Monthly Archives: July 2010

Blue Horseshoe Loves Anacot Steel

By Ken Ashley

(ATLANTA) July 23, 2010

A recent post on this blog addressed the fact that corporations have trillions in cash about to be deployed in corporate M&A. After many months of suspended animation, the same investment wave is happening before our very eyes in the world of corporate real estate. National Real Estate Investor reports in this July 16th article that global real estate investing is up by 40 to 50% over 2009 levels.

Aficionados of 1980’s trivia will recall the line, “Blue Horse Shoe Loves Anacot Steel,” which was the code that Gordon Gekko (Michael

Lease, lease, lease

Douglas) had Bud Fox (Charlie Sheen) use for insider trading in the film “Wall Street” (1987). This real estate market appears to have a lot of similarities. While of course not literally dealing with insider trading, we are certainly dealing with insider knowledge in this high risk stage. We seem to be at the part of  cycle where investing is really picking up, but we still have an avalanche of new money chasing product. But the savvy investors with market knowledge are making smart buys while silly money is bidding up so called “core” assets defined as 90% or great leased and in class “A” condition.

So where are the deals about which young Bud Fox would whisper that oft quoted phrase? Several Atlanta media outlets including the Atlanta Journal Constitution reported today that Campanile, a 20 story iconic office tower built to house the corporate headquarters of BellSouth, appears to be under contract for $78 a foot (the last owner, who lost the building in foreclosure, paid $223 a foot). We have worked on warehouse deals that cost more than that. Yes, the building is 15% occupied. Yes, many dollars will need to be spent in improvements, hold time and other costs. But as they say down South, “goodness gracious!” Campanile is an example of what will be a series of stunning deals nationwide that will be made in the coming months by smart and well capitalized investors.

This will be an interesting real estate market to watch and while we still have plenty of bad loans and high risk deals to work through, investors are not the only ones who can make hay in this market (another Southern phrase for you). When buildings of any asset class trade at 30-40% of normal value, you can almost hear Bud Fox sitting on the shoulder and speaking into the ear of Corporate America. It’s time to gear up with insider knowledge and go get those deals done whether they be a purchase or a lease for corporate use. It simply doesn’t get any better than this. Bud Fox told me so.

Please Take My Money

By Ken Ashley

(ATLANTA) July 20, 2010

Dana Mattioli writes a great article in the Wall Street Journal today (reprinted below) suggesting that companies are finally ready to spend some of the $1.84 Trillion in assets they have squirreled away. One of the executives in the article describes the “comforting” feeling of having all that cash available. Talk about a good problem to have.

We have gotten calls from clients over the past 60 days who are on the prowl for companies to purchase, so we can confirm we see the trend occurring as well.  So the question is what can a real estate director do to support the CFO and team in evaluation transactions?  What kind of things should they be on the lookout for?

Of course, alerting the CFO that leases are overmarket is easy. Taking a holistic view of a target company is more challenging but clearly the right way to approach the deal and create real value for the enterprise. Here’s a  high level check list for due diligence:

  • Complete the requisite “over/under” analysis comparing rates to market. Long term leases that are over market can be used as leverage to reduce the purchase price.
  • Check the debt stack of landlords. Make sure the assets are stable and that your SNDA‘s are in place. Unstable situations can also be used as a chit on the purchase price but in many circumstances can be worked through.
  • Review termination options, contraction and expansion options. Flexibility is a good thing especially in M&A deals.
  • Check sublease language and make sure it is reasonable. Restrictive language can affect the deal price.
  • Make sure that renewal options are reflective of market.
  • Look for hidden value in leases such as the ability to early renew post closing. Many times investment bankers are focused in other areas so you can significantly reduce cost (just don’t tell the other side!)

Of course, the more data you have, namely leases, the more through evaluation you can perform.  In any case, mentioning the idea to executives and offering to be a resource is a great place to start. I would bet in many cases CFO’s and other deal leadership assume that the investment bankers are going to handle all the details.

Clearly there is a role for corporate real estate in these situations as well – and a way to get yourself invited to the closing dinner!

Here’s the article:

CEO’s Get Ready To Tap Cash Piles

By Dana Mattioli

The root of all deals

In what may signal an important shift, some chief executives say they are ready to start spending the mountains of cash they have stockpiled over the past year, despite lingering worries about the global economy.

Many companies, stung by the financial crisis, have hoarded cash as a cushion against continued economic turmoil. But their curbs on spending and investing have been damping economic growth.

At the end of March, nonfinancial companies in the U.S. were sitting on $1.84 trillion in cash and other liquid assets, up 26% from a year earlier, the Federal Reserve reported. In May, 43% of U.S. corporations had larger U.S. cash and short-term investments than six months earlier, according to a survey of 337 senior finance and treasury executives by the Association for Financial Professionals.

Now, some corporate leaders are starting to dip into their coffers, seizing the chance to make favorably priced acquisitions and expand and upgrade facilities.

“Our cash is piling up, and we’re looking at the capital to fuel growth going forward,” said Boudewijn Beerkens, chief financial officer of Wolters Kluwer NV.

The Dutch publishing company was holding €409 million, or roughly $530 million, of cash as of Dec. 31, up from €345 million a year earlier.

In a recent interview, Wolters Kluwer Chief Executive Nancy McKinstry said she is hoping to use some of that money for acquisitions. Last year, business owners were reluctant to consider selling their businesses because they feared they wouldn’t get good prices, Ms. McKinstry said. She expects the improved economy this year will make them more willing to sell.

