Philip Blumberg Blog

Seen the release?

In case you you missed it, there was a lot of coverage in the news of the fact that American Ventures Realty Investors is planning to acquire $500 million to $1 billion in commercial real estate in 2007. The company is planning to acquire class A office properties in private market or public REITs.

Here's the release below.

Regards,

Philip

CORAL GABLES, Fla., Dec. 19 /PRNewswire/ -- American Ventures Realty Investors, one of the largest commercial real estate investment managers in the U.S., today said it anticipates acquiring $500 million to $1 billion in commercial real estate in 2007. The company said it plans to acquire Class A office properties via acquisitions in the private market or public real estate investment trusts.

"We see increased opportunity to generate strong returns for our investors through an acquisition-focused strategy," said Philip Blumberg, president and CEO of American Ventures. "We have accumulated strong cash stockpiles to fuel acquisitions in 2007. That strategy may include bids on public REITs, as well as acquisitions of strategic individual property assets." Blumberg cited the interest rate environment, strong commercial tenant demand and reduced prices in certain markets he cites as "gateway cities," due to their attractive economic, trade or financial bases.

American Ventures' current holdings include commercial properties in the Southeast and Southwest United States. Its investment portfolio comprises commercial real estate, development land, cash and other assets. Investors include high net worth individuals, foundations, pension funds and banks.

In a bid to selectively boost its holdings in 2006, American Ventures was a final bidder on two major commercial property sales. American Ventures led an investment group that bid $1.2 billion on the landmark News Corp. headquarters building in New York City. The company was also a finalist in the pursuit of the Bank One Center in Dallas with a bid of more than $200 million.

In March 2006, American Ventures set a Florida Class A office building record transaction price (price paid per square foot) with its sale of Miami's 1401 Brickell Office Tower for $61 million, or some $325 per net rentable square foot. The acquirer was Testa Inmuebles en Renta, S.A., a major Spanish public real estate company.

American Ventures later in 2006 sold its 220,000 square-foot office tower (Alhambra Circle) in Coral Gables, Fla., for $60 million, or $272 per square foot. The acquirer in that transaction was RREEF, a U.S.-based real estate investment manager and a division of Deutsche Asset Management. During the year, American Ventures also sold land adjacent to its Three River Office Tower in Houston to facilitate expansion of the Omni Houston Hotel.

Founded in 1979 by CEO Philip Blumberg, American Ventures specializes in U.S. investment management. Blumberg Office is the American Ventures company and brand focused on investment ownership and management of commercial office properties.

"We are looking for properties in major markets suitable for our management brand, which stands for a five-star quality of service and physical environment for our tenants," said Johnny Winton, president of asset management at Blumberg Office. "Buying, transforming, and managing office buildings to this standard have played a major role in driving our investment funds' returns, historically among the highest in the U.S."

American Ventures' investment portfolios have comprised some $500 million in U.S. commercial real estate assets. A Blumberg Capital Partners company, American Ventures is a member of the National Council of Real Estate Investment Fiduciaries.

REITs are inefficient commercial property ownership structures

Much has been written and said of late on the value of public REITs in the wake of Blackstone Group's $20 billion acquisition of Equity Office Properties Trust, the largest publicly traded office building owner in the U.S.  That transaction is set to close early next year.

I've contended for some time that public REITs like Equity Office are inefficient commercial property ownership structures, particularly for office-building holders. REITs actually are inefficient vehicles based on three specific characteristics:

• Corporate structure --- In exchange for an inherent tax advantage, the REIT corporate structure is burdened with severe limitations in terms of cash retention and operational restrictions. By not being able to retain stockpiles of cash, for instance, defense against possible takeovers is limited.  And these takeover opportunities are becoming more apparent given the escalating underlying values of building assets in most REITs nowadays.

• Management --- Often, management in a publicly held REIT is forced to manage to quarterly expectations of the equity markets, and not to the long-term characteristics of the commercial real estate market. This investment horizon mismatch promotes poor corporate- and asset-management policies.  For this reason, aggressive private real estate companies view public REIT office properties as the most vulnerable.  By shifting a REIT portfolio to the private market, the assets are moved back into a more consistent management environment and investment horizon.

• Valuation --- Public market valuation models mistakenly regard REITs as operating companies and, thus, value them as a blend of aggregate cash flow, corporate strategy, and public market and sector movement.  However, this approach ignores the sum of the breakup value of the individual assets - which, in a real estate context, is really all that a portfolio of properties really is. That's now fueling the current round of REIT acquisitions - and why they are disconnected from a public market determined (naively so) to view and value REITs as operating companies rather than collections of assets.

Each of these three critical factors contribute or lead to disadvantages when holding large portfolios of commercial real estate and, thus, make REITs especially good takeover targets.

As such, I included the ability to acquire REITs in American Ventures' current open-end Fund, and we have been examining such opportunities more and more (as I have mentioned publicly in recent interviews with The Wall Street Journal). My company, American Ventures Realty Investors, also may soon launch a real estate hedge fund to specifically target REIT acquisitions.

I believe the wave of recently announced acquisitions of several public REITs, including the pending Blackstone-Equity Office transaction, will be followed by even more public-to-private deals. This spurt of consolidation illustrates that there likely will be additional opportunities in 2007 to buy properties on the public markets in leveraged deals, essentially to tap the break-up values. While there are good individual asset acquisition opportunities, such bulk transactions may lead to more price efficiencies than individual asset purchases, even with the cost and time to unwind the assets from the portfolio.
It’s an attractive opportunity for investors in the private market to realize what public markets may be under-valuing.

Philip