Self-Storage REIT CEO Thinks Analysts Need an Art Lesson

MARK HESCHMEYER, EDITOR
SEPTEMBER 9, 2013
WWW.COSTAR.COM
A WEEKLY NEWSLETTER FOCUSING ON CHANGING MARKET CONDITIONS, COMMERCIAL REAL ESTATE, MORTGAGES AND
CORPORATIONS PUBLISHED BY COSTAR NEWS
IN THIS WEEK'S ISSUE:
Self-Storage REIT CEO Thinks Analysts Need an Art Lesson .......................................................................................................... 1
Women‟s Fashion Retailers Trimming the Fat from Store Portfolios ................................................................................................. 3
Rolling Up REITs: Firms Merging to Gain Scale and Entry to Public Markets ................................................................................... 6
Greystar Acquires $460 Million Portfolio of Multifamily Assets .......................................................................................................... 8
Retail, Health Care Lead Employment Growth; Financial Firms Lead Cuts ...................................................................................... 9
Facility Closures & Downsizings ...................................................................................................................................................... 11
China‟s Gaw Capital Partners Builds on U.S. Track Record ........................................................................................................... 12
Loan Demand Weakens Even as Delinquencies Decline ................................................................................................................ 13
Recoveries on Liquidated U.S. CMBS Hit Stumbling Block ............................................................................................................. 13
Capital Markets Round-Up .............................................................................................................................................................. 14
Google‟s Landmark London Campus Moves out of the Sidings ...................................................................................................... 15
Developers Aren‟t Closing the Book on Barnes & Noble Just Yet ................................................................................................... 16
Self-Storage REIT CEO Thinks Analysts Need an Art Lesson
Ability To Adjust Rents Monthly Painting a Path to Stronger Operating Results, Growth than in Other
REIT Sectors
Fed up with stock analysts lumping his
self-storage property REIT with all other
equity REITs, CubeSmart CEO Dean
Jernigan threw out a challenge to the
analysts attending his firm's earnings
conference call last month: paint us as an
individual portrait, not as a book of paintby-number pictures.
"It's very discouraging for me to see in
corporate America good earnings reports
by other companies, and see the REIT
sector trade down, with all of us being
painted with the same brush. And I think
that's patently unfair," Jernigan said at the
outset of his call. "I would like to challenge
someone on this call to write a very thoughtful piece on the self storage sector to paint us with a different brush."
From late July through the end of August, the Dow Jones Equity All REIT index has traded down more than $30
from $293 to about $260 - an 11% decline. CubeSmart has fallen 4% in that time to $16.49/share.
Other publicly traded REITs in the self-storage universe have seen their share prices slip as well. Sovran Self
Storage Inc. was down from a high of $74.10 in early August to $66.27, off 10.6%;
Extra Space Storage Inc. was down 9.3% to $40.43; and sector giant Public Storage was down 6.7% to $152.40.
Together the four REITs own or control more than 3,556 self-storage facilities with more than 253 million square
feet. Public Storage alone controls more than the other three combined.
But why does the industry need to be seen as a separate work of art compared to the broader REIT gallery?
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"Clearly, we're an operating company in the real estate business,” Jernigan said, "But we're not just a real estate
play. We're an operating company that has 30-day leases. We're very nimble, and we can be very nimble as it
relates to pricing. So the basic question to me is, would you rather be in an environment of low growth or no
growth with low interest rates, or a growth environment of 3% to 4% in GDP with higher rates and hitting a
targeted 2.5% inflation rate? And I would tell you, I'll take the latter every time.”
SELF-STORAGE TO SEE SHIFT IN PRICING STRATEGY?
Ki Bin Kim, director of US REIT Equity Research at SunTrust Robinson Humphrey, says rents are clearly a
differentiating factor in self-storage REITs and the key to helping the industry stand out. He ranks self-storage as
his favorite REIT sector and has buy ratings on Extra Space Storage, Sovran Self Storage and CubeSmart.
Over the past several years, changes in promotions have been the most important driver of self-storage growth,
other than occupancy, and changes in 'street rates,' which essentially equate to monthly rental rates quoted to
potential new tenants, have not mattered much, Ki wrote in a report late last month. But that is about to change,
according to Ki.
"We are entering the first innings of a pricing strategy shift in self-storage where the changes in street rates will
begin to matter more," noted the SunTrust Robinson Humphrey. "In the past three months, 90% of the increase
in net rents was due to changes in street rates vs. changes in promotions, a complete 180 from the past.”
“Street rates aren‟t just beneficial in capturing higher rents from new customers, they are equally beneficial to the
business of sending out rent increase letters,” he added.
Year-over-year net effective rents increased 4.3%, driven by street rate that are 3.1% year-over-year, and
promotional discounts that are -1.3% lower year-over-year, Ki said.
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“There will be a time to be less bullish on this sector as self-storage NOI growth normalizes, but we think it‟s too
early to underweight this sector today given the very strong operating performance, reasonable valuation, and
pending favorable real estate comps that should come to market,” Ki said.
GEARING UP FOR GROWTH
The self-storage industry is clearly gearing up for growth as the economy recovers and people need places to
store all their 'stuff.'
As for REITs in the sector, expected higher interest rates will impact self-storage REITs‟ net asset value as cap
rates move up, but they will also present growth opportunity, asserts CubeSmart‟s Jernigan.
“It will create more sellers for us,” he said. “Higher rates will give us more opportunities to buy more assets and
to continue to consolidate the sector.”
