” said the source familiar. “They [Blackstone] bought that philosophy of bringing in really good restaurant and retail operators into the park to provide a better quality offer. It took what was basically a money losing retail business and made it a very profitable retail business as Center Parcs didn’t have to employ people and be a retailer anymore.”
Yet, perhaps the most significant value-add play made by Blackstone was going ahead with developing a fifth site after planning permission was granted for Woburn Forest in Bedfordshire in 2010.
“It was a very bold decision in the depths of the financial crisis to push on and go and do a speculative development of a fifth Center Parcs,” says the source familiar.
The bullishness of Blackstone to pump significant capital into Center Parcs during Britain’s recession and the global financial crisis of course paid off in the long run as Blackstone was able to book nearly 4x its initial investment. But, what also helped create such a stellar return was some fortunate timing, as in 2009 some of Blackstone’s financing was coming due but the firm was able to buy its debt back cheap during the recession.
Keeping on track
By 2010, Blackstone was looking at exiting Center Parcs and, according to a PERE report at the time, it engaged an advisor in a process to potentially float the properties as a Channel Islands-listed real estate investment trust to make the process more tax efficient and liquid for third party investors to participate.
However, a source close to the firm’s thinking at the time says that Blackstone actually ran a dual-track exit strategy never ruling out a trade sale. “An all cash offer was probably what Blackstone always wanted. By exit it had owned the investment for ten years from limited-life capital so even if it could have got more from an IPO to think about being locked-in for another two or three years it becomes a really long-term hold.”
Gerry Murphy, chairman of The Blackstone Group International Partners, was obviously pleased with the outcome calling Center Parcs “an excellent investment for us” in a statement.
Brookfield ultimately walked off with the keys to Center Parcs, but the firm was by no means the only potential buyer. Rumoured to also be a bidder was London-based private equity house CVC Capital Partners, which was working with Greenwich, Connecticut-based real estate investment manager Starwood Capital Group. Another consortium that PERE understands was close was Canada’s biggest pension plan, the Canada Pension Plan Investment Board, and KSL Capital Partners, the US private equity leisure and travel specialist.
“To date, Brookfield Property Group’s investment activity in the UK has focused primarily on the office and logistics market; however, our global portfolio has always encompassed a broader mix of asset types including property deriving its returns from leisure activities,” commented Ric Clark, chief executive of Brookfield, when the deal was announced.
And Brookfield has some growth potential for the business after Center Parcs secured planning permission for a sixth park in Ireland. However, the Center Parcs business in Europe is a separate entity and is owned by Pierre & Vacances, the French timeshare operator, so Brookfield will be unable to expand into continental Europe.
Although, Clark did add that Brookfield could “see compelling opportunities to grow the business and enhance our investment returns.”
Not that growth is necessarily the route the Toronto-based asset manager needs to take. After all, Center Parcs may not be your average real estate asset but it is a core income-producing asset, and its occupancy levels have averaged approximately 97 percent these last five years. Nevertheless, Brookfield is going off the beaten track in the hunt for yield.