As it awaits formal confirmation of its takeover of Quintain, Estates Gazette speaks to Lone Star’s UK head Angus Dodd about the strategy for the flagship Wembley Park development and the company’s future
Lone Star’s £700m takeover of Quintain Estates & Development, the latest in a series of mega-buys by the private equity firm, will bring to an end the tumultuous, post-downturn chapter in Quintain’s history.
In a rare interview, Angus Dodd, Lone Star’s managing director of UK and Ireland, discusses his intention to create a new masterplan for Quintain’s flagship Wembley Park, which could take in another 43 acres; London’s residential market; and Lone Star’s new £2bn hotel business.
The move is likely to see Quintain’s peripheral interests, such as its stake in West End investment vehicle WELPUT, sold off in the medium term and end in the eventual sale of its flagship Wembley Park project, once built out, as one large entity. In Lone Star’s view, the estate is worth more than the sum of its parts.
In addition to its Wembley project, Quintain owns an 11.2% interest in healthcare business Quercus, which was classified as non-core prior to the Lone Star bid and will continue to be so, and its London portfolio of smaller projects, such as Aldermary House, EC4. It is also an investor in, and joint manager of, the £1.2bn unit trust WELPUT.
These elements are clearly not central to the Wembley-driven company and it is expected that these ultimately will be sold off.
This is all part of a plan that Lone Star has been working on for some time.
“We started looking at Quintain a year ago and looking at it intensively early this year. At that point we hired Morgan Stanley and all our other advisers,” Dodd says.
Initial contact was made with the management of the company, led by chairman William Rucker and chief executive Max James, a couple of months before the offer was made in order to determine whether Quintain would be open to a takeover.
Having made $10.5bn (£6.7bn) of acquisitions in the UK and Ireland in the past five years and $23.7bn in Europe, Lone Star is one of the most influential and followed names in the market.
The Dallas-based investor is using its $5.8bn Lone Star Real Estate IV fund, which it raised in its first and only close in April, to buy the listed company, and under its ownership Quintain will be better funded and ready to exploit the opportunities in its portfolio.
Lone Star had seen Quintain as a prospective public-to-private deal for several years because of its inability to tap the public market and its share price, which had been trading at a discount to NAV.
“I think the public market finds it difficult to understand and value, in particular, the development aspects of the Wembley project,” says Dodd.
As a result, Quintain has not been associated with many new major regeneration opportunities. The company has also had to sell off elements of Wembley once they have been completed to fund the next stage of development.
The public market’s apprehension over Quintain stems from a time after the financial crisis in 2009 when its share price dipped below 4p and the magnitude of its debt pile led the company to warn shareholders that there was “material uncertainty” over whether it could continue as a going concern.
Since then it has aggressively deleveraged and its share price has steadily risen, with the Lone Star offer made at 131p per share.
But it did not return to be the powerhouse it was before the downturn, having to sell its 50% stake in its other major regeneration project in Greenwich Peninsula to Knight Dragon in 2013 for £186m.
Under Lone Star’s ownership, which is due to be formalised following the 9 September closing date for shareholders to accept the deal, Quintain will remain a separate entity. It will not be amalgamated with other aspects of the Lone Star portfolio or be taken on by its asset management arm Hudson. All of Quintain’s management is expected to remain in place.
Hypothetically, the Quintain team could look at new projects or help with other projects under Lone Star’s control, but it “has a massive task on Wembley involving a lot of capital and a big commitment to building out the estate”, says Dodd.
Accounting for 80% of the company’s assets, the Wembley Park project represents one of London’s few remaining regeneration opportunities.
It has consent for 5,500 homes, of which 525 are completed and 1,200 are in development; 3.3m sq ft of commercial development,
1m sq ft of which is completed, including the SSE Arena and the London Designer Outlet; and 43 acres to the east and south-west of the project with potential for 6m sq ft of development.
“The shortfall in London’s housing provision is a well publicised feature of the market and that shortfall is not for £2,000 or £5,000 per sq ft houses, it is for sub-£1,000 per sq ft houses. Wembley falls firmly into that bracket as well as providing a big PRS opportunity,” says Dodd.
Lone Star has a long track record in undertaking major development projects in Europe. In the UK it is currently working on Two Fifty One, the 41-storey residential tower in Elephant & Castle, SE1, as well as building out the 1,000-acre, 5,500-home Priors Hall site in Northamptonshire.
It is expected that the delivery of the remainder of Wembley will be accelerated and completed in five to six years. In order to do so, a new masterplan is due to be submitted early next year to incorporate the company’s unconsented land. One of the main features of this land is the down-at-heel Wembley Retail Park, which has a number of vacant shops.
A new masterplan will require mass consultation with Brent council, the GLA and the local community.
“The existing masterplan is difficult to implement and needs to be revised. We know what we are getting into on this front – we are used to dealing with local and government authorities and giving them the certainty of execution they require,” says Dodd.
The build-out time of the portfolio roughly matches the life of the Lone Star fund that is acquiring Quintain.
Its purchase of the company is to be funded using a £425m loan from Wells Fargo; more development finance will used on an asset-by-asset basis.
One quirk of the Lone Star bid is that Quintain’s share price has stood at around 0.5p above the offer price since it was made. When a share price trades at a premium to an offer this can indicate that some investors think a rival, higher bid could be forthcoming. But there appears to be little concern in the Lone Star camp over the prospect of another approach, as the price is only marginally above the offer.
Assuming the Lone Star bid is accepted, Quintain looks destined to become streamlined, to accelerate its delivery of Wembley and fulfil its potential. If the housing market holds steady and a new masterplan is implemented, no doubt it will provide another healthy return for Lone Star.
Jury is out on fate of Lone star’s other maturing investments
Lone Star has been most active in the non-performing loan market post-downturn, but it has also increased its activity in the direct market in the past year.
The few UK and Irish non-performing loan portfolios that are coming up for sale are generally of lower quality than those sold earlier in the cycle and are becoming more expensive as time goes on. With so many organisations having disposed of their non-core positions, it is also the lack of opportunities that is forcing Lone Star into the direct market more often, prompting moves for the likes of Quintain.
Lone Star is continuing to plough cash into the market with its latest $5.8bn (£3.7bn) fund – Lone Star Real Estate Fund IV – but it is now also looking to exit many more mature investments made by its previous fund.
Most notably, it has appointed Rothschild to either sell or IPO its £2bn Amaris hotels vehicle next year. Amaris includes Jurys Inn, which it bought for £700m earlier this year, and hotels it gained control of through its purchase of £5.2bn of loans from IBRC last year.
“The acquisition of Jurys gave us a very strong management team which, coupled with the Hudson expertise, is a good basis for creating that hotel platform. We have got capex and rebranding of the hotels to do, and an IPO is just one exit option,” Dodd says.
Big sales are also expected by the end of the year from the £1bn of assets it bought from Moorfield’s first two funds in February. Most notably, £300m of assets in Brindleyplace, Birmingham, in which Lone Star inherited a 50% stake as part of the Moorfield deal, are for sale.
