While much of the recent headlines have focused on the run-up in values of trophy properties in the most desirable submarkets of handful of primary world class cities, distressed investors continue to plumb markets and properties left for dead in the last few years.
As a way of exploring the current state of distressed investing, we'll take a look here at recent deals from experienced distressed investors: Boxer Property in Houston; Mountain Real Estate Group in Charlotte, NC; and Thompson National Properties in Irvine, CA.
If nothing else, their deals highlight the old saw that one landlord's albatross is another investor's potential golden goose.
Editor's Note: This is one of a series of four stories published this week on distressed investing. Please checkout our other coverage:
For Distressed Investors, There is No Where To Go but Up
A Statistical Picture of Distress Levels
Regulators on Whether Bank CRE Distress Has Hit a Tipping Point
Boxer Property: Staying Local; Avoiding Unrealistic Expectations
Andrew J. Segal, CEO of Boxer Property in Houston, isn't captivated by what the institutional buyers have been doing in the core coastal financial markets lately.
"Where are those [2007 rose-colored] glasses of mine when I need them?" Segal asks. "Some of the recent "core" purchases only make sense when you put them on. I am still wearing my 2011 pair, and they make it hard to see anything past my nose."
Segal's sight is on markets he knows best, such as Texas and other states "that have a reasonable foreclosure time frame," where the legal process won't keep a property in limbo for extended periods. Segal noted that in Texas, a lender or noteholder can foreclose one month after the missed payment.
Segal just completed his first acquisition this year: 1100 NASA Parkway, a 56,850-square-foot, six-story office building in Clear Lake, TX. The property has a current occupancy of 32%.
Boxer Property dealt directly with the seller, LNR Texas Partners Inc.
This purchase comes on the heels of an active acquisition year in 2010, when Boxer Property's purchased 16 buildings, totaling more than 3 million square feet.
"This first acquisition is a strong start towards the company's 2011 acquisition goal of doubling its 2010 transactions," Segal said.
Boxer Property currently manages more than 13 million square feet across the United States of both office buildings and retail malls.
Mountain Real Estate Group: Hard Work; Clear End Game
Mountain Real Estate Capital just closed a $20 million note held by CommunityOne Bank of Asheboro, NC. The note secured by the Kellswater Bridge community in Kannapolis, NC, a 270-acre master-planned community consisting of 245 finished or partially finished homesites and entitlement for at least another 400 lots in future phases.
Mountain Real Estate will team with Raleigh-based LStar Land as its co-developer of the project.
Kellswater Bridge is one of three North Carolina assets Mountain Real Estate has acquired from banks recently - and is part of more than $630 million in note purchases on land development projects it has acquired.
Despite the volume of deals, Arthur G. Nevid, chief investment officer of Mountain Real Estate, said distressed deals aren't getting any easier.
"Strategic distressed investing has been difficult and will not get any easier in 2011, as the assets being marketed are typically at the bottom of the food chain, difficult to model and usually small in asset size. The overall effect of this slow cleansing is a protracted recovery in search of a bottom," Nevid said.
"On the other hand, the supply of distress continues to grow as CRE maturities accelerate, interest reserves burn off and pressure on banks to clean their balance sheets mounts," Nevid added. "Thus far in 2011, we have seen a distinct increase in bank portfolios available to bid as compared to last year at this time."
Nevid said there is still a disconnect between buyer and seller on distressed assets, but it is less about price and more about demand.
"There is more interest on the sale side in distressed properties (REO) and more interest on the buy side on distressed debt." Nevid said. "While banks are hesitant to rush [non-performing loans] to market as they fear the extent of the impairment, once foreclosed their desire is to not be a property owner and shed such owned assets as quickly as possible."
"On the other hand," he added, "many buyers are more comfortable chasing notes rather than assets as the notes provide them a double bite at the apple (first through a possible negotiated note repayment and then, if need be, through ownership and operation/disposition of the asset)."
"Those seeking to buy REO need to believe that there is a viable exit plan for each asset, which is usually difficult given the quality (or lack thereof) of the typical foreclosed asset," Nevid said.
Thompson National Properties: Strong Credit Tenants in Forgotten Markets
Once a fast-growing market, high rolling Las Vegas was pretty much ground zero for the Great Recession, and it is again a prime destination for those willing to throw the dice on distressed assets.
TNP Strategic Retail Trust Inc., a publicly registered non-traded REIT affiliate of Thompson National Properties, invests in multi-tenant necessity retail properties. The REIT went under contract in the past week to acquire Craig Promenade, a retail center in North Las Vegas,
Craig Promenade is comprised of 109,250 square feet constructed in 2005 that is 77.5% leased and anchored by Big Lots, a national retailer. TNP is purchasing the property at a 40% discount to the original loan amount on the property and a cap rate of 8.07%
"Craig Promenade is another prime example of the type of real estate TNP Strategic Retail Trust is targeting," said Charles Osbrink, Thompson National Properties' director of acquisitions. "Strong credit tenancy, healthy surrounding demographics and a multi-million dollar 150-acre regional park redevelopment adjacent to the center are positive factors that we believe will position Craig Promenade as one of the most competitive retail centers in the marketplace."
The Craig Promenade deal is typical of what Las Vegas insiders are seeing these days.
"There have been three 90,000-square-foot plus retail centers, (one was retail/office), close in the last 90 days. None of them are grocery anchored, and, most of them have been plagued with leasing trouble," said Ron Opfer, director of
commercial real estate, special asset solutions for Coldwell Banker Premier Realty in Henderson, NV. "Nonetheless, it indicates the kind of activity Las Vegas is having from a distressed point of view."
"None of these deals would stand out as the kind of deals you would brag about to your friends on the golf course," Opfer said.
Nonetheless, there is a lot of excitement for such deals in Las Vegas, where commercial activity in December 2010 was the markets best month in more than three years.
"Attention is focused like a laser on the extremely distressed markets such as Las Vegas where industrial vacancies are up nearly 400% from the good times, land values are down 27% over 2009 which was one of our worst years on record, and the retail and office market still exhibit recession type fundamentals," Opfer said.
"There is a preference for specific property types," Opfer added. "Apartments top the list for nearly every distressed property group. Medical office or high profile retail usually follows. At the bottom of the list are unfinished office or industrial projects."
One thing is for certain about Las Vegas, Opfer said: "Every broker in the country has a buyer for a Class A asset 90% occupied selling for 10 cents on the dollar. My phone rings every week with an investor looking for this type of asset. Unfortunately, in our market, these deals don't happen. The investment dollars are like piranhas hungry for a Class A center, but, settling for whatever they can get."
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