Private equity, unwrapped

These firms led the pack in NYC spending during 2011, even if much money still sits on the sidelines

For years, private equity firms have been lavished with huge sums of money by investors looking to own New York buildings. But recently, there have been fewer deals that those firms are finding attractive — ones that offer quick and bountiful yields. Plus, many so-called distressed opportunities that were supposed to materialize didn’t, as banks worked out new loan terms with their struggling borrowers.

As a result, many private equity firms’ buckets of cash have been sitting unspent. And, under typical investment rules, funds that are not deployed within three years must be returned to investors, without a hotel or condo or office tower to show for them.

In addition, because private equity firms are generally looking for greater returns than other types of investors such as pension funds and institutional players, their portion of the commercial real estate investing pie is shrinking.

In 2009, in the depths of the recession, private equity deals accounted for 39 percent of total investment sales in Manhattan, according to research firm Real Capital Analytics. In 2010, as distressed opportunities became scarcer, that share fell to 23 percent, with the figure looking to be about the same for 2011 at the end of the year.

Over the same period, private equity firms have been awash in money. From 2009 to 2010, they raised $63 billion, according to data from the London-based financial research firm Prequin.

That equaled almost all of what was raised during the entire pre-boom period, from 1990 to 2004.

In 2011, the Prequin data shows, $160 billion was raised. That pot of money will inevitably compete with capital from earlier fund-raising rounds, and thus probably struggle to find worthy investments, analysts say.

In all, “you promise your investors a 20 percent return, but it is hard to do that with New York real estate,” said David Eyzenberg, a managing director of NewOak Capital Advisors who also teaches at New York University.

“You would have to take a vacant building in Nebraska for that kind of thing,” he added, “which is why a lot of funds are having a hard time putting it out the door.”

Yet a handful of private equity firms are showing themselves to be up to the challenge, pulling away from the pack in the past 12 months with some large and notable transactions. This month, with the help of Real Capital Analytics data and news reports, The Real Deal looked at closed deals involving private equity firms where the company’s share in the buildings exceeded 50 percent. Below are profiles of the biggest spenders in the pack.

Rockwood Capital Partners: $491 million

This San Francisco-based firm, formerly of White Plains, N.Y., finished in the top spot with six closed deals in New York, with a total value of $491 million.

One of them was the complicated, multi-party, $390 million purchase of 530 Fifth Avenue, a limestone, full-block edifice once known as the Bank of New York building. Today, the high-rise office tower is also home to retailers Fossil and LensCrafters.

Rockwood’s five other buys were of a much different stripe: five five-story rental buildings located mostly on the Upper East Side.

The deals, in which Rockwood partnered with Stone Street Properties — an upstart firm that already owns three similar properties in the West Village — were part of a $90 million portfolio purchase from Icon Realty Management that closed in September.

Rockwood, which is led by Edmond Kavounas, a former attorney who has been investing in New York real estate since 1980, likes diverse plays ranging from office buildings to small rentals, according to Michael Phillips, a managing director of Jamestown Properties, which was the general partner on the 530 Fifth Avenue deal. (According to Phillips, Crown Acquisitions is handling leasing; Murray Hill is the asset manager; and Rockwood is the equity investor.)

The firm did not return calls for comment. But Phillips said: “I think value comes in a lot of different shapes and sizes. I think [Rockwood’s principals] are sharp guys. They’re strategic, long-term investors.”

Savanna Partners: $465 million

Savanna Partners notched a close second place finish among private equity firms picking up properties in New York City. Between December 2010 and the middle of last month, it had four closed acquisitions, with a total value of $465 million.

Showing an eye for emerging neighborhoods, Savanna snatched two buildings around Madison Square Garden and the Financial District: The firm purchased 31 Penn Plaza and 100 Wall Street — each for about $130 million..

And, its dollar volume of transactions will likely be even higher when non-closed deals like the office tower 21 Penn Plaza — which it bought in partnership with the Feil Organization for $137 million, according to news reports — are included.

The busy streak has been fueled by the firm’s closing last spring of a $550 million fund — its second. The first, for $313 million, closed in 2006.

What helps put Savanna — headed by Chris Schlank and Nicholas Bienstock –toward the front of the pack, analysts say, is that it operates buildings itself. As a result, it doesn’t have to collect rents and oversee renovations through third parties.

“Essentially they are eliminating what in the past had been an extra layer of management,” said Tom Boytinck, who teaches in the real estate program at Columbia University with Savanna’s Bienstock, and is cofounder of Allegro Advisors, a boutique investment bank.

“That’s their whole shtick,” Boytinck said.

CIM Group:
$382 million

Increasingly active CIM, a Los Angeles-based firm that The Real Deal profiled last month, closed four deals for $382 million last year in New York City.

