NB Distressed Debt has announced the sale of its combined largest holding, a lodging and casino sector investment, for proceeds totalling approximately $34 million. It says that the sale price is “substantially equal to the carrying value in the most recent Net Asset Value announcements” and represents a gain of approximately $9 million over the acquisition value. The sale has been in progress over the last three quarters. The company says that the Board will review the cash positions at the February board meeting to determine the amount and timing of distributions to shareholders.
Summary of the investment management process
The asset management team at Neuberger Berman Investment Advisers LLC has provided the following summary of the investment management process surrounding this asset:
- “NBDDIF purchased a non-performing loan secured by approximately 60 acres of land adjacent to the gaming corridor in Las Vegas at a significant discount to par value. The initial purchase of the loan was at an implied basis of $1.5 million per acre – the original loans equated to approximately $9.0 million per acre. The borrower (a complex Tenants-In-Common structure of entities) failed to pay the loan when it matured.
- The Company, working with other lenders, ultimately foreclosed on the loan collateral, which in addition to undeveloped land included an apartment complex of 998 residential units that had become dilapidated in the absence of capital improvements. NBDDIF and the owners made significant improvements, including the deferred maintenance, repairs, and upgrades needed to bring the units back up to building code standards – increasing overall occupancy, rental rates and cash flow.
- The land and apartments had a wide range of potential realisable values, which depended on the various possible future uses and related cash flow profiles. The loan collateral had zoning approval for mixed-use casino and lodging development. Other potential uses included a sports, entertainment and convention facility or a combination of retail, residential or commercial developments.
- A buyer developing a new casino or hotel would have likely paid the highest value for the land, whereas a land bank or speculator would have likely been at the low end of price range. NBDDIF and the new ownership worked with advisors to conduct a broad and deep marketing of the property to potential buyers. Engaging with multiple interested parties, the Company prioritised buyers who had the ability to execute with limited contingencies.
- Discussions with potential buyers determined that there was ultimately limited appetite to develop the mixed-use casino and commercial facility that would maximize the value of the zoning and likely proceeds in a sale. Following in-depth discussions with a shortlist of buyers, NBDDIF and the owners ultimately executed a purchase & sale agreement with an interested party in 3Q18 and completed the transaction in February 2019.
Impact on NAV and Potential Distributions
The Company will receive approximately $34 million in sale proceeds. Of this, approximately $6.9 million is due to NBDD and $17.9 million to NBDX. The return on investment to these two funds represents a 1.4x multiple on invested capital and an estimated IRR of 4.4%. It represented NBDD’s largest investment and NBDX’s second largest investment.
NBDG purchased shares in the new entity in the secondary market in 2016 from a forced seller at a different point in the investment’s life. NBDG will receive approximately $9.1 million in proceeds. The return on investment to NBDG represents a 1.2x multiple on invested capital and an estimated IRR of 8.3% on a constant USD basis (in GBP terms, an estimated IRR of 6.5%).
The Board says that it will review the cash positions at the February board meeting to determine the amount and timing of distributions to shareholders. Portfolio fact sheets for NBDD, NBDX and NBDG are being finalised following the successful sale and will be available shortly.”