Toronto-based insurer Fairfax Financial Holdings Ltd. has agreed to purchase a portfolio of 63 construction loans from property investment company Kennedy Wilson. The deal is valued at $2.1 billion, of which Fairfax will fund 95 percent. The transaction comes only a month after Pacific Western Bank sold 74 construction loans to Kennedy Wilson for $2.4 billion at a $200 million discount, Reuters reported.
The construction loan portfolio that Fairfax acquired is worth approximately $2.3 billion. The insurer will also assume 95 percent of all future funding obligations under the loans, which total roughly $1.7 billion and have an average interest rate of 8.6 percent. Fairfax expects the average annual return in connection to the loans to exceed 10 percent.
More than 70 percent of the construction loans that traded are connected to multifamily and student housing projects, while the rest is attributed to a mix of industrial, hotel and life science office developments. The transaction is set to close during the third quarter of 2023.
Besides the loan portfolio acquisition, Fairfax will make a $200 million preferred equity investment in Kennedy Wilson, an agreement that will enable the insurer to acquire perpetual preferred stock that carries a 6 percent annual dividend rate. This transaction is set to close before the end of the second quarter.
The deal comes in the aftermath of the March collapse of Silicon Valley Bank and Signature Bank that resulted in increased volatility in the financial markets and amounting concerns over interest rate hikes. According to CBRE, commercial real estate lending activity has continued to slow, with many borrowers waiting on the sidelines for conditions normalize.
Fairfax and Kennedy Wilson first partnered in 2010 when the two firms acquired $250 million of real estate assets. A decade later, the companies launched a $2 billion debt platform in which Kennedy Wilson acts as asset manager.
In early 2022, Fairfax made a $300 million strategic preferred equity investment in Kennedy Wilson. The Beverly Hills-based company was expected to use the proceeds to fund its development pipeline, real estate investment and pay off in full its unsecured bank borrowings.