Canada has been the leading foreign investor in the United States commercial real estate market for years, and the country’s fondness for U.S. properties continues with an announcement from Toronto-based Fairfax Financial Holdings. Fairfax has committed to acquiring an approximately 95 percent stake in a portfolio of real estate construction loans that Kennedy-Wilson Holdings will purchase from troubled Pacific Western Bank, based in Los Angeles. The total principal outstanding balance on the loans is $2.3 billion, but Kennedy Wilson struck a deal that places a $2.1 billion price tag on the portfolio. Fairfax will pony up roughly $2 billion of the purchase price, leaving Kennedy Wilson to fund the remaining cost. Approximately 70 percent of the loans are secured by multifamily or student housing projects.
Canadian real estate has done well in the past few decades, giving Canadian real estate firms plenty of buying powder. Fairfax was eager to use their capital for the distressed loan portfolio. The average loan to value of the loans it purchased is around 51 percent and the vast majority of the projects are for multifamily and student housing, which both have strong macro-economic fundamentals. The plan seems to be holding these loan commitments to maturity, which averages to around 1.7 years. If all goes well Fairfax expects the annual return on capital to be over 10 percent. Not bad, even in a high inflation environment.