In The News
June 2, 2016
Eyeing D.C.: Monday Properties poised to return to acquisition mart
Real Estate Financial Investment
Monday Properties, which has been a net seller of assets over the past three years, is ready to expand its portfolio again. The New York-based investment management company is seeing the most opportunity in Washington, D.C., where it hopes to tap into situations where borrowers have commercial mortgage-backed securities due and need a partner to help refinance as well as more traditional acquisitions, according to Anthony Westreich, chairman and ceo. To this end, the firm has brought on Brian Berry, a veteran investment professional, with a mandate of helping the firm to navigate today’s complex and competitive investment market. Berry, who has worked in the major markets on the East Coast, is a specialist in Washington, D.C. He has held senior roles at Trizec Properties and Tishman Speyer, and joins the firm from Oak Point Investors, a firm that he founded. The company’s sales activity included selling off its New York office portfolio, capped by the $1.2bn sale of the iconic 230 Park Avenue office tower to RXR Realty in early 2015. That transaction, as well as Monday Properties’ other sales, is a reflection of the firm’s long-term strategy of value creation, Westreich said. “I’m still somewhat skeptical about values in New York today but we always remain focused on sourcing interesting opportunities,” he added. “Monday Properties has been a net seller over the past three years, especially in New York,” Westreich told REFI. “When you’re a seller people start to question your long-term viability. We are a value-add owner/operator which means we harvest returns for our investors and our capital when the market gets frothy. While we were enjoying being a net seller in New York, we were working through our business plan in our D.C. portfolio and waiting for that market to show signs of recovery. Our hire of Brian Berry is not only a tremendous addition to the Monday Properties’ team, it is also symbolic – it’s an announcement to the market that Monday Properties believes that there are or soon will be some unique buying opportunities available. REFI: Over the past three years, Monday Properties has been a net seller of assets. At the same time, you spent substantial time leasing up your Washington, D.C., assets. Where are you right now and what’s next? AW: I’ll start out with some background. Monday Properties was founded in 1998. Since our inception we have completed over $12B of real estate transactions on 50 disparate transaction representing over 27 million square feet. We’ve been a very active buyer and seller of commercial offices in supplyconstrained markets like New York and Washington, D.C. We’re a private company that owns, operates and develops real estate. Over the past three to four years, we’ve strategically decided to be a net seller instead of a net buyer. During the time, we sold off our entire New York office portfolio, culminating with the sale of 230 Park Avenue. That historic transaction was a symbol of our divestment of our New York assets. We continue to have a large portfolio of office buildings in the greater Washington, D.C. area. That market, over the past few years, has struggled due to federal sequestration, the BRAC [Base Realignment and Closure] Act and a general malaise at the GSA that led to an overall softening in the leasing market. But over the past two quarters, we’ve noticed a serious sea change. We’ve seen net absorption and population growth and we believe that over the next two to six quarters, we will see a lot more growth in Washington attributable to not only an administration change, but also due to the overall pent up demand for growth within the area. With that theme, we harvested our returns in New York and have a bit of a war chest that we’ve been waiting patiently to invest. We think that the D.C. market presents a unique opportunity to take advantage of opportunities resulting from not only an improvement in the leasing market, but also the huge amount of CMBS debt maturing in 2016 and 2017. REFI: How will the vacancy issues affect owners’ ability to refinance in D.C.? BB: The leasing market continues to improve but there is still lingering vacancy in many submarkets. There are many undercapitalized owners who just don’t have the financial resources and/or expertise required to upgrade properties for the needs of today’s tenants. While assets have appreciated since the recession, many owners will still need to de-leverage and address the capital improvement needs of their buildings. There are many performing CMBS loans that are nearing maturity that are not in default or special servicing. The underlying debt on these loans is often 70-90% of current collateral value. In today’s market, many owners need additional equity or mezzanine debt to effectively refinance these types of assets. REFI: What’s different about what tenants are looking for today? BB: Today’s tenants are looking for great buildings with a diverse group of in-building and neighborhood amenities to attract and retain staff. This is more than a deli, a small fitness center, and bicycle parking. Tenants have a strong desire for very good transit or metrorail accessibility, shared common space, building WiFi. They also desire indoor and outdoor seating areas, state of the art bike facilities, electric car charging stations and more. Buildings that aren’t offering these types of improvements and amenities are having difficult time attracting and retaining tenants. REFI: When you’re looking at acquisitions, what is the most important factor? AW: I’m not sure there is a simple answer for that. As a building owner in D.C., it needs to be about geographic location – you need to be on or near a transportation hub. One of the reasons why we’ve seen so much leasing in Tyson’s Corner, for example, is the Silver Line of the Metro’s expansion. My family and I have been operating in the D.C. office market since 1959. The old adage of ‘location, location, location’ resonates deeply in the greater Washington, D.C. area. Aside from geography, there is obviously the actual building. Tenants are becoming more thoughtful about the way they use their space – it’s more about efficiency and relying on the building for amenities like shared conference facilities and other common area attributes. We need to look at the bones of the building and ask questions like, “Does this allow tenants to use shared space efficiently? We will also look at the credit of tenants and lease roll because that will also affect our ability to reposition a property, and therefore, harvest long term value. REFI: How will you source and structure your deals? AW: As a privately owned firm, we typically get control of an asset as a general partner and bring in a limited partner. It’s the typical GP/LP partnership that we’ve done successfully over the past two decades. I’ve always said that it’s not difficult to find capital for good deals – it’s difficult to find good deals. But generally, if the asset is underwritten properly and makes good economic sense, the capital will be available. The debt markets have been wonky recently, but we have always tried to be thoughtful about leverage and typically don’t lever our deals above 70% of actual value. We find that there is good availability with balance sheet, CMBS or other lenders with leverage levels that are within our range and that use conservative underwriting metrics.