Many had a ride-to-the-rescue quality, like CIM’s buying $85 million in senior debt at the embattled Trump Soho. There was also the purchase, for an undisclosed sum, of the note for 209 unsold units in the 330-unit, 47-story William Beaver House condo, which has struggled to find buyers since launching sales in 2006. After buying that note from an affiliate of the Blackstone Group (see related item below), CIM pushed to slash prices by 20 percent and also put a batch of the condos on the market as rentals, which are being leased by Rose Associates. Studios there now start at $3,535 a month.

CIM also paid nearly $43 million for 46 East 57th Street, a townhouse that sits next to the former site of the Drake Hotel at 432 Park Avenue, which it bought in 2010 and where it plans to build a massive 1,300-foot tower. Not known for ground-up construction, CIM kept developer Harry Macklowe on the project, though without an equity stake. Macklowe controlled the site before his empire crumbled in the late 2000s.

A spokesperson for CIM did not return calls for comment.

Beacon Capital
Partners: $354 million

This Boston-based firm — which once controlled the John Hancock Tower and which sold many of its holdings to Equity Office Properties in the 1990s in a $4 billion deal — spent $354 million on New York real estate in 2011.

One of those deals, for about $150 million, was the acquisition of a land lease, at 330 Hudson Street, where the firm will build a 350,000-square-foot tower. The other was the purchase of the majority interest of 195 Broadway, the 29-story former AT&T Building near the under-construction One World Trade Center. Efforts are now underway to add three retail stores to No. 195’s lobby.

At first glance, Beacon, which is headed by Alan Leventhal, would appear to be a poster child for the imbalances among private equity firms when it comes to capital raised versus capital spent. Indeed, the last fund it closed, its fifth, was for a whopping $4 billion.

But the firm (which controls the A-list 1211 Sixth Avenue, home to News Corp., as well as similar trophy buildings in L.A., Washington, D.C., London and Paris) has invested every last cent, according to its website.

The next batch of funds could come from the sale of 1211 Sixth, which was shopped around this fall for $1.9 billion, though there was no offer higher than $1.6 billion for the 45-story office tower, according to news reports.

RLJ Development: $332 million

Named for the initials of Robert L. Johnson, the founder of Black Entertainment Television, this Maryland-based firm prefers spending its cash on hotels.

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Last year was no exception, with the $332 million purchase of Midtown’s Doubletree Hilton Metropolitan, located at 569 Lexington Avenue, at East 51st Street. It was the firm’s only New York purchase of 2011.

Formerly known as the Loews Hotel New York, the 760-room tower was designed in 1961 by noted hotel architect Morris Lapidus, who gave Miami Beach the Fontainebleau.

The Doubletree — which was sold by Highgate Holdings, Whitehall Real Estate Funds and Rockwood Capital — is the third New York hotel RLJ has purchased in recent years. The others are the Hilton Garden Inn, at 63 West 35th Street, and the Fashion 26 Hotel, at 152 West 26th Street.

RLJ is expected to do a renovation of the hotel — the last one was about a decade ago — which would significantly enhance its value, said John Fox, senior vice president with PKF Consulting. He noted that it’s a very large property by New York standards, saying: “It certainly wouldn’t be replicated today.”

There’s a relative shortage of hotel rooms, so demand will stay strong, especially with this “prime Midtown location,” Fox said.

Dune Capital
Management: $264 million

A hedge fund/private equity firm, Dune is headed by Daniel Neidich, a former Goldman Sachs banker who helped raise $12 billion for Goldman’s Whitehall Real Estate Funds and leveraged it into $50 billion in properties, according to news reports.

Other Dune Capital executives used to work for George Soros. Those Wall Street backgrounds might have come in handy as Dune, in a series of complex financial pas de deux, wrested control of the Mark Hotel, at 25 East 77th Street, for $145 million.

During the boom, developer Alexico Group had purchased the Mark with the hopes of turning the upper-story units of the 16-story building into co-ops. (Because the Mark sits on leased land, condos weren’t an option.)

But during a massive $100 million renovation, the market began to turn, and the units proved tough to sell. Even though Alexico scaled back its conversion plans from 42 to 10 co-ops, selling them proved tricky, and some buyers demanded their money back. With its cash flow squeezed by paying land rent, Alexico was in a jam.

Then, after much back and forth with the bank, Dune finally bought the five troubled mortgage notes for the Mark from Anglo Irish Bank, which later was nationalized. Next, Dune threatened to foreclose and ended up with the 150-room, 10-co-op hotel this past summer.

The firm seems to like distress. In November, it picked up 35 buildings, most of them Upper West Side rentals, for $119 million, by buying the soured note on the properties, which were owned by controversial developers the Pinnacle Group and the Praedium Group. Dune did not return calls for comment.

Thor Equities:
$261 million

When most real estate observers think of Thor, they likely think Coney Island — and the firm’s long-running standoff with Mayor Bloomberg over a seven-acre parcel there.

