June 25,  2009     Notes from Richard LeFrak on CNBC and other Commercial Real Estate Ramblings

Richard LeFrak is a long time participant in Commercial Real Estate.  He is well respected in the investment community.  He is known as being pragmatic, fair and a fine business person and developer.

http://www.cnbc.com/id/15840232?video=1163635085&play=1

The following are notes of LeFrak discussion, without any of our comments:

A.    Two fundamental problems. Sources of capital is one, and deep recession is the other. "Our industry is in intensive care right now."

B.    CRE, cap rates were yielding 4% - 6%, now rising to 7,8,9 and 10%. This will cause opportunity to new investors and great pain for current owners who can not manage their debt.

C.    You will have a case of "haves" and "have-nots." "Haves", managed balance sheet well and kept low leverage. "Have-nots" were overly enthusiastic, or they said what the hell, what have we got to lose, we can borrow the money. This was common in the industry, especially from 2004 - 2008.

D.    Investors will have to get used to the idea of the new normal. Once they get used to it. You will be able to buy properties, well below replacement cost. Amazing bargains will come. This is a natural dynamic of the industry.

E.    We are still in a grey period. We don't know when this will occur.

F.    Economy will eventually square away.

G.    Underwriters will use rational standards. This is a big game changer.

The following are our quick comments:

It is of our opinion that this is an example of one of the "have-nots" that LeFrak discusses. "Enthusiastic buyers from 2005 till 2008." For example, this company  had Total Assets of $9.5B, and Total Debt of $5.2B at December 31, 2005. At March 31, 2009, they had Total Assets of $19.4B, and Total Debt of $12B (not including Capital Securites and Preferred Stock of $1.9B).  They have $3.1B coming due in 4Q11.

SL Green Realty presented at NAREIT Conference on June 4, 2009

Marc Holliday, CEO said, "I would add that I think REITs generally are going to be, in my estimation, the winner coming out of this market, whenever that is, a year or two, three years down the road. REITs went into this market 30% to 40% levered at the market peak. They may find themselves now somewhere between 60% to 80% levered at the market trough, but that means they still have equity, and that means they are still viable, and that viability is enhanced through $14 billion of equity raises into the REIT sector, including $400 million for SL Green over the past two and a half months."

"There's probably 10 to 12 major owners in New York City that own in excess of 60% of the overall Manhattan inventory, who have scale, capital resources, and a generally intact balance sheet that I think are going to be largely on the sidelines, not sellers of product, and that's going to afford New York a stabilizing effect to have such a large amount of its midtown inventory in stable hands. There's also going to be examples of players, but I think you can measure those on two hands, who probably are going to run into some degree of financial distress. Opportunities will arise. We would expect to get our fair share of those opportunities as we have in the past, and we expect to continue in the future."

"The rent we achieved on our recent leasing at 100 Park is below what we would have achieved a year and a half ago, but still today well ahead of what we would have achieved prior to our redevelopment of that project, even in today's market."

"It's very hard to peg a cap rate today in terms of where cap rates are because there has been little to no sales. But I don't see any reason why, when Manhattan stabilizes, when there's the prospect of stabilized rent or rent growth and we are working off of a base of rents that are well below two years ago but not wholly inconsistent where they were earlier in this decade, that cap rates will return to some level of historical normalcy. Can't really -- 6%, 6.5%, 7%. I don't think that's a stretch. It's hard to peg when that will occur, but I think you just have to watch the credit markets, and I think to cap rates will follow the credit markets."

"We sort of think about -- cost to build is down about 20% to 30%. There haven't been any land trades, so it's very difficult to pick a price for land. That's highly subjective block to block and area by area. But what was $1,000 I would say is probably $700 to $800 a foot. It's certainly not less.

There hasn't been a crash in commodity prices that sort of translated to construction or labor. The city's owners have pushed back against labor, I would say as much as they're comfortable doing at this point and gotten some concessions, and things have gotten a bit more efficient. But it's still very costly, and very time-consuming to put up new construction and with today's financing, clearly if you're going to see any starts for quite some time."


Andrew Mathias - President and Chief Investment Officer said, "I think a lot of the opportunities to come will be in those highly leveraged situations where ultimately the properties will trade back to lenders. We started to see the first of that trend with the Macklowe portfolio, and most recently with 1330 Sixth Avenue. We expect that trend to continue in some of these -- many of these highly levered situations."