Interchange Portfolio

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Situation

In August 2012, an affiliate of Alliance Partners HSP, LLC, acquired a four-property office portfolio comprising 311,000 total square feet known as the Interchange Portfolio (the “Portfolio”) located in the Philadelphia Metropolitan Area from a distressed seller. The seller was a regional owner/operator that had financed the properties using a cross-collateralized loan when the properties had high occupancy. However, the Portfolio occupancy and market conditions deteriorated and the seller could not refinance upon loan maturity. The seller and its lender agreed to dispose of the property in a “short sale”, whereby the lender agreed to a sale at a price below the value of its mortgage.

Value Creation

  • Acquisition – Alliance was able to purchase the Properties at an attractive basis in part due to issues surrounding the acquisition, for example:
    • The properties in the Portfolio varied greatly in size (i.e. the smallest property had 18,000 square feet and the largest property had 135,000 square feet) and occupancy (i.e. the lowest occupancy was 10% and highest occupancy was 100%). The variety eliminated some potential buyers given that some portion of the Portfolio did not meet their acquisition criteria.
    • Two of the properties had potential environmental issues and required significant testing pre-acquisition to evaluate risk. Alliance spent approximately $100,000 in environmental due diligence costs prior to closing, which cost may have dissuaded some buyers from pursuing the acquisition given the uncertainty as to the outcome of that investigation.
    • The opportunity was brought to Alliance by an individual investor who was seeking a capital partner with operating capabilities. Alliance was able secure the deal by structuring a “win-win” joint venture with the investor.
    • Due to speed, Alliance had to close the acquisition with 100% equity at a price that was above the financial capability of most high net worth investors. Furthermore, since the Property was to be financed shortly after closing, the post-financing equity investment fell below the threshold sought by most real estate investment funds. Therefore, the deal size did not meet the criteria of many buyers, reducing competition.
  • Leasing - Given that the value of the Portfolio had become less than the value of the debt, the seller was unmotivated to expend new capital to complete new or renewal leases. After acquisition, Alliance met with all of the existing tenants and sought opportunities to extend leases in exchange for improvements and/or concessions. Alliance successfully renegotiated the leases of four tenants occupying a cumulative 113,000 square feet (36% of Portfolio), securing an additional $9.8MM of contract net rental revenue.

The largest lease extension involved an 88,000-square-foot tenant leasing 100% of one of the four properties. Alliance recognized that the quality of this tenant’s credit would allow the asset and lease to be repositioned for sale in the “net leased” market, in which buyers underwrite real estate assets with single tenants on long-term leases more like company bonds and are willing to pay premiums over traditional real estate investors. Consequently, Alliance restructured the single-tenant lease in a “net leased” manner.

  • Capital Improvements – Alliance completed approximately $750,000 in deferred maintenance, system replacements, and cosmetic improvements to make the buildings more functional and marketable.
  • Redevelopment – the fourth asset, Trinity Corporate Center (“Trinity”), comprises 135,000 square feet and is well located but is outdated with significant deferred maintenance and no amenities. Consequently, Trinity is less than 10% leased. Alliance is leveraging its redevelopment experience to reposition Trinity and lease it to stabilization. Trinity has been rebranded as ArborRidge.

Select Photos

275 Phillips Boulevard, Ewing, NJ (Sold)

275 Phillips Boulevard, Ewing, NJ (Sold)

Trinity (Current Condition)

Trinity (Current Condition)

Trinity (After Redevelopment)

Trinity (After Redevelopment)