CubeSmart had an active investment second quarter buying nine assets for $87.5 million and selling none.
Subsequent to quarter end, it also acquired an additional asset in New York City for $13 million but exited the
Knoxville, TN market for disposition proceeds of $25 million.
Public Storage expects to complete the acquisition of 29 self-storage facilities this month (21 in Florida, five in
Massachusetts, two in California, and one in Rhode Island).
Extra Space Storage has acquired 27 properties in Arizona, California, Hawaii, Illinois, Maryland, and Texas for
$275.2 million since year-end 2012. It has an additional 20 probable acquisitions expected to close during the
fourth quarter in Arkansas, California, Connecticut, Florida, Georgia, Illinois, Massachusetts, North Carolina,
Ohio and Texas for $128.3 million.
Sovran Self Storage has three properties under purchase contract for $28 million and no properties under
contract for sale.
Women’s Fashion Retailers Trimming the Fat from Store Portfolios
More Fashion Retailers Downsizing Than Expanding
Many women apparel retailers are finding their store square footage a size or two too big these days, and are
taking steps to shrink the waste in their real estate portfolios.
Some of the more popular chains, such as Abercrombie & Fitch and The Jones Group, are trimming more than
others. Both have recently announced major real estate restructurings.
The Jones Group said it will reset its domestic retail business by closing 170 underperforming stores and
streamlining its wholesale divisions and supply chain.
Among the steps Jones Group plans to take to improve profitability are: Closing approximately 170
underperforming domestic retail stores by mid-2014. Afterwards, Jones Group expects to operate a smaller and
more productive chain of domestic stores, with outlet stores comprising a significantly higher percentage of the
overall retail portfolio; Continuing to evaluate individual store profitability, and considering converting certain
stores to other brands; consolidating production, design and selling divisions, and its distribution and supply
chain facilities; reducing domestic retail staff by approximately 18% and corporate, support and supply chain staff
by approximately 2%, for a total headcount reduction of approximately 8% upon completion.
Jones Group began reducing its retail staff headcount this month and will continue through the first half of 2014.
PINCHED POCKETBOOKS HURTING ABERCROMBIE & FITCH
Michael S. Jeffries , chairman and CEO of Ohio-based Abercrombie & Fitch, explained this past month that the
second quarter proved to be more difficult than expected for his firm due to weaker traffic, particularly in July, and
continued softness in the female business, although the reason for the drop-off in traffic remains unclear.
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Our best theory is that while consumers in general are feeling better about the overall economic environment, it
is less the case for the young consumer," Jeffries said. "In addition, we believe youth spending has likely diverted
to other categories. We assume that these effects will abate at some point, but until we have seen clear
evidence of that, we are planning sales, inventory and expense levels on a conservative basis.”
The fashion retailer expects to open only a small number of stores this year but plans to close 40 to 50 stores,
primarily through natural lease expirations at the end of the year.
In addition, the company is nearing the completion of a long-term strategic review of its real estate. The results of
that review will be presented to the company‟s board of directors in the middle of this month.
MEANWHILE SOME FASHION RETAILERS BACK IN GROWTH MODE
While, eight of 13 publicly held women apparel retailers whose earnings announcements CoStar News examined
for this report reported plans to close more stores than they planned to open, five of those major retailers are
planning store growth, with three of the five -- Chico‟s FAS, Ann Talor and Victoria Secret -- each planning to
open 50 or more stores.
Chico's FAS new store growth continues to be a key element of its omni-channel strategy. The company said
increased square footage provides its customers the important ability to touch and feel its inventory.
It opened 33 new stores this past quarter, for a total of 112 net new stores compared to last year, and is on pace
to open 135 to 140 new stores in 2013.
"Rather than trying to open these stores coast to coast, border to border, like we did with Soma, we're really
trying to go in and concentrate in areas where we can build massive stores, like in Southeast and Southwest
Florida,” said David F. Dyer, CEO and president of Chico‟s FAS. “And then we're going into the Texas area, and
we'll go into Arizona. But we're going to go in with multiple stores so we can get the efficiency of our marketing
and media dollars."
Outlets are a big part of Chico's store square footage growth as that is one of the few areas where there is new
mall development occurring, the company said.
Ann Inc., operator of Ann Taylor stores, opened 21 stores this past quarter, including three Ann Taylor stores,
three Ann Taylor Factory stores, 11 Loft stores, and four Loft Outlet stores. It closed only three stores and is on
track to open 65 stores this year.
By brand, Ann Inc. plans to pursue the continued rollout of the Ann Taylor new concept stores, and expects to
have nearly 40 additional stores in this format by year end. Approximately five of these will be new stores, 15 will
reflect existing store downsizes and remodels, and 20 will reflect capital-light refreshes of existing stores.
L Brands, operator of the Victoria‟s Secret chain, is planning to increase its real estate investment at Victoria's
Secret, primarily to increase square footage in stores for its Pink brand. Only about 20% of its current stores
carry the full Pink assortment.
Victoria's Secret square footage in the U.S. will increase by just a little less than 4% this year, driven by
expansions of the existing Victoria's Secret stores and the opening of about 50 new Pink stores. Total company
square footage will increase by just under 3%.
ADDITIONAL FUTURE CHAIN PLANS
Bebe stores plans to open one bebe store, one 2b bebe and to close up to 10 bebe stores and five 2b bebe
stores, which will result in approximately a 5% decrease in total store square footage from the end of fiscal 2013.
