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Fairfax Financial Partners With Kennedy Wilson to Acquire $2B Loan Portfolio from Pacific Western Bank

Diversified Healthcare Trust, Office Properties Income Trust, The RMR Group
Courtesy of Felipe Galvan

TORONTO — Fairfax Financial Holdings Limited (TSX:FFH and TSX:FFH.U) is pleased to announce that it has agreed with Kennedy-Wilson Holdings, Inc. (“Kennedy Wilson”) (NYSE:KW) that, through certain of its subsidiaries (collectively, “Fairfax”), it will acquire an interest of approximately 95% in certain of the real estate construction loans (collectively, the “Loans”) that Kennedy Wilson has agreed to acquire from Pacific Western Bank (the “Transaction”), a bank holding company headquartered in California.

The total purchase price for the Loans is approximately $2.1 billion, of which Fairfax will fund 95% (approximately $2.0 billion). The aggregate principal balance currently outstanding under the Loans is approximately $2.3 billion. Fairfax will also assume approximately 95% of all future funding obligations under the Loans, subject to customary conditions to disbursement, which future funding obligations attributable to Fairfax total approximately $1.7 billion. The aggregate principal balance of the Loans, which are floating rate, currently carries an average interest rate of approximately 8.6%, and Fairfax has entered into interest rate swap arrangements to effectively fix this rate over the life of the Loans. The weighted-average remaining term to maturity for the Loans based on gross commitments is approximately 1.7 years, with some Loans subject to customary extension rights by the borrower up to a maximum of two additional one-year terms. Taking into account the discount at which Fairfax acquired the principal balances of the Loans, Fairfax expects the average annual return on the capital deployed by Fairfax in connection with the Loans to exceed 10%. All of the Loans are secured by real property located in the United States with an average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. More than 70% of the Loans relate to multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects.

“We are excited to continue our great partnership with Kennedy Wilson, led by Bill McMorrow, and to acquire an interest in a stable and attractive loan portfolio that further strengthens the foundation of interest and dividend income-generating assets that will benefit Fairfax over the next two to three years,” said Prem Watsa, Chairman and CEO of Fairfax Financial Holdings Limited.

The closing of the Transaction and the sale of each Loan is subject to the satisfaction of customary closing conditions (including Pacific Western Bank securing certain counterparty consents and waivers), and it is currently expected to close in multiple tranches during the second and early part of the third quarter of 2023. If a required counterparty consent or waiver in respect of a single Loan is not obtained, Fairfax will not be obligated to acquire that Loan but Fairfax’s rights and obligations with respect to the acquisition of each other Loan will be unaffected.

In addition to the Transaction, Fairfax also agreed to make a $200 million preferred equity investment in Kennedy Wilson. Under the terms of the agreement relating to the investment, Fairfax will acquire perpetual preferred stock that carries a 6.0% annual dividend rate and is callable by Kennedy Wilson at any time. Additionally, Fairfax acquired 7-year warrants for approximately 12.3 million common shares with an initial strike price of $16.21 per share, based on Kennedy Wilson’s closing price on June 2, 2023. The investment is subject to customary closing conditions and is expected to close during the second quarter of 2023.

Fairfax Financial Holdings Limited is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management.