Background

Hallmark acquired this eight-storey, 75,000 sq ft office scheme in Basingstoke in 2004. Upon loan expiry in 2009, the lender requested repayment as they were unwilling to grant a loan renewal or extension. With this occurring at arguably one of the lowest points of the recession, refinance was not possible due to the significant writedown of valuations across the globe. As such, the lender was forced to instruct LPA receivers to orchestrate its sale.

Harnessing the Advantage

While other asset managers would have walked away with a loss, Hallmark saw their intimate knowledge of the property as a strategic advantage worth leveraging. In planning the property’s repurchase, the team exercised full due diligence as if it were an entirely new acquisition, with the added advantage of 5 years’ knowledge of the property. Their strategic modeling showed a profitable opportunity with low to moderate risk that would be mitigated by achieving a considerably discounted purchase price.

Repurchase Execution

Having formulated a definitive strategy for the property, the team made a direct offer for its repurchase from the lender at the Hallmark's target price. The lender, however, took the advice of the LPA receivers to sell the investment on the open market, hoping to achieve a higher sale price than that offered by Hallmark.

Utilising their extensive network of contacts, Hallmark successfully established communication with the appointed receivers. The team reiterated their belief that this property would not sell at the price the lender was seeking, and requested the receivers stay in touch during their sale attempts. Hallmark closely monitored the situation on a frequent basis for 12 months, and whilst the property saw much interest on the market during that year, they were unable to generate a buyer at the lender’s price. At that time, Hallmark assessed the situation as ripe for making a new offer with the receivers.

Having kept a steady pulse on the property’s unsuccessful sale over a period of 12 months, and given that an entire year’s rental income potential had elapsed, Hallmark’s team confidently made a second offer to repurchase the property in cash, at an even lower offer than previously submitted. Further to Hallmark's robust negotiations, the receivers ultimately agreed terms and Hallmark repurchased this property in 2011.

Full Cash, Full Control

Whilst Hallmark normally uses leverage to maximise profit, the team executed a cash-only purchase to address two strategic points for this property. The first goal was to strengthen Hallmark’s buying position. Not only had the LPA receivers seen 12 months transpire with no buyer, the remaining prospective buyers carried a tangible risk factor given the lengthy and uncertain loan approval process at a low point in the recession. By offering to purchase in cash, Hallmark eliminated the remaining buyer competition, despite their (twice reduced) lower offer.

Secondly, at that point of the recession, lenders were quick to foreclose on loans. If Hallmark had acquired a mortgage for the property, notwithstanding the tenant's undoubted covenant strength, the forthcoming lease expiry (in four years’ time) might have increased losing control of the property should the market not have recovered sufficiently by then. To overcome this risk, Hallmark purchased the property for cash, giving the team full control to execute their asset management strategy as planned.

Producing Profit

Between 2011 and 2014, Hallmark collected rent on the unencumbered property and subsequently negotiated a beneficial settlement package with the outgoing tenant. By the end of 2014, Hallmark had returned the entire capital investment to their clients, plus an additional c. 17.5% profit. In accordance with their strategic plan, the team then applied for and received approval to change the property use from office to residential. The property has since been sold, providing clients with a substantial amount of additional profit.

Case in Point

The Hallmark team demonstrated great resourcefulness in translating their knowledge of the property into a profitable exit strategy. The strategy was contingent upon, and fulfilled, by the team’s adaptability to the recession environment, savvy networking and negotiation skills, and forward thinking in repurposing the building from office to residential. This case exemplifies Hallmark’s drive to maximise results through diligence, teamwork, and innovative thinking.