Real Estate Forum - November 2008

Q3 Revenues Drop
For CRE Service Firms

REITs aren’t the only enterprises suffering from the economic meltdown. The three publicly traded commercial real estate services companies announced sobering third-quarter results.

CB Richard Ellis Group Inc. reported revenue of $1.3 billion versus $1.5 billion in Q3 ’07. Its net income in the third quarter amounted to $40.4 million, or 19 cents per diluted share. That was quite a drop from a year earlier when it was $114.9 million, or 48 cents a share. CBRE’s opening stock price on Nov. 12 was $4.55, a precipitous drop from its 52-week high of $24.75.

Brett White, CBRE’s president and CEO, acknowledged in a statement that market conditions are challenging, but that the company “performed reasonably well.”

Soon after it released its Q3 earnings results, Los Angeles-based CBRE filed papers with the SEC declaring its intention to offer 50 million shares of its class A common stock for a price of $3.77 per share. It estimates that the net proceeds from the offer will amount to $180 million, or $207.1 million if the underwriters exercise their over-allotment option to purchase up to 7. 5 million addition shares.

CBRE was not alone in reporting poor Q3 results. Grubb & Ellis Co. registered a quarterly net loss of $44 million, or 69 cents per share. The net loss for the Santa Ana, CA-based company for the first nine months of this year reached $55 million, or 87 cents a share. Its stock price opened on Nov. 12 at $1.06, down from a 52-week peak of $7.50.

Meanwhile, Jones Lang LaSalle reported net income on a GAAP basis of $15 million, or 43 cents per diluted share of common stock, for the third quarter. That compares to a year earlier, when the Chicago-based company charted net income of $47 million, or $1.38 a share. On Nov. 12, JLL’s stock price stood at $24.96 at the opening bell, a decline from the high of $90.83 attained on April 28.

GGP Mulls Bankruptcy
As Troubles Mount

Beleaguered retail REIT General Growth Properties has warned in a government filing of possible bankruptcy if pending loan obligations cannot be met. The company has $958 million of debt scheduled to mature in early December. An

additional $3 billion is set to come due in 2009.

“In the event that we are unable to extend or refinance our debt or obtain additional capital on a timely basis and on acceptable terms, we will be required to take further steps to acquire funds necessary to satisfy our short-term cash needs, including seeking legal protection from our creditors,” said the company in the SEC filing. “Our potential inability to address our 2008 or 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a going concern.”

Shares of the company sank more than 70%, reaching 49 cents at the close of Nov. 11, the day the filing was announced. The stock traded at $41 per share in January.

“The company was carrying on under its normal course of business right up until the end of August,” says Louis Taylor, senior analyst at Deutsche Bank. “At that time, it was pursuing a corporate-level debt deal and a large asset financing, and those options became unavailable when the credit markets froze in the middle of September.”

Since then, he says, the REIT has aggressively pursued asset sales, loan extensions and corporate-level capital injections. The company, for instance, placed its Las Vegas portfolio on the market. Two of the assets in the deal, the Palazzo and Fashion Show Mall, have some $900 million of debt set to come due at the end of the month.

In the wake of its financial troubles, GGP’s CEO, John Bucksbaum, and president, Robert A. Michaels, stepped down. In the interim, Adam Metz will serve as CEO, while Thomas H. Nolan Jr. will assume Michaels’ former seat.

Taylor says it’s too early to determine whether the change in management will benefit the company. Deutsche Bank has placed a hold rating on the REIT.

The management changes were an extra negative for analysts at Moody’s Investors Service, which downgraded GGP’s ratings to B3 from Ba3, stating it “adds increasing uncertainty to the strategic vision for the REIT. The earnings pressures have eroded GGP’s credit metrics and the cushion for both the secured debt and interest coverage covenants for the Rouse debt.”

Indeed, many observers attribute GGP’s debt woes to its flurry of acquisitions in recent years, namely the $12.5-billion purchase of the Rouse Co. in 2004. “They didn’t raise sufficient equity to make that acquisition,” Taylor recalls.

NEWS WRAP continued on page 60

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