But the firm, helmed by Joe Sitt, also has a war chest of private equity capital to play with, through its Urban Property Funds, which is financed through pension funds, college endowments and private foundations. The funds have raised over $1 billion in the last 10 years and have helped fuel Sitt’s property-spending spree. (See profile of Sitt on page 48.)

Locally, those reserves enabled Sitt to close on two Manhattan* buildings in 2011, for $261 million. Added to the firm’s 40 properties in locations from Chicago to Mexico City is an historic prize: 597 Fifth Avenue. The former home of Charles Scribner’s bookstore, the 12-story building, which Sitt bought from A&A Acquisitions, cost $99 million. Sitt also teamed up with developer Joseph Moinian to buy out Goldman Sachs at 245 Fifth Avenue for $162 million.

With the 597 Fifth deal*, some brokers say Sitt overpaid for a building whose street-level interior space is landmarked, meaning that it will be difficult to stick just any old tenant in there.

However, Thor may be gambling the building can fetch higher rents, which is a bet many private-equity players make, said Ben Thypin, director of market analysis for Real Capital Analytics. “They’re always looking for the Goldilocks of risk,” Thypin said. “Risky enough, but not too risky.”

And, Thor’s total deal volume is even higher when all of its* pending sales are factored in. For example, last month, Sitt* agreed to buy three connected buildings at 516-520 Fifth Avenue from Aby Rosen’s RFR for an undisclosed sum that some have put at $132 million. The deal, and several others, had not closed by press time.

Blackstone Group: $258 million

The real estate track record of this private equity powerhouse is commanding: 300 investments globally over the past two decades, for $28 billion, according to its website.

And those purchases weren’t merely of, say, 20-unit condos, but often of multi-building portfolios, or even larger acquisitions.

“Their idea of a good time is to buy a real estate company,” said Boytinck of Allegro Advisors, alluding to Blackstone’s 2006 purchase of Sam Zell’s Equity Office Properties Trust.

But if the firm has had a fallow period locally, it might have been in 2011, when it bought just two New York properties, for a total of $258 million — despite sitting on $12 billion in dry powder. Then again, it cast a wide net globally in 2011, spending* $111 billion for 3,650 properties, RCA said.

One purchase here was the $160 million deal for the top 12 floors of the former New York Times building, at 229 West 43rd Street. (In November, it installed a basketball court to attract tenants.)

Yet the overall slow pace of acquisitions suggests Blackstone might be one of those private equity firms struggling to find the perfect deal, analysts say.

The firm, headed by Stephen Schwarzman, was mostly* in a selling mood in New York City in* 2011, unloading the Radisson Lexington, at 511 Lexington Avenue, for $335 million. Meanwhile, its stock price was about $14 a share early last month, down from a yearly high of $19.63.

Morgan Stanley: $191 million

Many of the city’s blue-chip investment banks have real estate investment arms. But while Goldman Sachs’ Whitehall Real Estate Funds appears to be regularly divesting itself of assets, Morgan Stanley went in the other direction in 2011, with the eyebrow-raising, $191 million purchase of 1107 Broadway, an office it hopes to turn into luxury condos.

Yes, new condos, which in the last few years have been a tough sell in New York, in part because lenders have been reluctant to help homebuyers finance them.

But Morgan Stanley is perhaps taking solace in its partner, the Witkoff Group, a seasoned hand whose portfolio contains the Woolworth Building, as well as the former Daily News building on East 42nd Street.

In all, its plan for 1107 Broadway — a 16-story, 305,000-square-foot tower facing Madison Square Park, which is also known as the Toy Building North — calls for spending $100 million to put 145 condo units in the building, according to news reports.

Morgan and Witkoff won the building, previously owned by Lehman Brothers, in an auction sale over the summer by beating out the CIM Group, among others.

Starwood Capital Group:
$139 million

A hotel-centric firm that gravitates toward distress, Starwood, which closed its ninth fund, for $1.83 billion, in March 2010, nosed into 10th place last year with two sizeable purchases.

The first was a case-and-point illustration of its approach: The $72 million purchase of 1414 Sixth Avenue, at West 58th Street, which was once a hotel through the 1970s, but more recently contained offices.

The 18-story, brick high-rise had been owned by private equity firm Murray Hill Properties, which picked it up for $121 million in 2007. That means it was acquired by Starwood at a hefty 41 percent discount over just a four-year period. (Murray Hill purchased it, from APF Properties, which bought it from SL Green in 2004 for $61 million.)

In addition, Starwood — which was founded in 1991 by Barry Sternlicht and is headquartered in Greenwich — also acquired 20 West 53rd Street, otherwise known as the Donnell Library, from the New York Public Library for $67 million. The deal, which closed in July, included Tribeca Associates. A 120-room hotel-and-condo combo is planned there.