Grubb & Ellis seeks stability

Chairman steps in with investment after problem with banks; firm looks ahead to future

Jul.July 01, 2003 04:43 PM

Grubb & Ellis has seen its share of troubles.

In March, the commercial real estate service giant pushed out its chief executive officer, Barry Barovick, along with its chief financial officer, after an unsuccessful move towards consultancy at the expense of the standard brokerage business model.

Last fall, the company was delisted from the New York Stock Exchange. Total revenue declined from $414 million in 2000 to $313 million last year .

Most recently, Grubb & Ellis Chairman and controlling stockholder, Michael Kojaian, stepped in to acquire the company s outstanding senior credit facility for $32 million. The move came after the company had received three waivers on loan agreements with the Bank of America and two other banks since December. The waivers were necessary because company earnings had fallen below levels required by the banks, although company earnings on the whole have risen compared to last year.

Now, with Kojaian stepping in and promising greater flexibility for loan agreements, and with the days of a consulting-driven business model behind it, Grubb & Ellis is looking ahead.

The firm is headed by a four-person senior management team, including Dick Fulton, executive vice president of transaction services for the eastern region, and Brian Parker, chief financial officer, who rejoined the company after Barovick s departure.

While the firm may have tried to corner the market for real estate advisory services at the expense of the standard broker-driven business model under the leadership of Barovick, a former Ernst & Young consultant, these days, it s all about the brokers.

“The company has always been involved in consultancy,” said Fulton. “But we re putting emphasis back on the brokers. We re looking at consulting as an adjunct.”

“There is a renewed focus on the core strength of the organization,” said Parker. “We want to focus on what we do best.”

While scores of top brokers departed in 2001 and 2002, Fulton said the flow of brokers leaving has largely stopped. “We ve lost very few over the last several months,” he said. The company also plans to put additional cash into core services, including funds “to recruit additional professionals,” Parker said.

It also hopes to capitalize on the merger of giants CB Richard Ellis and Insignia Financial Group, which is set to close soon. “We see an opportunity there,” said Fulton. “It s a potentially difficult integration. Anytime you have changes like that you re going to have people that aren t comfortable with the new situation.”

In the New York office, Grubb & Ellis lost their top rainmaker, Glenn Markman, who defected to build his own team at Cushman &Wakefield last summer, and another top broker, Robert Emden, left. Fulton said since that time the company has “had several people move to G &E” in New York, though no instantly recognizable “marquee names.” The number of staff in New York has remained “virtually unchanged” between 2002 and 2003, he said.

Fulton also said changes have been made in New York because “talent there was being underutilized,” specifically in the law firm group. The group is now being used to help on deals throughout the U.S. “We asked, why not use that expertise throughout the country? ” he said. “We are now, and it s been very advantageous.”

Since Barovick s departure, the company s headquarters have returned to Northbrook, Illinois, just outside Chicago, after Barovick had moved them to New York. Fulton said the impact was negligible, noting that most of the administrative functions had never left Northbrook, and that the changes were “mostly at the executive level.”

The move back to Northbrook helped bring back CFO Parker, for one. Parker joined the company in 1996 but left when Barovick wanted the senior team to relocate. “He wanted to have all of the senior team in New York. I took a pass on that.”

While there is speculation that the board may soon take the company private or seek a merger partner, Fulton and Parker both said they couldn t comment on any plans. But Parker did note the disadvantages of being a public company.

“We are a public company traded over-the-counter. Four shareholders control 80 percent of the company. We have the disadvantages of being public- disclosure, the Sarbanes-Oxley Act, etc.-and very few of the advantages. We ve been in this situation for a number of years.”

However, Fulton said that employees at the company aren t as concerned about going private as they were a year ago. “A year ago, if you went into any office, the first question was, why are we not a private company? The stability is not a concern anymore.”

Grubb & Ellis stock was trading at $1.25 as of June 16, down from $16.50 in 1998, but up from $1.01 last fall. Part of the trouble, some observers note, is that Wall Street has a hard time understanding how real estate companies like Grubb & Ellis work. One line of thinking during Barovick s tenure was that consulting work could provide for consistent cash flow. Fulton admits the brokerage business, by its nature, does have a problem with “recurring revenues”. But Parker notes that “consulting has a cycle as well.”

One indication of where Grubb & Ellis might be heading might be gleaned from a move the company made in April. At that time, an agreement with the company s Phoenix office significantly changed that office s structure. On April 1, working in conjunction with BRE Commercial, a brokerage firm in the San Diego area, the office began operating as an affiliate, Grubb & Ellis|BRE Commercial. “The business model, unique to the real estate industry, is designed to test whether the firm can enhance service to its clients by providing local ownership as well as access to an international platform,” a company press release said. The “size, makeup and success of the Phoenix office have often made it a test location for best practices within Grubb & Ellis,” the release said.

Now that the four-person management team at Grubb & Ellis has been in place for several months, “stabilizing the organization”, as Parker said, the board and chairman Kojaian are beginning the search for a new CEO, though no timetable has been set.

“The Board and the Chairman are working through exactly what they are looking for,” said Parker, adding his opinion that “we don t want to venture too far from the core” in making a new hire.

But while the company moves forward, certainly, questions remain. One is the earnings issue, the EBITDA (earnings before interest, taxes and depreciation) that dipped below a level acceptable to the banks and caused Kojaian to step in with his $32 million purchase. EBITDA was a loss of $1.7 million for fiscal 2002, which ended June 30, compared with income of $27.9 million for fiscal 2001. But in recent months, the picture has brightened as EBITDA has risen for the first nine months of fiscal year 2003, which ended March 31st. EBITDA was a gain of $3.69 million, compared to a loss of $1.96 million for the first nine months of fiscal year 2002.

The company is also making efforts to streamline operations, with Fulton saying the company stripped $15 million out of annual operations this March. In addition to the $32 million credit facility acquired by Kojaian, he also provided $4 million of working capital to the company in May on favorable terms.

“The fact that our majority stockholder has agreed to take on the additional role as our creditor underscores Michael s commitment to Grubb & Ellis,” said Parker.

“It s so refreshing not be continually confronted with the question of are we going to be in business tomorrow,” Fulton said.


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