Body Central plans to open 22 stores this year and is contructing a new office in Washington, DC.
Christopher & Banks closed eight stores in the past quarter. Luann Via, its CEO, said it is taking a very
methodical approach to its real estate portfolio and is evaluating it continually fFor opportunities to grow its outlet
stores.
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Express took possession of a site in Times Square that will be the future home of its New York City flagship store
and also controls a future flagship store location in San Francisco. For the full year, Express is projected to open
16 stores and close only nine.
Guess opened three new stores and closed seven, ending the period with 507 stores in the U.S. and Canada.
New York & Co. is operating 21 fewer stores than this time last year. Comparable store sales are expected to
increase by a low to mid-single digit percentage.
Wet Seal expects to close five Wet Seal stores and three Arden B stores this quarter and more by the end of the
fourth quarter in both divisions.
Rolling Up REITs: Firms Merging to Gain Scale and Entry to Public Markets
Even as Broader IPO Market Activity Rises Dramatically, REIT Stock Selloff Stymies Those Hoping to
Merge or Tap Public Equity Markets
By: Randyl Drummer
Call it the Great REIT Roll-up of 2013. This year‟s crop of REIT mergers, initial public offerings and conversions
includes a number of large deals in which companies have rolled up funds and non-traded REITs into publicly
traded or non-traded entities -- in many cases to create liquidity events for long-time shareholders.
Earlier in the recovery, especially during 2010-2011, new REIT market entrant launches included many so-called
“blind-pool” entities that sought to raise capital from investors based on the track records of their executive
management teams, many of whom were former REIT managers. But the fact that those proposed REITs did not
yet actually own any assets deterred investors, and some of those blind-pools were postponed or scrapped.
By contrast, the large private-equity players and veteran REIT managers backing the recent wave of REIT
formations, mergers and conversions own plenty of property, it‟s just that it‟s held in smaller portfolios and nontraded entities that are getting rolled up into some of the largest REIT transactions of recent years. Investors in
the triple-net/single-tenant lease, health-care real estate, and other specialized property types have been
especially active.
“The majority of the IPOs this year have been roll-ups of some type of portfolio into a new entity,” noted Stuart
Eisenberg, real estate practice leader for accounting and consulting company BDO USA, LLP. “The consensus
is that investors would like to have a portfolio they‟re investing in, as opposed to just giving a management team
the go-ahead to start a fund and go buy property.”
Eisenberg expects strong activity on this front for the rest of 2013, with existing REITs raising equity as needed
from the public markets, and investors continuing to put additional IPO deals in the pipeline.
“The question is whether the pricing and the volume of proceeds in these offerings will be acceptable to some of
those who are anticipating going public,” he said. “Also, the upward movement of interest rates and international
volatility is having a bit of an effect on the markets.”
Typically, a REIT roll-up is formed when pre-existing operating entities or properties are combined into a single
operation under a new public company through a merger or IPO. The process can vary significantly among
transactions and are generally driven by tax or marketing strategies.
Some of the world‟s largest private-equity companies and REITs have gone this route to buy property, or to
unload assets they acquired during the previous real estate cycle.
One major transaction involves W.P. Carey Inc., a traded REIT, which recently announced it will acquire one of
its non-traded REITs, Corporate Property Associates (CPA) 16, in a transaction valued at close to $4 billion. The
combined company is expected to have an equity market capitalization of about $6.5 billion and an enterprise
value of $10.1 billion following the merger, which is subject to the approval of stockholders from both REITs.
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In July, private equity firm Blackstone Group filed to take its fifth firm public this year via an IPO, the Extended
Stay America hotel chain. The proposed offering consists of common stock of Extended Stay America and Class
B common stock of ESH Hospitality Inc., which will trade together as a unit.
Blackstone has also been planning two big-ticket IPOs: Brixmor Property Group, their shopping center
investment company; and Hilton Worldwide. Analysts have also mentioned Blackstone‟s La Quinta hotel portfolio
as a potential candidate for a public offering.
Blackstone has a strong track record of forming new REITs culled from its various real estate investments.
Blackstone launched BRE Select Hotels Corp. this past spring, after BRE Select acquired Richmond, VA-based
Apple REIT Six Inc., and its portfolio consists of 66 hotels with 7,658 guestrooms in 18 states, for $1.2 billion.
Blackstone Mortgage Trust Inc. also completed a public offering of 16 million shares raising more than $500
million to originate CRE loans. WCI Communities, a lifestyle community developer and homebuilder of single-and
multifamily homes in Florida‟s coastal markets, launched a public offering in July. WCI, which owns or controls
8,300 home sites, is chaired by Stephen D. Plavin, senior managing director of the Blackstone Group and the
CEO of New York-based Capital Trust, a mortgage REIT now managed by Blackstone.
The uptick in rollup activity is also a function of the dramatic acceleration in liquidity events for investors in the
non-listed REIT industry, said Kevin
Hogan, president and CEO of the
Investment Program Association, an
Ellicott City, Md.-based trade group
representing 50 direct investment
vehicles, including non-listed REITs
and business development companies
(BDCs).
While the financial criteria driving these
decisions to roll up and go public vary
by company and asset type, the firms
“obviously feel that real estate
fundamentals are sound, occupancy
rates and rental rates are very stable,
so the parent companies are willing to
provide the liquidity to go public,”
Hogan said.
