The Real Deal New York

Jeff Blau projects “hairy” exits, refi problems for investors in core assets

Related exec said company is focused on increasing value of investment in CommonWealth REIT
By Katherine Clarke | June 04, 2013 06:00PM

Related Companies CEO Jeff Blau is concerned that the free flow of debt and equity financing for core New York City commercial buildings will mean future trouble for investors who’ve been snapping up trophy assets with in place cash-flow.

The commercial mortgage-backed securities market is “as frothy as it’s ever been,” Blau said today as a panelist at the Bloomberg Hedge Funds Summit, held at the Signature Theater in Midtown. “It’s a very competitive market at [every price point].”

For instance, Crown Acquisitions and Highgate Holdings will probably borrow up to $1.1 billion against a 27-story office and retail tower at 650 Madison Avenue, between 59th and 60th streets, that they acquired for $1.3 billion less than a week ago, Blau speculated.

“If you buy at three or four caps, where are you going to go from there?” he said, noting the high financing levels could lead to a “hairy exit” for investors in these kinds of assets or “refinancing challenges” in the future.

However, 650 Madison is a unique investment for its potential as a prospective residential play, Blau said.

“The leases all expire by 2024,” he said, identifying the acquisition by Crown and Highgate as a prospective “redevelopment play.” With retail rents and residential condominium prices at historic highs in and around Central Park, “it could make sense to tear down a $1.3 billion office building,” he said.

For its own Hudson Yards project, Related looks for wealth funds from around the world, such as Oxford Properties Group, the real estate investing and development arm of the Ontario Municipal Employees Retirement System pension fund, and the Kuwait Investment Authority, both of which have contributed investment to the mammoth office development project.

On the first building at Hudson Yards, Related sourced equity financing through a “non-regulated entity,” Blau said, a reference to mortgage REIT Starwood.

“[Starwood] was a lot more flexible than many central banks,” he said, noting: “There’s plenty of equity capital looking to move into the U.S. Equity is almost easier than debt at this point.”

Asked to identify Realted’s biggest headache, Blau spoke to a play by the company’s equity fund to derive some upside from its ownership of a 9.8 percent stake in real estate investment trust CommonWealth, which owns more than 500 office buildings. In February, Related partnered with Corvex Management, a hedge fund headed by Carl Icahn protégé Keith Meister, to buy the stake in the company and has focused its attentions on removing Cortex’s board of trustees – a difficult process.

“We got involved because we saw mispriced real estate in this corporate shell,” Blau said, attributing the undervaluation of CommonWealth’s stock to the “antiquated structure” of the organization, whose board has allegedly operated the company in a way that is geared towards maximizing fees for its external manager, a company owned and controlled by the heads of CommonWealth’s board, Adam Portnoy and his father, Barry Portnoy of Reit Management & Research.

Aside from four others controlled by the same entity, Blau said the CommonWealth REIT is “the only externally-advised REIT over $1 billion.” Related opted to invest in CommonWealth particularly for the structure of its bylaws, which provide for the ejection of the company’s manager if the move gains favor with at least 66 percent of the voting members of the organization’s board, he said.

“It’s a bit of a battle,” he admitted.