Oceanwide Sells SF Project to Hony Fund for $1.2B After Deal Collapses

A troubled mainland developer’s race to dispose of assets to meet looming debt repayments took a twist yesterday when China Oceanwide Holdings brought on board a potential replacement buyer for its unfinished San Francisco project.

Oceanwide said in an announcement to the Shenzhen stock exchange that it had set up a framework agreement to sell the two-building complex – which is planned to include San Francisco’s second-tallest tower – to Beijing-based fund manager Hony Capital for $1.2 billion.

The deal follows the collapse on 25 March of the company’s agreement to offload the Foster + Partners-designed, mixed-use project in one of North America’s most valuable real estate locations to a unit of Beijing asset manager SPF Group.

Looming Due Dates Force Sale

The developer is scrambling to offload the partially completed Oceanwide Center as $280 million in senior unsecured notes become puttable on 30 April, while a $400 million bond is due in July, making a quick injection of cash necessary, according to ratings agency S&P.

Cash flow problems already forced the mid-sized builder which once aimed to become one of the biggest foreign developers in California, to halt construction on one of the two towers in the complex last October. The firm’s $1 billion LA development came to a stop in January 2019, after a contractor hired by Oceanwide sued the developer for $53 million over unpaid bills.

Under the terms of the framework agreement revealed yesterday, Hony Capital will pay $500 million on completion of the acquisition, with a further $700 million payable based on the financial performance of the project.

Under the terms of the agreement announced in January, SPF would have paid Oceanwide just over $1 billion for the San Francisco project — as much as $200 million less than the maximum amount which the developer might receive under the terms of its newly announced deal with the Hony Fund.

Under the terms of the deal with SPF Group, the asset manager would have made an initial payment of $636 million, which then would have been topped up with a maximum of $376 million depending on the profitability of the Oceanwide Center. The preliminary agreement with the Hony Fund delays more of the payment to the later stages of the transaction while making that cash contingent on the project’s fortunes.

Buying a Distressed Asset

Hony Capital, which has more than $12 billion in assets under management, including a minority stake in WeWork’s China business, will acquire the asset in San Francisco’s South of Market Street area through its Hony Capital Mezzanine Fund 2019.

Oceanwide said that a sale agreement will be signed following further negotiations, while noting in the bourse filing that there is “still considerable uncertainty” regarding the transaction.

While the acquisition is expected to close 15 days after the 30 June due diligence deadline, allowance has been made for an extension should the pandemic impede progress, according to Oceanwide’s statement.

Oceanwide is the third-largest shareholder – with a stake of just under 17 percent – in the Beijing-based fund manager’s parent company Legend Holdings, which is the controlling shareholder of Lenovo Group.

Running Out of Money on the West Coast

Should the deal complete, Hony Capital will become Oceanwide Center’s fourth owner in seven years, as financial problems follow the project from one investor to the next.

Oceanwide had picked up the project for $296 million in January 2015, from a joint venture between local developer TMG Partners and Northwood Investors as the largest in the company’s set of US acquisitions in 2014 and 2015.

The purchase of what was then known as First and Mission came two years after TMG and Northwood Investors had acquired the property for $122 million, following the bankruptcy of original developer David Choo.

Earmarked for completion in 2023 – but now over two years behind schedule – the complex two minutes’ walk from San Francisco’s landmark Salesforce Tower is planned to have one million square feet (92,903 square metres) of office space, 265 homes and a 169-room Waldorf Astoria hotel.

The taller tower is planned to reach 910 feet (277 metres), which would rank it below only the Salesforce Tower in the Bay Area, while the shorter tower is designed to rise 605 feet above sea level.

A Wuhan Specialist Suffers Internationally

The proposed disposal of the landmark complex would continue Oceanwide’s run of never having completed a development in the US, with most of the projects the firm has acquired either having stalled or been sold off.

In January last year, work on the company’s Oceanwide Plaza in Los Angeles stalled after subcontractors were not paid, with the development yet to re-start.

By mid-2019 the company had put up for sale its condo tower project at 80 South Street in Manhattan with an asking price of $300 million, without having broken ground on the 113-storey development.

Oceanwide had originally acquired the luxury residential project from the Howard Hughes Corp for $390 million in 2016. As of the time of publication the developer had yet to find a buyer for its Manhattan project as New York remains glutted with luxury condominiums.

The company’s cash flow problems have also extended to China, forced it in January 2019 to sell a pair of projects in Shanghai and Beijing to Hong Kong-listed Sunac China for RMB 12.55 billion.

S&P said in a note issued on 4 March that the coronavirus outbreak is hitting Oceanwide particularly hard “in terms of property sales in China, given that the vast majority of Oceanwide’s property inventory is in Wuhan, the epicenter of the outbreak”.