“The non-listed industry is becoming
more competitive and creative, and
we‟re seeing new approaches. These
rollups are examples of new ways the
industry is offering value to the
investor,” he said.
Other public offerings involving rollup or
merger transactions include:
American Realty Capital Properties
(NYSE: ARCP) in February rolled up
American Realty Capital Trust III
(ARCT3), acquiring the latter‟s 16.5
million-square-foot net lease portfolio.
In July, the company announced yet
another related non-traded REIT
merger, a $3.1 billion deal giving
American Realty Capital Trust IV
(ARCT4) shareholders 2.05 share of
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ARCP common stock.
Apple REITs 7, 8 and 9 agreed last month to roll into a single hospitality investment trust through two merger
transactions. Apple 9, the resulting REIT, will have a portfolio comprised of 191 hotels with 23,711 rooms in 33
states, subject to shareholders approval.
“Due to the increased size and scale of the combined company, we believe that it will be better positioned to
pursue enhanced avenues of liquidity for our shareholders through the exploration of certain strategic
alternatives such as possibly listing the combined company on an exchange, a sale of the combined company or
a merger with a third party company and to have access to more attractive financing,” said Glade M. Knight,
chairman and chief executive of Apple REITs 6 through 9. McGuireWoods LLP is acting as corporate counsel to
each Company in connection with this transaction.
Phoenix-based Cole REIT Inc. (NYSE: COLE), a non-traded REIT sponsor which primarily invests in triple-net
retail, office, and industrial properties, this spring rolled up Cole Credit Property Trust III, raising $809 million to
funnel back to investors in the form of liquidity events.
Cole REIT, closed at $11.11 on Sept. 3, nearly even with its June 10 launch price of $10.90.
A host of REITs hoping to take advantage of the recovery in the single-family home market have turned in
mediocre-to-subpar performance in publicly traded markets since their IPOs, including American Residential
Properties Inc. (NYSE: ARPI), Ellington Residential Mortgage REIT (NYSE: EARN), and Trade Street Residential
Inc. (Nasdaq: TSRE). All posted double-digit losses since their initial offerings.
On a related note, launches of initial public offerings (IPOs) hit a six-year high in the second quarter, with five
publicly traded REITs among the 61 companies that raised a total of $13 billion, according to Renaissance
Capital.
That would have been a fairly impressive showing even in 2007 during the heady moments before the Great
Recession and the freezing of the credit markets piled heavy leverage onto many REITs.
But most of those REIT IPOs launched early in the second quarter of 2013, before worries about rising interest
rates and most recently, concerns about war in Syria kicked off a period of market softening and a market sell-off
that has cut into investment trust shares since May.
In total, the REIT world has seen almost 40 new companies listed since the Great Recession, through 29 IPOs,
four listings of non-traded REITs, five conversions and one spin-off. Mergers have eliminated a number of
companies, but the REIT space has still grown considerably, and the future pipeline continues to be large.
A growing number of private companies are in registration for public markets -- and a large amount of real estate
in non-traded REITs will eventually need to be transferred in order to create liquidity events for their
shareholders, according to a Citi analysis of IPO conditions for REITs.
While the downturn in REIT performance since May is likely playing a part in the timing and composition of
offerings, “we expect a significant amount of the companies and portfolios will find their way into the public
markets either as new listed entrants, or as acquisition opportunities for the existing REITs,” Citi‟s Michael
Bilerman noted in the recent analysis.
Greystar Acquires $460 Million Portfolio of Multifamily Assets
In a sweeping reshuffle of its portfolio property mix, Inland American Real Estate Trust has found a buyer for a
huge chunk of its multifamily portfolio.
Charleston, SC-based Greystar Real Estate Partners is purchasing a $460 million portfolio of multifamily assets
from the Chicago-based REIT.
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The purchased portfolio consists of 14 institutional apartment communities, or 4,371 units throughout markets
with exposure to the growing domestic energy industry: Houston, Oklahoma City, Dallas, San Antonio, and
Louisville. The transaction values the properties at approximately $105,000 per unit.
“We are excited with the opportunity as the portfolio of stable, income producing properties fits well within our
investment strategy of acquiring assets with strong existing cash flow at values below replacement cost and in
markets experiencing significant employment and population growth,” said Wes Fuller, Greystar‟s executive
director of investments. “We believe the assets are positioned to perform well driven by extensive renovation and
operational enhancements planned by our team.”
The portfolio was purchased within two Greystar-sponsored investment vehicles.
The portfolio is comprised of the following:
MARKET
NO. OF PROPERTIES NO. OF UNITS
Houston
Oklahoma City
San Antonio
Dallas 1
Louisville
Total 14
6
4
2
372
1
4,371
1,882
1,325
536
256
Greystar Real Estate Partners is one of the largest operators of apartments in the United States, managing
approximately 215,000 units in more than 100 markets.
Inland American Real Estate Trust has been selling its apartment and single-tenant net leased holdings as part
of a long-term strategy to reinvest in office, industrial and multi-tenant retail properties.
Retail, Health Care Lead Employment Growth; Financial Firms Lead Cuts
Total nonfarm payroll employment increased by 169,000 in August, and the unemployment rate was little
changed at 7.3%, the U.S. Bureau of Labor Statistics reported. Employment rose in retail trade and health care
but declined in information.
Retail trade added 44,000 jobs in August and has added 393,000 jobs over the past 12 months.