Mr. Beerkens said Wolters Kluwer wants to make acquisitions in the $100 million to $200 million range by year end, and is looking for software firms specializing in tax, accounting and health-care information.

Meanwhile, Pep Boys-Manny, Moe & Jack plans to use its cash to expand its network of tire and service centers, according to Chief Executive Officer Mike Odell. The Philadelphia-based auto-parts and service retailer had cash holdings of $87.8 million as of May 1, up sharply from $21.3 million a year earlier.

By the end of its fiscal year in January, Pep Boys plans to open around 40 tire and service centers, up from the about 25 it opened the previous year. Each of those centers will cost the company about $450,000 for equipment, inventory and facilities improvements.

Mr. Odell said low prices for leasing commercial real estate make this an attractive time to open the new outlets.

Last year, Pep Boys made a $4 million acquisition of a 10-store Orlando, Fla., tire-and-automotive chain and converted it into auto-service centers. Mr. Odell said he would like to find similar small acquisitions, but that he is open to buying larger chains of up to 100 stores.

“It’s all about being opportunistic,” says Mr. Odell. “If the opportunity is there, we’ll do it via acquisition.”

Other corporate leaders share that inclination. Merger-and-acquisitions activity is up this year, as are all-cash deals by value. Companies globally announced $1.2 trillion of deals in the first half of 2010, of which 66% by value were all cash, according to data provider Dealogic. That compares with $1.1 trillion in deals a year earlier, of which 54% were all cash.

Cree Inc., a Durham, N.C., maker of LED lighting, has boosted its cash holdings to finance expansion, said Chief Financial Officer John Kurtzweil. The company had $988 million in cash and short-term investments as of March 28, up from $367 million a year earlier.

Mr. Kurtzweil said the company will spend more than $250 million on factories, equipment and expansion efforts in China and North Carolina this year, $150 million of which it spent in the first half of the year.

In June, Cree bought a 60,000-square-foot office in North Carolina for its expanding sales and marketing staff. It also is renovating another space for research and development.

Mr. Kurtzweil said Cree is scouting for companies that create the technology for LED components. He said he prefers using the company’s own cash for acquisitions, rather than being “beholden to any banks” for financing, partly because he is wary of banks’ fees and approval bureaucracies.

Computer Sciences Corp. had $2.8 billion in cash as of April 2, up from $2.3 billion a year earlier, and is looking to ramp up spending on acquisitions, said Chief Financial Officer Mike Mancuso.

The information-technology-services company, based in Falls Church, Va., expects to spend an annual average of between $250 million and $500 million over the next three years on acquisitions in the cloud computing, health-care and cyber-security businesses, he said.

Mr. Mancuso calls the economic recovery “tortoise paced,” but believes it still is important to invest in future growth. Although Mr. Mancuso is looking to ramp up growth, he also concedes, “It’s a comforting feeling having that cash available.”

Indeed, some companies said they have built up their cash piles mainly as a defense against further economic turbulence.

Office-supply retailer OfficeMax Inc., based in Naperville, Ill., had $540 million in cash at the end of the first quarter, compared with $149 million a year earlier.

“In the event that there was another downturn we wanted to be sure we had adequate liquidity to cover ourselves,” said OfficeMax Chief Financial Officer Bruce Besanko.

Mr. Besanko said he is open to changing the company’s position once the economy improves further, but first he is keeping an eye on the unemployment rate, especially among white-collar workers, and small business formation.

“Strongly Apparent that the National Vacancy Rate in CBD has Peaked”

By Ken Ashley

CHICAGO (July 9th, 2010)

Let the record reflect that the commercial real estate recovery has begun.  In an excellent article yesterday,  Bloomberg’s Daniel Taub quotes Maria Sicola, executive managing director and head of Americas research for Cushman & Wakefield discussing the signs of the office market shift. “Markets throughout the U.S. continue to strengthen” she said. It is”becoming strongly apparent that the national vacancy rate for CBDs has peaked.”

In the Cushman & Wakefield report which is the basis for the article, Sicola indicates that “office vacancies in U.S. central business areas fell in the second quarter from the prior three months, the first drop since 2007, as companies hired workers and took advantage of lower rents”.

The Bloomberg article says that office vacancies in both central business districts and suburban areas rose to 17.4 percent in the second quarter, the highest since 1993, New York-based research company Reis Inc. said July 6. Cushman & Wakefield’s figures are for central business districts in cities including New York, Washington, D.C., Philadelphia, Boston and San Francisco.

“The average vacancy rate in central business districts fell to 14.8 percent from 15 percent at the end of the first quarter”, said Sicola. Sixteen of the 31 cities tracked by Cushman & Wakefield had declines in vacancies, the company said.

Some office landlords cut their rents to fill space, Cushman & Wakefield said. The average rent fell to $36.49 a square foot from $36.88 in the first quarter. Nineteen of the 31 districts covered in the survey had quarterly declines in rates and 13 of those had drops of less than 3 percent, a smaller decline than in past quarters, C&W said.

Rental Rates nearing the Bottom

“While there is still substantial competition among landlords to offer the best deal to prospective tenants, rental rates are nearing a bottom in several markets,” Sicola said.

The U.S. has added 882,000 jobs since the beginning of the year, according to the Labor Department. The drop in office vacancies in the second quarter followed nine straight increases dating back to the last three months of 2007, when the rate bottomed out at 9.7 percent, C&W said.

So, as we have said in this space before, now is the time to be in the market. Different areas and different product types will recover at varying speeds. However, based on our own experience, activity is up significantly and we even had a landlord pull us aside on a tour last week to apologize that he simply couldn’t be as aggressive as he had been in the past.

The times, they are a changing.