South Korea’s Meritz Securities Co. Ltd. has abandoned plans to acquire about 40 stores of Walmart Stores Inc. in southern states of the U.S. for $500 million, after U.S. rate rises following the election of Donald Trump slashed expected returns from the deal.
Meritz Securities had signed a sales and purchase agreement with a U.S. real estate investment company last September to buy the medium-sized outlets of the U.S. retailer, and were in the middle of finetuning detailed conditions to reflect the higher borrowing costs, according to a Meritz source on Jan. 4.
But the South Korean brokerage house terminated the negotiations late last month. It also had planned to buy additional Walmart shops in the west and other parts of the U.S. after closing the deal.
“As U.S. mortgage rates rose by around 0.9% points, the actual returns for equity investors have declined more than 1% to 2% points because of the leverage effect,” said an investment banking source.
After the U.S. Federal Reserve lifted the federal fund rate by 0.25 percent last month following the election of Donald Trump, U.S. T-note yields, benchmarks of U.S. mortgage rates, have crawled up 0.6~0.7% points between September and December, 2016.
Meritz had aimed to sell its equity stake in those Walmart outlets to other domestic institutional investors.
The Walmart stores which Meritz had targeted have been developed and managed by the unidentified U.S. real estate firm for about one year or less. Most of them are medium-sized shops without retailing durable goods such as large-sized home appliances. They have around 20 years remaining on the lease with Walmart.
Meritz offered to buy a smaller number of the Walmart outlets than it had planned to acquire and reworked the contract structure. But it finally decided to drop the agreement because the lowered expected returns would make it difficult to resell its equity interest to other institutional investors.
The Meritz source added that it had not paid a deposit for the contract, so the negotiations cost only due diligence and legal expenses.
With U.S. mortgage rates moving up amid expectations of U.S. economic growth and inflation, South Korean brokerage companies are expected to take a step back from equity investment in U.S. real estate, and to switch to other regions or debt tranches of real estate investments.
“While local institutions are adjusting target returns on U.S. properties, they are highly likely to turn their eyes to Europe, or participate aggressively in senior loan or mezzanine transactions which have been handled by management companies generally,” a local brokerage firm’s real estate investment official told the Korea Economic Daily.
Meanwhile, a consortium of Korea Investment & Securities Co. Ltd. and Hana Asset Management Co. Ltd. agreed in December 2016 to buy the NASA headquarters building in Washington D.C. for about $360 million from a REITs company, shortly after their local rival KTB Asset Management Co. Ltd. had given up the acquisition because of soaring funding costs.
Korea Investment adjusted the financing conditions and targeted an annual return of 6% from the NASA head office deal, which is subject to U.S. funding costs.
By Daehun Kim and Chang Jae Yoo
<Edited by Yeonhee Kim>