Employment in health care increased by 33,000 in August. Within the industry, most of the job growth occurred
in ambulatory care services (+27,000).
Employment in professional and business services continued to trend up (+23,000). Over the past 12 months,
this industry has added 614,000 jobs. Employment in temporary help services changed little in August.
Within leisure and hospitality, employment in food services and drinking places continued to trend up in August
(+21,000). Over the year, food services and drinking places has added 354,000 jobs.
Wholesale trade employment continued to trend up (+8,000). This industry has added 83,000 jobs over the past
12 months.
Within manufacturing, employment in motor vehicles and parts rose by 19,000 in August, after declining by
10,000 in July. Auto manufacturers laid off more workers for model changeover in July than in recent years. The
return of laid-off workers contributed to the increase in August. Over the past 12 months, auto manufacturers
have added 34,000 jobs.
Within information, the motion picture and sound recording industry lost 22,000 jobs in August, following a gain
of 8,000 in July.
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Employment in other major industries, including mining and logging, construction, transportation and
warehousing, financial activities, and government, showed little or no change in August.
JOB CUTS
Monthly job cuts surged to the highest level since February, as U.S.-based employers announced plans in
August to slash payrolls by 50,462, a 33.8% increase from the 37,701 planned job cuts announced in July,
according to outplacement consultancy Challenger, Gray & Christmas Inc.
Job cuts last month were 57% higher than a year ago, when employers announced plans to reduce payrolls by
32,239. This marks the third consecutive month in which job cuts outpaced the comparable period from 2012.
August ranks as the second largest job-cut month of the year behind February, when announced layoffs reached
55,356.
Employers have now announced 347,095 job cuts so far this year. That virtually matches the 352,185 job cuts
announced from January through August 2012.
August workforce reductions were dominated by the industrial goods sector, where manufacturers announced
22,162 job cuts. That was the largest job-cut total for this sector since January 2009, when 32,083 planned
layoffs were announced. It is the largest one-month job-cut total for a single industry category this year and
nearly surpasses the 26,103 job cuts announced by industrial goods manufacturers in all of 2012.
“Heavy job cuts in the industrial goods sector are never a good thing, as they can be indicative of widening
cracks in the economy‟s foundation. However, the August surge in industrial goods job cuts was driven largely by
falling global demand for mining equipment. While that definitely has an impact on the economy, it is not as
worrisome as an overall slowdown in construction or manufacturing,” said John A. Challenger, CEO of
Challenger, Gray & Christmas.
“The fact is U.S. manufacturing activity has been on the rise, hitting a five-month high in August, according to the
most recent manufacturing purchasing index. Furthermore, GDP grew at a better-than-expected 2.5% annual
rate in the second quarter. There are definitely challenges ahead, including the precarious situation in the Middle
East, uncertainty over the impact of health care reform, and possible shifts in monetary policy, but the economy
is in a much better position to weather these storms than it was just a year or two ago,” he added.
Well below the more than 22,000 job cuts announced in the industrial goods sector, the second-ranked computer
sector announced 4,663 job cuts in August. That was up 194% from 1,587 job cuts by computer firms in July. To
date, the computer sector has announced 26,180 job cuts, down 30% from the 37,670 layoffs recorded through
eight months of 2012.
The financial sector remains the top job-cutting industry year-to-date, having announced 41,942 job cuts as of
August. That eight-month total is 56% higher than the 26,887 financial sector job cuts announced by this point a
year ago. Challenger recorded nearly 3,100 job cuts in the financial services industry last month, most of which
were attributed to falling demand for mortgage products due to the recent run-up in interest rates. With mortgage
rates at record lows, there was heavy refinancing activity; representing 70% of mortgage originations at one
major national bank in the first half of the year. With rates now climbing, refinancing products have dropped to
half of all applications and is expected to decline further in coming months.
The Mortgage Bankers Association reported that mortgage applications fell 4.6% in the week ending August 16.
“The housing market has been showing signs of life lately. It would be a real blow to the economy if that progress
were to suddenly grind to a halt because of rising interest rates. This sector drives so many other parts of the
economy, including construction, retail spending, consumer goods manufacturing, that it is vital to keep it moving
upward,” said Challenger.
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Facility Closures & Downsizings
Standex International Corp. is consolidating its Food Service Equipment Group facility in Cheyenne, WY, into
its Mexico facility and other Cooking Solutions operations in North America. The company is taking this action in
line with its efforts to reduce costs and improve productivity across the FSEG.
Company
Citibank
Charitable
Resource
Foundation
Grainger Inc.
Robert Bosch
Tool Corp.
Sprint
FirstMerit Bank
Benteler
Automotive
Flagstar Bank
Metavation
Asset
Acceptance
Corp.
Bank of
America
BEF Foods,
INC(Bob
Evans)
Bank of
America
JPMorgan
Chase
(Mortgage
Bank)
TimberTech
Reser's Fine
Foods
Bank of
America
Park View
Federal
Savings Bank
(First National
Bank)
Arrow
Electronics
General
Dynamics
Wells Fargo
(Home
Mortgage
Northeast
Retail
Fulfillment
Group)
Address
1901 E. Vorhess
St.
City
State
Closure or
Layoff
Danville
IL
Closure
121
Immediately
200 E. South St.
5959 W.
Howard St.
255 W. Fleming
St.
