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US Real Estate: The Time To Buy
24 Jun 2009
Gerald Marshall, CEO, Amerimar Enterprises, Inc.
How has Amerimar been affected by the global financial crisis?
We as a company are doing well. Globally, the real estate market saw an excessive amount of debt flowing into the marketplace from the period of 2005 through 2007. Ample credit availability drove prices way up. As a result, that period of time yielded very few new acquisitions for the company, as our conservative use of leverage kept us priced out of most deals. On the other hand, we were highly successful in selling a large portion of our value-added property portfolio. We pared back our portfolio from 23 to 14 properties, from about US$1.3bn worth of property to about US$700m. The remaining properties that we have in our portfolio are generally healthy, which will allow us to focus more of our energy and time seizing the opportunities that are beginning to emerge as a result of the global financial crisis.
Are you able to secure finance for your existing portfolio?
Unless your leverage level is very low, it is difficult to find new lenders to refinance existing debt. We are finding that existing lenders are generally willing to work with you if you are able to demonstrate – and in our case we are – that you are the right management team for the asset. Lenders will always have a hard time leaving an existing borrower in-place if they are not well positioned to add value to the asset—either through management expertise or the infusion of new equity—or if the debt is well in excess of the value of the property.
Are you looking to acquire new properties?
We are actively bidding on assets at this time, and we are seeing opportunities to buy debt – sometimes at less than half of the face value of the existing loan balance. In many situations the equity has no value, the mezzanine loan is out of the money and the most subordinated portions of the senior debt are out of the money as well. Often the strategy is to buy the senior debt at a discount and also get control of the subordinated debt and servicing rights.
Are you focusing on a particular asset class?
At this early point of the cycle, we prefer office assets which have long term leases on half to three quarters of the building. The leases provide cash flow and stability while we work the asset to stabilization during what might be an extended downturn in the economy. As we start to move through the cycle and we see some economic recovery, we will start getting aggressive on some hotel acquisitions and once we see some job growth, we will start to look at some multi-family acquisitions. We see retail as something we would defer until later on in the cycle. We see a very conservative consumer preventing retailers from hitting their sales targets. Many retailers are dealing with their own issues and are not adding new stores. In my opinion, many retailers have lease structures that really should only have been granted to a tenant with much stronger financials.
Do you think there is some way to go in the downturn?
That really is the trillion dollar question right now. Are we in the eye of the storm or are we on the way back to recovery? I can argue both ways. There are a lot of leading indicators that are showing that things are recovering, but on the other side, there has been a lot of pressure on lenders to not move on residential foreclosures. In many situations the pressure not to foreclose has come and gone, and we are starting to see more and more residential properties being taken back by lenders. The increasing number of people being foreclosed out of their homes and the additional supply of foreclosed properties will be a drag on the economy. There is a lot of uncertainty right now, and there is no way to know whether we are buying at the bottom or whether we are buying early.
In light of this, how have you adapted your analysis of risk?
You need to be conservative with your assumptions and capitalize the asset to withstand a protracted downturn. When you are bidding on assets at less than 50 percent of the face value of the debt, from our point of view, you don’t have to be buying at the very bottom. We believe that when you are buying at these deep discounts to the long term fundamental values of the property, in two or three years from now you will look back and feel you made good acquisitions. If you are buying a property at 50c on the dollar, I don’t really care if it goes down to 47c before it gets to 75c, so long as you are capitalized to ride out the storm.
Do you agree investors will now focus more on valuations and the tangible asset rather than repackaged financial instruments?
I agree with that assessment wholeheartedly. When I talk about long term fundamental value of property, that is really what I am alluding to. If you have a well located, well conceived project that you can buy at a deep discount to replacement cost, it’s probably a good opportunity. At this point in the economic cycle with widespread despair, it is very difficult to put together a pro-forma on a property that really shows a compelling opportunistic return. But when you look back on the last big downturn, in 1993 – 1995 it was equally difficult then as well. However, as we work through the excess and the economy starts to improve, companies will start taking down more space; and the financing market for property will come back. The market has a tendency to move very quickly, so when it does turn, it is likely that investors will significantly outperform the conservative projections that they are making at this time, just like we saw in the 90’s. Returns will be earned the old fashioned way, through improved property market fundamentals and property level operations. The days of financially engineering returns are gone, at least for a while.
To what extent is financing available in the US market?
Generally, there is very little financing to speak of at this point. This is what is driving the opportunity for those who have capital today. When financing is readily available, and you can highly lever an asset at a very low rate, this is an indication to me of a peak of property values and is probably a good time to sell. Now here we are at the opposite end of the cycle. It is very difficult to obtain any kind of meaningful financing proceeds, and I think this signals a good time to buy. If you are in a position now to purchase properties on an unleveraged or low-leverage basis and you can wait for the capital markets to improve, then I think you will be well rewarded.
Would you consider investing outside the US?
We have looked at some projects in the Middle East with local joint venture partners. We are looking at opportunities where we can bring expertise, for example the ability to do a boutique hotel to create a unique experience which speaks to the history and culture of the location of that property. That is something that we have done on several occasions here in the United States and we’re looking to export that expertise overseas.
What have you learned as a company from the global financial downturn?
It is interesting because people say this financial debacle happened very quickly but I don’t know if I share that view. If you look back a couple of years, people were asking “what is going to happen when the teaser rates on the subprime loans expire”? In October 2005, Bill Gross wrote about the impending subprime mortgage crises. I think it was widely known that financial institutions were pumping huge risk into the market. During that time, we were fortunate to sell off about 40 percent of our portfolio. Could we have been more aggressive in our dispositions when the market indicated it was time to sell? Yes. That said, being a real estate developer and operator is not about timing markets, but rather about executing on business plans for individual assets, and the majority of the assets that we chose to hold were not ripe for disposition at that time. I am very content with our remaining portfolio, and I feel fortunate to say we are solidly positioned to take advantage of new opportunities.
Gerald Marshall was a speaker at Cityscape Connect, NYC 24th June 2009
Source: Cityscape Intelligence