It was September 28, 2006, and some of the biggest names at CBRE, one of the country’s biggest commercial real estate brokerages, were standing proudly in New York City. They were gathered at the rostrum of the New York Stock Exchange, where the execs of their new publicly-traded real estate investment trust, CBRE Realty Finance, were ringing the closing bell on the day’s trading.
It was the public debut of powerhouse CBRE’s first venture into becoming a financier of commercial real estate deals, not just a broker. It’s also a pretty sure bet that few of the dozen or so executives beaming proudly that afternoon had any clue that within 24 months CBRE would be walking away from its Hartford, Conn.-based REIT, that the company would be crippled by investor lawsuits, and that the NYSE – so happy to have the company on its roster in September 2006 – would be delisting CBRE Realty Capital by October 2008, as the company turned into little more than a penny stock.
How did it all go so bad, so fast?
High Hopes
CB Richard Ellis made its grand entrance into the realty finance game in mid-2005, trumpeting a “powerful combination” between itself and its new indirect subsidiary, CBRE Realty Finance. But CB Richard Ellis’ young offspring soon ran into financial and legal trouble, and as of 2009, will be cut loose from its parent entirely.
CBRE Realty Finance, a finance and investment company, went public in 2006 at the height of the commercial real estate market. Its initial public offering was accompanied by a projection of positive real estate market growth for the future.
That future quickly turned sour, with a credit crunch eventually cratering the market. And a lawsuit now alleges that the company’s finances were troubled even as far back as that optimistic 2006 initial public offering. (See accompanying article.)
Whatever the company’s health when it was formed, what is certain is that it took only seven months for the company to jettisoned its CEO and announce that it would no longer engage in joint venture investments.
The years since have not helped the company’s progress. With the real estate market relentlessly plunging and outstanding loans dragging on the company’s books, CBRE Realty Finance was de-listed from the New York Stock Exchange last month.
The same day, the company announced – after a net loss of $55.5 million in the third quarter – that it was separating from the real estate giant that spawned it.
The company will be on its own as of New Year’s Day, launching as a new company with no ties to CBRE. Its two CBRE-related board members resigned from CBRE Realty Finance’s board.
Although the company’s spokeswoman declined to comment further on the run-up to this decision, the company had previously hired Goldman Sachs to look into its options, including sale or merger. But as of Sept. 30, the analysis concluded that such options were “either not available or [were] not in the best interest of stockholders.”
This divorce, however, directly contradicts previous statements touting the necessity of the companies’ relationship. In 2007, a few weeks before original Realty Finance CEO Keith Gollenberg resigned, the company’s 10-K filing noted, “We are dependent upon our manager and certain key personnel of CBRE and CBRE/Melody Â…. And may not find a suitable replacement if Â… such key personnel are no longer available to us.”
In CB Richard Ellis’ original 2005 release announcing the Realty Finance formation, Gollenberg hyped his company’s “unique strengths derived from CB Richard Ellis’ local market intelligence Â… this powerful combination will help make us a leader in developing innovative solutions for borrowers and sellers.”
‘Rude Awakening’
George Fantini of Boston-based real estate broker Fantini & Gorga, who is a shareholder with CBRE, said initially that CBRE believed it would have great synergy with its new subsidiary. Ideally, a large international brokerage firm like that would feed deals to its parent.
But as with many companies, he said, “all that heady optimistic stuff has come to a rude awakening.”
At the end of the third quarter, CBRE Realty Finance had $18.7 million in cash and cash equivalents. Its asset portfolio is $1.4 billion, down 15 percent from the beginning of the year thanks to a number of non-performing loans and troubled joint ventures dragging on its books.
In the last quarter, the investment portfolio decreased by $94.8 million, partly because of $31.2 million in unrealized fair value marks on the company’s commercial mortgage-backed securities investments.
Other troubles have contributed: The provision for loan losses was zero for the first nine months 2007. This year, it was $102.8 million, with $43.6 million of that in the last three months alone. That loss reserve spiked because of loans that either aren’t recoverable or aren’t likely to be recovered, because of both overall market conditions and specific problems with each loan.
The company had made a few unconsolidated joint loans that are currently tanking: one retail development lost its biggest tenant and looks to lose another, putting a $7.3 million impairment loss on the books. Another building is 100 percent vacant, leading to an $800,000 impairment.
One consolidated joint venture, an apartment building in Maryland, got a $26.6 million loan from the company that will be due Dec. 14. As of the end of September, the outstanding balance on the loan was $25.8 million. The company is reportedly trying to sell the apartment property, but if it cannot sell in the next month, its worst-case scenario involves having the property repossessed through foreclosure.
Many of these problems were compounded this year, but a class-action lawsuit filed last year alleges that the troubles go back to the supposedly brighter days of 2006, when the company made its initial public offering.
The plaintiffs, lead by CBRE investor Philip Hutchison, accused Gollenberg and CBRE Realty Finance of making misstatements on the IPO, including its cheery assessment of the real estate market’s future.
The plaintiff’s statement takes issue with the company’s assertion that it had no impaired loans on its books – not so. The company in fact had $20 million in impaired loans that should have been written down, but were not.
As of now, the company admits that because of the current market, it cannot originate loans, has reduced access to capital, and reduced cash available for stockholders.
In the quarterly conference call, current CEO Ken Watkins reiterated that the company remains committed to its shareholders, but acknowledged that its course was uncertain.
Referring to one joint venture asset, he said, “In this market, unfortunately, until the cash is in the bank, I’m done with prognostication.”