30780 Orchard
Lake Road
4813 Clio Road
Kewanee
IL
Closure
60
9/20/2013
Niles
IL
Closure
94
9/17/2013
Watseka
IL
Closure
126
1/1/2014
Farmington Hills
Flint
MI
MI
Layoff
Layoff
56
135
10/26/2013
10/30/2013
320 Hall St. SW
5151 Corporate
Drive
760 E. Huron
Ave.
Grand Rapids
MI
Closure
200
10/14/2013
Troy
MI
Closure
299
9/18/2013
Vassar
MI
Closure
113
10/13/2013
Warren
MI
Layoff
73
10/2/2013
Beachwood
OH
Layoff
997
10/31/2013
Bidwell
OH
Closure
52
10/15/2013
Cincinnati
OH
Layoff
98
10/31/2013
Columbus
OH
Closure
97
10/11/2013
Columbus
OH
Closure
58
9/27/2013
Delphos
OH
Closure
104
9/13/2013
Independence
OH
Layoff
53
10/31/2013
Solon
OH
Layoff
57
10/11/2013
Solon
OH
Closure
54
9/27/2013
Springboro
OH
Layoff
31
10/14/2013
West Chester
OH
Layoff
63
10/6/2013
28405 Van Dyke
Ave.
3175 Science
Park Drive
363 Green
Valley Drive
8790 Governors
Hill Drive
3401 Morse
Crossing
2141 Fairwood
Ave.
1600 Gressel
Drive
6100 Oak Tree
Blvd.
30000 Aurora
Road
28600 Fountain
Pkwy
200 S. Pioneer
Blvd.
9021 Meridian
Way
THE WATCH LIST NEWSLETTER
No. of
Layoffs
Impact Date
11
Company
Citizens Bank
Bank of
America
Arris
Solutions, Inc.
West Point
Products
Acquisition
Address
801 Market St.
1120 Boyce
Road
City
Philadelphia
State
PA
Closure or
Layoff
Closure
Pittsburgh
PA
60 Decibel Rd.
184
Schoolhouse
Lane
State College
Valley Grove
No. of
Layoffs
87
Impact Date
Immediately
Closure
209
9/30/2013
PA
Closure
54
Immediately
WV
Layoff
79
Immediately
China’s Gaw Capital Partners Builds on U.S. Track Record
Hong Kong-based Gaw Capital Partners has created a new U.S. entity, Gaw Capital U.S. to manage new real
estate funds and provide investment advisory.
Meanwhile, Gaw Capital Partners' existing U.S. associate, Downtown Properties, will continue to co-exist
alongside Gaw Capital U.S. as its asset management partner.
Gaw Capital U.S. announced that Timothy Walsh has joined Gaw Capital U.S. as president and COO. In this
newly-created position, Walsh will oversee U.S. operations and increase the firm's investments in U.S. real
estate. Walsh joins Gaw Capital U.S. from the New Jersey Division of Investment where he served as chief
investment officer and director of New Jersey's 74 billion pension fund.
Gaw Capital U.S. plans on raising a U.S. Fund in the fourth quarter of 2013 with targeted fund size of $300
million to $500 million.
The main strategy for the fund will be value creation through design, creative repositioning, and redevelopment
with a special angle at creative office and creative hospitality redevelopments in urban locations
Gaw Capital Partners' management already has experience in investing in U.S. real estate projects. Downtown
Properties Holdings has been acquiring and managing real estate investments in the United States since 1991.
Its portfolio in Los Angeles, San Francisco, New York and Hawaii comprises over 2.5 million square feet of office
buildings, hotels with over 1,000 rooms, two 18-hole championship golf courses, a ski resort and three residential
redevelopment projects.
Separately, Chinese insurance funds have more than $14 billion available for overseas real estate investment,
with high transparency markets, including the United States, United Kingdom, Canada, Singapore, Hong Kong
and Australia, expected to be among the key targets, according to the latest research from global property
advisor CBRE Group Inc.
Given the present scarcity of investable prime properties in first-tier Chinese cities and the short-term risk from
the oversupply in second- and third-tier Chinese cities, prime high-end office properties in core international
cities are expected to be highly sought after, especially considering the attractive yields they can produce in
today‟s low interest rate environment.
Chinese institutional investors are still relative newcomers to cross-border real estate investment strategies,
compared to pension funds, insurance funds and sovereign wealth funds from other regions.
However, in recent years Chinese institutional investors have started to increase their investment in overseas
real estate markets; a trend that has been driven by several factors, including limited investment channels in
China, abundant liquidity, local currency (RMB) appreciation, and the relatively lower valuation of overseas
assets in the years following the 2008 financial crisis.
“Chinese insurance institutions are already well established in domestic markets, but following a series of
government policy changes, they will look to target overseas commercial real estate markets,” said Marc
Giuffrida, executive director, global capital markets for CBRE. “The insurance industry, in particular, is thriving;
THE WATCH LIST NEWSLETTER
12
buoyed by ever-increasing funds they will target gateway cities around the world such as London, New York,
Toronto, Singapore, Hong Kong and Sydney in increasingly large amounts. The low liquidity, value-added
potential and stable cash flow of prime office and retail assets offers a perfect match for these investors.”
Loan Demand Weakens Even as Delinquencies Decline
Lending activity weakened a bit in the past month as several Federal Reserve district banks reported lessfavorable conditions than in the preceding Federal Reserve Beige Book reporting period.
Loan growth in the Atlanta, Chicago, St. Louis, and San Francisco Districts was slower than in the previous
reporting period.
