* June 8 deadline for Walton Street to repay loans-sources
* Blackstone positioned to take over properties-sources
* Blackstone shopping for debt financing-sources
By Ilaina Jonas
NEW YORK, June 5 (Reuters) - Blackstone Group LP could be days away from gaining control of 23.8 million square feet of warehouse and distribution centers from Walton Street Capital LLC if Walton defaults on loans used to buy the properties, three sources familiar with the matter said on Tuesday.
Friday is the deadline for real estate private equity company Walton Street to repay some $2.45 billion of maturing senior and junior debt it used in 2007 to buy West Coast Industrial Portfolio (formerly known as CalWest) for $2.75 billion, the sources said. The portfolio is comprised of about 95 properties mostly in California, Washington and Arizona.
Walton said in an email that it believes the portfolio is valued at about $2.1 billion, or 86 percent of the $2.45 billion of outstanding debt.
Blackstone owns or controls most of the junior debt on the portfolio. Walton Street, based in Chicago, is unlikely to repay the loans on the portfolio, said two of the sources, who asked not to be named because they were not authorized to speak publicly about the matter.
If Walton Street defaults, Blackstone is in line to repay the senior loans and take the property. That could come in the form of a foreclosure or Walton could transfer the deed to Blackstone. Walton Street said the portfolio’s debt would not become the burden of Walton Street’s funds, and it is not tied to its other properties.
Walton Street expects the West Coast Industrial Portfolio to return more than 55 percent of its invested equity, primarily from property cash flow. It said that over the past 12 months the portfolio generated about $54 million of distributable net cash flow after debt service and management fees.
Over the past two years, Blackstone has bought or gained control of seven of the eight layers of junior debt. Those loans carry a face value of $1 billion, one of the sources said, adding that Blackstone bought them at a “very significant” discount.
Blackstone spokeswoman Heather Lucania declined to comment.
During the financial crisis the value of warehouse and distribution centers declined 32 percent to 40 percent, depending upon the location, according to Moody‘s/RCA CPPI indexes. While values have recovered somewhat, they are still off 27 percent to 19 percent from 2007, according to the indexes.
Occupancy for the portfolio was 93 percent when Walton Street bought it, Green Street Advisors analyst Eric Frankel said. He said occupancy today is in the mid 80s, and like most warehouse and distribution centers rental rates are low.
Blackstone is shopping for $1.35 billion to finance repayment of $1.45 billion of debt coming due that it already does not own, one of the sources said.
That includes a $1.1 billion mortgage and the most senior slice of junior debt owned by General Electric Co, another of the sources said.
Blackstone began buying warehouse and distribution centers near the bottom of the market in 2010 and has amassed about 45 million square feet of the commercial real estate known as “industrial property”.
If it adds on the West Coast Industrial portfolio and a pending acquisition of 69 U.S. properties from Dexus Property Group, Blackstone will own over 80 million square feet of warehouse and distribution centers in the United States.
Warehouses and distribution facilities, sometimes as large as 17 U.S. football fields, are often built near highways, airports and shipping ports. The hulking concrete shells are stuffed with goods headed for stores. Tenants of these centers include shippers, manufacturers and retailers.
Investors like this type of commercial real estate because the income is steady and the properties require little capital for upkeep, Green Street’s Frankel said.