UK - Tesco has formed a fourth joint venture with a UK pension fund to sell and leaseback property assets, in an effort to release value from its property portfolio.

The latest deal is structured as a 50-50 joint venture with an unnamed pension fund, and involves the sale of £514m (€556m) of property assets - 15 Tesco stores and two distribution centres - which will be leased back to the venture on 30 year RPI-linked leases.

Tesco revealed in a statement that the transaction will be funded mainly by fixed-rate notes issued by Tesco property Finance 2 Plc - the debt issuing arm of the joint venture - and it is also expected to produce an average initial yield of 5.2% for the stores and 6.3% for the distribution centres.

This is the third joint venture formed by Tesco with UK pension funds to release money from its property portfolio. In its interim results published today it noted that on 15 August 2008 it agreed a sale and leaseback deal with the Universities Superannuation Scheme (USS) for £222m. (See earlier IPE article: Sources confirm Tesco/USS real estate deal)

It noted this followed a smaller transaction of just £44m of assets that was transferred to BP Pension Trustees in June 2008, however most recently - on 25 June 2009 - the retailer confirmed it had formed a joint venture with its own Tesco Pension Trustees for the sale and leaseback of £386m of assets comprising 12 stores and two distribution centres. (See earlier IPE article: Tesco fund gets £500m property as deficit exceeds £1bn)

Meanwhile, latest figures from the interim results showed the deficit in the Tesco defined benefit (DB) scheme had increased from £1.1bn at the end of February [the financial year end] to £1.4bn after tax on an IAS19 basis by the end of August.

Tesco attributed the increased deficit to a “fall of over 100 basis points in the high-quality corporate bond rate which drives the discount rate for valuing the Fund’s future liabilities.”

However in the results presentation Laurie McIlwee, group finance director, noted that five weeks later the deficit had fallen back down to £1.1bn, while the actuarial deficit “remains small and manageable”.


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