Kansas City reported a decline in lending, reversing slight growth earlier in the summer.
Several districts characterized business lending as largely flat. Chicago reported that recent interest rate
increases likely were depressing commercial investment. However, Kansas City noted that expectations for
better economic conditions and stronger profit growth had offset any effects of rate increases on business loan
demand.
Demand for mortgage refinance loans declined in the New York, Philadelphia, Cleveland, and Richmond
Districts. By contrast, purchase mortgage lending continued to grow moderately in most Districts, although San
Francisco noted that applications have dropped a bit in some areas of that District.
A few districts commented that stiff competition for high-quality commercial borrowers was eroding loan volumes
at banks that maintained prudent interest rates and terms.
Delinquency rates for commercial and multifamily mortgage loans declined in the second quarter of 2013,
according to the Mortgage Bankers Association‟s (MBA) Commercial/Multifamily Delinquency Report.
“Commercial and multifamily loan performance continued to improve during the second quarter, with delinquency
rates falling for every major investor group,” said Jamie Woodwell, MBA‟s vice president of commercial real
estate research. “The quarterly decline in the delinquency rate of loans held in commercial mortgage-backed
securities (CMBS) was the largest on record, and delinquency rates for loans held by life companies and the
GSEs remain low and fell lower during the quarter.”
Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the second
quarter were as follows.
 Life company portfolios: 0.08% (60 or more delinquent);
 Freddie Mac: 0.09% (60 or more days delinquent);
 Fannie Mae: 0.28% (60 or more days delinquent);
 Banks and thrifts: 2.16% (90 or more days delinquent or in nonaccrual); and
 CMBS: 7.81% (30 or more days delinquent or in REO).
Recoveries on Liquidated U.S. CMBS Hit Stumbling Block
The recovery rate on liquidated U.S. CMBS loans suffered a fairly sizeable setback last quarter, dipping to 60.5%
for second-quarter 2013, compared to 71.4% in the first quarter, according to the latest quarterly index results
from Fitch Ratings.
“30 CMBS loans had 95% or greater losses last quarter, while 16 of those loans saw losses of 100% or greater,”
said Stephanie Petosa, a Fitch managing director.
Other highlights of the report were as follows.
THE WATCH LIST NEWSLETTER
13
The average recovery rate for liquidated loans in the first half of the year was 66% compared with 72.8% for
2012.
During 2Q13, 11 loans of more than $10 million incurred losses greater than 95% and five loans had losses
greater than 100%.
Specific loss trends included peak 2006/2007 vintages, office was the most prevalent property type, the
Southeast was the geographic area most heavily affected.
LARGEST LOANS WITH LOSSES IN CMBS FIXED-RATE CONDUIT/FUSION DEALS JULY AND AUGUST
2013
Prop
Type
Loan Name
City
State
The Promenade
Shops At Dos Lagos RT
Corona
CA
Hyatt Regency
Albuquerque
HT
Albuquerque
NM
Penn Station
Shopping Center
RT
District Heights
MD
20 North Orange
OF
Orlando
FL
Arizona Golf Resort
HT
Mesa
AZ
TAG Portfolio
OF
Various
IL
Reservoir Corporate
Center
OF
Shelton
CT
Pga Plaza Shopping
Palm Beach
Center
RT
Gardens
FL
Colw ick Executive
Center
OF
Cherry Hill
NJ
Compson Financial
Center
OF
Boca Raton
FL
Five Star Plaza
RT
Rocklin
CA
Airpark Business
Center
IN
Nashville
TN
The Equitable
Building
OF
St. Louis
MO
Source: Wells Fargo Securities, LLC and Intex Solutions, Inc.
Sec Bal
($mil)
Bal at
Loss
($mil)
Loss Amt
($mil)
CMBS
$125.20
$123.98
$123.98
JPMCC 2008-C2
$43.00
$43.00
$38.39
GSMS 2007-GG10
$39.30
$42.70
$19.19
$53.40
$39.30
$40.42
$18.21
$39.01
$24.01
$18.27
$18.21
$17.50
GSMS 2006-GG8
CGCMT 2006-C4
JPMCC 2007-CB19
LBUBS 2005-C5
$17.95
$15.40
$14.85
CSFB 2001-CP4
$33.45
$33.45
$14.73
CSMC 2007-C1
$17.76
$16.96
$12.70
JPMCC 2006-CB16
$18.75
$15.00
$17.46
$13.14
$11.90
$11.70
CD 2005-CD1
CSFB 2005-C2
$74.00
$74.00
$11.67
BSCMS 2007-PW16
$30.00
$28.78
$11.43
MSC 2007-IQ14
Capital Markets Round-Up
American Homes 4 Rent filed to offer up to $100 million of preferred shares. It intends to use the net proceeds
to continue to acquire and renovate single-family properties, including certain escrow properties, and to repay
debt. In addition to single-family properties, it also may seek to invest in condominium units, townhouses and
real estate-related debt investments.
Ares Commercial Real Estate Corp. acquired Alliant Capital LLC for $61 million. Alliant Capital LLC is a
financial services company focused on originating and servicing multifamily loans for various government and
government-sponsored entities (GSEs), primarily through the Fannie Mae Delegated Underwriting and Servicing
(DUS) program. It will change its name to ACRE Capital LLC, and continue to be led by Ed Hurley.
Colony American Homes closed on a $500 million credit facility with J.P. Morgan. The facility has a $500
million accordion feature that allows Colony American Homes to increase the credit to $1 billion. It will use the
proceeds to continue to acquire single-family rental homes across the United States.
