Fairfax Financial Holdings Ltd. is expecting double-digit returns from a multibillion-dollar deal to fund the construction of multifamily and student housing developments in the United States.
Toronto-based Fairfax FFH-T will spend US$2-billion on a collection of 63 loans from Beverly Hills, Calif.-based Kennedy-Wilson Holdings Inc., Fairfax announced Monday. Kennedy-Wilson acquired the loans – 70 per cent of which relate to multifamily or student residences, with the remainder a mix of industrial, hotel and life sciences office space – from Pacific Western Bank last month.
Fairfax will buy a 95-per-cent interest in the loans from Kennedy-Wilson, which have a total of US$2.3-billion in balances owed. Despite an average annual interest rate of 8.6 per cent on the loans, Fairfax said it “expects the average annual return on the capital deployed by Fairfax in connection with the loans to exceed 10 per cent” once the discount the company received is taken into account.
All the loans are secured by real property in the U.S., the company said, with an average loan-to-value ratio of 51 per cent. That means the properties have an average market value of nearly twice the total value of the loans.
The deal comes as construction of high-density residences in the U.S. has surged in response to the higher-interest-rate environment. Construction spending shot up 7.2 per cent in April on a year-over-year basis, the U.S. Commerce Department announced on June 1, with the monthly data coming in 1.2 per cent above March levels.
Spending on single-family housing projects actually declined by 0.8 per cent, the Commerce Department said, but that weakness was offset by a 0.6-per-cent rise in outlays on multifamily housing projects.
Construction-related loans are also climbing. U.S. banks held roughly US$468-billion of such loans in the final quarter of 2022, according to the most recent data available from Standard & Poor’s, up nearly 5 per cent from US$447-billion during the same period one year earlier.
As a percentage of gross loans and leases, S&P said construction loans in the fourth quarter of 2022 reached their highest levels since the second quarter of 2011.
Alongside the loans, Fairfax is also acquiring US$200-million worth of preferred stock in Kennedy-Wilson, which will come with a 6-per-cent annual dividend. The investment represents the third major cash infusion Fairfax has provided to Kennedy-Wilson, which manages US$16-billion worth of real estate in the U.S., Britain and Ireland.
Fairfax initially invested US$100-million in Kennedy-Wilson in 2010, and in 2022, the Canadian company acquired US$300-million worth of preferred shares that came with a 4.75-per-cent annual dividend. This latest investment brings the total Fairfax has invested in Kennedy-Wilson to US$600-million.
Fairfax’s share price has been on a tear since last October, climbing by nearly 60 per cent over about eight months from $620 on the Toronto Stock Exchange to $984.90 at the close of trading Monday.