It seemed like a good idea at the time.
By Howard Rudnitsky
November 2000
Institutional Investor Magazine
It seemed like a good idea at the time. Like others who made paper fortunes on Internet investments, commercial real estate companies had every reason to celebrate as technology stocks soared in 1999 and early 2000. Such firms as the Hines organization in Houston and real estate investment trust Boston Properties acquired stock in companies with which they felt some strategic connection -- suppliers of broadband communications for office buildings, for example. Others made e-commerce plays: San Franciscobased AMB Property Corp. took a stake in Internet grocer Webvan Group; Taubman Centers CEO Robert Taubman backed Fashionmall.com.
But with the Nasdaq beaten down, many realty venture capitalists are realizing that investing in bricks and mortar is a lot safer. Broadband stocks have tumbled 60 to 90 percent from their peaks. Webvan fell from 34 in December to below 2 in October. Fashionmall.com skidded immediately from its $9.50 IPO price in May 1999 and traded at $2 last month.
Samuel Zell, for one, is keeping his cool. High-speed broadband, he says, remains a good business. The Chicago-based investor holds an 11 percent stake in Dallas-based Allied Riser Communications Corp., which wires corporate offices. “REITs put little or no money in these investments. So there’s no risk, and they are still ahead despite the sharp sell-off,” says Zell. He is banking on “a big shakeout that will lead to consolidation” -- and higher stock prices.
To be sure, not all shareholders will have Zell’s patience. Early birds in Allied Riser, including Equity Office Properties Trust, Boston Properties and TrizecHahn Corp., took millions of shares before the November 1999 IPO in return for allowing access to their tenants. But the stock, which climbed from 18 at the IPO to 48 in March, crashed recently to below 4.
As an investment portfolio in its own right, FrontLine Capital Group, a spin-off of Melville, New Yorkbased Reckson Associates Realty Corp., can serve as a proxy of the realty venture capital trend. Its holdings include a controlling interest in HQ Global Workplaces, a provider of outsourced business support services. FrontLine’s shares rose from about 2 at its spin-off in 1998 to 68 late last year. In October they were down to 105/8. When FrontLine announced on October 18 that it would spin out HQ Global, whose quarterly revenues are running at $150 million, the stock rose $1.25.
FrontLine expects to stay the course. James Burnham, senior vice president of finance, says, “We have repeatedly demonstrated the ability to obtain whatever capital is necessary to accomplish our objectives.” If worse comes to worst, he adds, it can sell off companies that it owns.
But FrontLine posted a net loss of $104 million in the first half, and David Shulman, head of real estate equity research at Lehman Brothers, says Reckson shareholders are at risk because of two lines of credit totaling about $160 million that the REIT extended to FrontLine.
“While there appears to be asset value in FrontLine Capital, it’s not clear how they become liquid,” says Mike Kirby, a partner at Newport Beach, California’s Green Street Advisors. “They only have about $15 million in cash. Where they get the capital to repay the loans I don’t know.”
Private deal making persists despite the tech stock debacle. Simon Property Group plans to invest up to $75 million by the end of 2004 for a 50 percent stake in MerchantWired, which provides broadband access services to shopping malls. That investment, however, would be modest compared with TrizecHahn chairman Peter Munk’s announced plan to sell a large portion of his $3 billion in real estate to invest in telecommunications for hotels and data centers as well as elsewhere in the tech sector. Says Lehman’s Shulman: “TrizecHahn is coming a little late to the telecom party. There’s substantial competition out there already.”
What about existing tech investments? “My guess,” says Green Street’s Kirby, “is that some will make money in two years or so, but others will go out of business. It’s hard to know which ones will be successful. But I’ll eat my hat if we’ll again see any of the high prices these stocks reached early in the year.”