THE WATCH LIST NEWSLETTER
14
Google’s Landmark London Campus Moves out of the Sidings
By: Paul Norman, Editor of CoStar Commercial Property News in London
U.S. technology giant Google‟s plans for a landmark $1 billion, 923,942-square-foot headquarters at London‟s
King‟s Cross Central site is one of the most talked about and anticipated commercial developments of recent
years. Its design set for approval last week aims at fostering creativity via innovations such as the “northern
palazzo”, southern “lantern café” and a roof-top swimming pool and running track.
The detailed plans, which have been lodged by King‟s Cross Central developer Argent have been recommended
for approval by Camden planning officers who describe them as “unashamedly modern” but also relating well to
the surrounding heritage townscape.
The single building rises from seven to 11 stories and proposes 923,942 square feet in total split into: 870,681
square feet of offices; 53,259 square feet of shops, food and drink facilities; a staff cycle store offering 574
spaces at ground floor level; and significant external landscaping.
The shopping, food and drink uses will be developed at ground floor level fronting on to Kings Boulevard across
16 units.
Google UK Ltd has signed a lease agreement with the site owner Kings Cross Central LP (KCCLP) for the
building but under the terms of the agreement KCCLP will retain the ground floor commercial units to let to retail
occupiers.
The building will accommodate up to 5,000 employees plus visitors.
Camden planners write that Google has been actively involved throughout the design process for the building
“wishing to shape the space to suit its ethos of combining work time with leisure time and encouraging active
recreation”.
They add: “An important aspiration for the building has been for it to interact with its surroundings and promote
movement through and around the building while creating opportunities for views out over the surrounding city.”
It attempts this via a number of innovative features including a „promenade‟ that progresses its way up from the
building‟s three large main entrances through the various office floors, connecting cores, workplaces, major
shared amenities and a large roof garden.
The promenade would not only encourage free interaction between the building‟s occupants but is intended to be
visually expressed and appreciated as part of the building‟s external architecture.
Integrated within the offices are various ancillary uses including a staff café, multi-use games area (MUGA) on
the ninth floor, gym and wellness facilities, an audio visual studio, auditorium and events center and staff training
centers.
The roof areas will also contribute to the variety of activities on offer through a combination of amenity terraces, a
running track, a swimming pool and two further cafes.
Google is relocating staff from a number of sites in London including at Central St Giles in Camden and its
Victoria office in Westminster.
Planners write that the move has been driven by the need for flagship premises connected both to the
technology hubs of east London and international air and rail links.
It adds that some but not all staff would be relocated from existing premises and a significant proportion of the
5,000 plus staff would be new jobs.
THE WATCH LIST NEWSLETTER
15
King‟s Cross is being developed by the King‟s Cross Central Limited Partnership, which is a joint venture
between London & Continental Railways Limited, DHL Supply Chain and Argent King‟s Cross Limited
Partnership, in conjunction with Hermes Fund Managers.
In total, the King‟s Cross Central Limited Partnership project is delivering over 1,900 homes, CBRE is Google‟s
retained adviser; DTZ and Savills are letting agents at King‟s Cross Central on the offices; Lunson Mitchenall
advises on retail.
3.4 million square feet net of offices and 500,000 square feet of shops.
Developers Aren’t Closing the Book on Barnes & Noble Just Yet
The Bozzuto Group, a Greenbelt, MD-based real estate services company, and The Catholic University of
America today signed Barnes & Noble as a retail anchor for Monroe Street Market, a multi-phase, mixed-use
development located on five city blocks in Washington, D.C., adjacent to the Brookland-Catholic University Metro
station, and directly across the street from the University.
The store will feature 14,000 square feet of retail space on two levels, a 44-seat Starbucks-branded cafe, and
designated areas for Catholic University textbook and school spirit sales. Construction is scheduled to begin
within the next 60 days and the store is expected to open in spring 2014.
“We are thrilled to welcome Barnes & Noble @ Catholic University to the unique mix of residences, arts, vibrant
shops and restaurants at Monroe Street Market,” said Toby Bozzuto, president, The Bozzuto Group.
The lease agreement that The Catholic University of America signed with Bozzuto to open the Barnes & Noble
bookstore represents an continuation of a positive relationship that our University has enjoyed with the troubled
bookstore company,
Barnes & Noble College Booksellers has been a tenant on the Catholic University campus since 2012. When the
new bookstore opens, it will free up that campus space for other college uses.
The Bozzuto Group, Catholic University, and Abdo Development broke ground on Monroe Street Market in
November 2011. Several years earlier, Catholic University had publicly announced its decision to develop its
south campus. The University demolished three of its residence halls to make way for Monroe Street Market.
A multi-phase project, the development will ultimately consist of three buildings, Brookland Works, Portland Flats
and Cornerstone, encompassing approximately 720 residences, 45 townhomes, 83,000 square feet of streetlevel retail, 15,000 square feet of artist studio space, a 3,000 square-foot community arts center, and 850 parking
spaces.
Barnes & Noble College bookstores have been a bright spot for the retailer struggling from competition from
online booksellers. The retailer has seen its traditional bookstore count shrink by 15 stores in the last 12 months
to 674 stores. Meanwhile, its college division has grown by 25 stores and now outnumbers its traditional store
count.
THE WATCH LIST NEWSLETTER
16