Real Estate Forum - October 2008

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General Growth Moves to Halt Declining Financial Performance

Thompson, Argus Form Partnership

Weeks after announcing plans for a financial and strategic review, General Growth Properties has removed its chief financial officer, Bernard Freibaum, and suspended its common stock dividend.

The Chicago-based REIT has named its senior vice president and chief accounting officer, Edmund Hoyt, to head financial operations until a permanent replacement for Freibaum is

ously existing margin loans, which will halt further sale of their shares to satisfy the margin call.

“Freibaum bore responsibility for most of the margin-induced insider selling over the past month, as well as a balance sheet strategy that relied heavily on the now-shuttered CMBS market,” wrote Paul Morgan, an analyst at FBR Capital Markets. “We believe the change

“The severity of the deteriorating

global credit environment provides

little breathing room for the REIT.”

found. Prior to the announcement, Freibaum sold some three million shares of common stock to satisfy margin calls, using the proceeds to repay outstanding margin debts, according to a company statement. The release also noted that Freibaum now owns approximately 1. 3 million shares of stock and has an estimated $3.4 million of margin debt outstanding. All of the remaining executive officers have repaid all previ-

was necessary, but with over $4 billion in debt maturities over the next year and another $13 billion in 2010-11, it is a perilous situation in which to face a management transition.”

Morgan chided GGP’s management for not de-leveraging sooner and biding time in hopes of a return to low spreads and easy access to debt. FBR downgraded the REIT’s target price to $15, repre-

GGP continued on page 14

FCP Closes $230M Investment Vehicle

Federal Capital Partners has closed a $230-million private equity fund—FCP Fund I LP—that with some leverage should deliver between $800 million to $900 million of purchasing power to the company. This vehicle will mark the first time the Washington, DC-based firm ventures into debt and equity investment.

The fund will be targeting both hard assets and paper, says FCP co-founder and partner, Esko Korhonen. The assets will be in FCP’s traditional sweet spot of value-add, repositioning plays. “But we also feel there is a tremendous opportunity for lending right now.” Mezzanine capital will be a target, specifically, purchasing such paper, as is bridge financ-

ing. It is also possible, Korhonen continues, that the fund may delve into providing senior debt.

If the latter happens, FCP can count itself as part of a rapidly thinning group. Mezzanine paper, by contrast, has become a favored investment by many real estate funds because of the risk-adjusted returns it can now offer. (See “On the Paper Trail,” page 43.)

The most likely scenario is that the fund will buy notes and provide bridge financing, Korhonen says. “But the beauty of this is that we have the flexibility and discretion to go after whatever we think is the best opportunity in the market.”— Erika Morphy, GlobeSt.com

TIC pioneer Tony Thompson is squarely back in the co-ownership investment market: his company, Thompson National Properties LLC, has formed a joint venture to manage the properties of TIC sponsor Argus Realty Investors LP. Irvine, CA-based TNP is also getting ready to launch the first investment in its new Delaware Statutory Trust program.

The 50-50 joint venture between TNP and San Clemente, CA-based Argus will manage 29 TIC properties sponsored by Argus. Argus will ultimately wind down, as it will no longer be sponsoring new deals. For now, some staff remain at the firm, while 11 of its employees, including chairman and CEO Richard Gee and president Timothy Snodgrass, are joining TNP’s ranks. Gee was one of the original shareholders in Thompson’s former company, Triple Net Properties.

Consolidation of sponsors in the TIC market has been predicted by industry participants for the past year or two, but this is the first actual deal that has taken place. Thompson, like others in the business, says he expects it will not be the last, and may in fact serve as a catalyst for others to pursue mergers and acquisitions or some combination.

Indeed, the executive says he is in the late stages of a transaction with another, smaller sponsor. That deal, he says, could be consummated within the next few weeks. Thompson adds that he has done due diligence on, and had at least preliminary conversations with, other sponsors, though no agreements have yet been made. “This transaction is the beginning of an industry consolidation that will provide stronger sponsorship for investors during these uncertain times,” he says.

Snodgrass adds, “Given the current state of the real estate market, it’s the perfect time to create a relationship that will provide stability and produce innovative investment programs.”