Legendary value investor Seth Klarman’s Baupost Group is a part of the consortium that picked up seven Spanish shopping centers/galleries and a retail park in the port city of Alicante for €160 million. GreenOak Real Estate, a New York-based investment firm founded by former Morgan Stanley executives and headed by Chris Niehaus, is another member of the consortium. So is Grupo Lar, a Spanish company known as a property asset manager and investor with development skills.

Vastned, the seller of the properties, is a listed European retail property fund focused on premium shopping venues.

Seth Klarman Baupost Group

In its press release, Vastned said the transaction would reduce its “exposure to on-going capital requirements and economic risks associated with these challenged secondary Spanish shopping centres and the related continued pressure on rental income.” Vastned also said the sale proceeds of the “non-strategic” assets would be used to redeem loans, including mortgages related to those assets.

“Although the shopping centres have always contributed to the direct investment result, they had a highly negative impact on the value developments in the total property portfolio,” said Vastned CEO Taco de Groot. “We believe the value of the portfolio would decrease further due to the unfavourable outlook, the significant capital requirement and continuing pressure on rental income.”

Key terms of the transaction

Here is a slide from Vastned’s presentation on the deal.

1-terms

Vastned’s perceived downsides to continued ownership

2-downsides

Note the yellow-highlighted portions in the above slide. It cites limited potential, oversupply of similar RE, and significant upcoming capex due to the age of these shopping centers as some of the key reasons for the divestment.

Baupost’s investment outlook

At this stage one can only guess that Klarman and partners viewed the deal as cheap enough to justify the risks.

Note that Klarman is not averse to sit on cash for extended periods of time awaiting opportunities for value investing. Baupost is said to have had nearly $14B in cash, nearly half of its assets under management, as of late October 2013. In fact, in view of the dearth of investible avenues, Klarman’s Baupost has decided to return money to investors, the second time in a few years.

Probably, the Spanish deal offered a valuable margin of safety, considering Vastned’s admission that the deal was concluded at a value that was “29% below the latest appraisal value at 31 December 2013 of € 226 million.”