As signs of spring and economic recovery abound, the Graaskamp Center examined "New Beginnings: Assessing the State of our Industry " at the 2012 Spring Board Meeting, April 17-18 at the Four Seasons in Chicago. Over 130 professionals came together to hear cutting-edge presentations from experts in the field and share their experiences on the front lines.
The Tuesday evening dinner featured a keynote address from Lee Neibart, Global CEO of AREA Property Partners, a global real estate investment and asset manager that has overseen investment in multiple real estate funds and joint ventures, with an aggregate value in excess of $65 billion. Neibart, who has been a partner at AREA for nearly 20 years, spoke on their global scope and platform. He highlighted AREA's vehicles and their respective strategies and risk/return profiles. These funds had focuses on U.S. equity, U.S. debt, European equity and emerging markets.
Neibart spoke to AREA's stance regarding interest rates, stating that AREA is more traditional in their focus, looking at things solely as a real estate operator and resultantly focusing on what they can control, not on what they can't control (i.e. interest rates). Of particular interest were the LTV and IRR figures that Neibart shared for AREA's U.S. equity value-add fund and emerging markets India fund, about which the audience inquired further during the Q&A session. He also commented on his viewpoint on certain domestic markets and how AREA approaches (or does not approach) investments in these areas.
The discussion continued with a series of sessions on Wednesday, April 18. After an introduction by Graaskamp Center Executive Director Michael Brennan, the first session was the "CEO Panel: Assessments on Our Industry."
Led by David Shulman, Managing Member of David Shulman, LLC and Advisor to the AREIT Program, the panel discussed what trending they see in the current economic recovery. Our panel consisted of Scott Dennis, Managing Director and CEO of Invesco, David Brain, President and CEO of Entertainment Properties Trust, Ofer Yardeni, Managing Director of Stonehenge Partners, and Laurence Geller, President and CEO of Strategic Hotels and Resorts, Inc. One key question was what changes the presidential elections could have on the industry. The general sentiment of the panel was that election activity is more "background noise" than a main concern. However, for certain sectors this is not necessarily the case. In particular, changes in healthcare legislation can have large ramifications on the healthcare real estate sector, and movement towards a more socialist state can significantly hurt the luxury hotel environment.
Other topics included the Manhattan marketplace and opportunity for value-add moves, particularly in the multifamily sector given the large population of rent controlled tenants. Also, surprisingly, Manhattan markets are indicating that highest and best use of land is currently condominium development.
Additionally, the question was posed regarding what skills MBAs should focus on when out on the internship and job hunt. The panel agreed that communication skills were important, as well as a willingness to be humble and to work hard.
The second session, "Housing: May We Have Recovery, Please?" was moderated by Morris Davis, Academic Director for the Graaskamp Center for Real Estate. Davis and his panel examined what many believe to be key to a U.S. economic recovery and how that industry might be changing on the heels of the sub-prime crisis.
The panel, which included Steve Malpezzi, Graaskamp Center for Real Estate Department Chair; Fred Cooper, SVP of Finance, International Development and Investor Relations, Toll Brothers; Gerald Howard, CEO, National Association of Home Builders and David Goldberg, Building and Building Products Analyst, UBS AG agreed that the housing market was back in line with pricing fundamentals, but that homebuilding was at a significantly lower rate than what was needed. The panel felt that this is the best spring that they've seen in the housing market in five years. When looking at specific metro statistical areas, Los Angeles, San Francisco and Milwaukee were cited as some of the best opportunities, while Atlanta, Phoenix and Tampa were still highly depressed.
When Davis asked the panel what their thoughts were on the price of land purchased for the sake of holding, it was indicated that land can't be valued per what the last site sold for because of the large amount of speculation currently going on in the marketplace. The need for disciplined underwriting was stressed. The notion of buying and holding land was also voiced as a very dangerous for builders today.
The third panel of the day was entitled "Infrastructure: Time to Retool", led by Michael Rose, Director of Alternative Investments, Customized Fund Investment Group, Credit Suisse Securities, LLC. Rose was joined by David Martinelli, Managing Partner, Harvest Fund Advisors, LLC; Michael Cook, Senior Managing Director, Macquarie Infrastructure and Real Assets, Inc; Ben Hellweg, Investment Professional, Equity Group Investments; and John Flaherty, Principal, Carlyle Infrastructure Partners. This session involved a lively discussion on infrastructure as possible public - private model and its role as a vehicle for cash flow in a portfolio.
The panel agreed that a significant problem for infrastructure as a public - private endeavor is breaking through the traditional American view of how infrastructure should be funded. The group spoke on how the public - private model is frequently used in other parts of the world, but that it still hasn't gained a lot of traction in the U.S. Resultantly, U.S. infrastructure spending has fallen far behind that of other leading countries and that the quality of U.S. infrastructure has an impact on its economic growth.
Two successful U.S. public - private examples were given. One example involved Macquarie working with the state of Connecticut in rebuilding their rest stops along the highway. Macquarie will hold the rest stops for a period of years, and after that, the rest stops will come under the ownership of the state. The second successful U.S. example given involved the Hampton Road Tunnel built in Virginia, which alleviates wait times of 1 to 1.5 hours making a river crossing.
During the discussion, a great point was made regarding infrastructure having a natural monopoly once they gain scale. The reason for this is because it is a lot more difficult to leave infrastructure real estate than it is for a tenant to leave a regular commercial building, as there are rarely any comparable substitutes in the infrastructure arena.
Lunch was followed by the fourth panel of the day,"Our Neighbors to the North and South: Canada and Mexico". The panel was moderated by Christopher Ludeman, President of CBRE Capital Markets. Our two panelists representing our neighbors to the North were of Derek Dermott, Managing Director, BMO Capital Markets, and Mario Barrafato, Senior Vice President and Chief Financial Officer, Dundee REIT. Our panelists from Mexico were Carlos Ancira, President, Group Chartwell, Carlos Lopez, President, Conquer, and Samuel Suchowiecky Cohen, Chief Executive Office, Hipotecaria Vertice, SA de CV.
The Mexican presenters led off with slide show presentations familiarizing the group with the Mexican real estate market and its history. They detailed the 1994 crisis where banks stepped completely away from construction financing, which led to the formation of Infonavit (National Workers Housing Fund Institute), via which Mexican workers are assisted by the government in the purchasing of homes. They progressed to speak on the first securitization of construction loans in 2003 and that of home mortgages in 2004. One key difference the panelists pointed out was that there is much less leverage in Mexico than is seen in the U.S. As an example, they cited that there was a 50% maximum leverage in hotel construction on cost.
The discussion then moved over to the Canadian panelists who spoke on stability of the banking system in Canada and that some Canadian REITs had doubled in value in the last two years. However, they then countered this by discussing the limited opportunities for large scale investors to enter the Canadian marketplace as a result of large pension fund investors already dominating the market.
The final session of the day centered on the hot topic of "Distressed Debt Investing: Is it Real This Time?" led by Michael Hoffmann, President and Partner of Probitas Partners. The energetic panel consisted of Jay Henry, Co-Founder and Managing Member of TriGate Capital, Daniel Rosenbloom, Senior Vice President of GEM Realty Capital, Kenneth Segal, Managing Director of Ranieri Partners, and Benjamin Young, Global Head of Real Estate for Strategic Value Partners.
The session focused on the potential for an influx of deal flows due to the large amounts of distressed commercial mortgages that have been "kicking the can" for the past three years. The group agreed that there are definitely opportunities in the market, but not at the level that was seen during the RTC days of the 90s. Despite this, this area is the #1 target for companies looking for opportunities, so the question as to why there wasn't more activity was posed to the group. The response was that there is minimal downside to holding onto distressed debt. "A rolling loan gathers no moss." One panelist likened it to a cricket match or a baseball game in early innings; it's going to be a long process, not a quick one. The comment was made that in the 90s there was an actual real estate problem, so you were able to just mark properties to market, but now there is a legislative issues and it isn't the same scenario as they saw previously.
Despite the preceding comments, the group maintained that deals on distressed debt were still available in the marketplace. In comparing the past and present distressed debt environment, the consensus on the current market is that "history doesn't repeat itself, but it can certainly rhyme."