Contents
Copyright © 2006 by Steve Bergsman. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Cataloging-in-Publication Data
Bergsman, Steve.
Maverick real estate financing : the art of raising capital and owning properties like Ross, Sanders, and Carey / Steve Bergsman.
p. cm.
Includes bibliographical references.
ISBN-13: 978-0-471-74587-7 (cloth)
ISBN-10: 0-471-74587-1 (cloth)
1. Real estate investment. 2. Real property—Finance. I. Title.
HD1382.5.B467 2006
332.63'24—dc22
2005029364
To my lovely wife, Wendy, and my two, wonderful boys, Ethan and Aaron
Introduction
The inspiration for Maverick Real Estate Financing derived from my experiences promoting my first book, Maverick Real Estate Investing.
When I undertook a series of lectures and book signings to help market my first real estate tome, I found most people wanted to hear reassurance about their inclinations to make an investment in real estate. They had land they wanted to buy, a concept for investment but most of all they wanted to buy a house, fix it up, and sell it. Most of them had heard about these seminars offering tips on how to buy a house with no money down or how to flip properties.
Although I don’t believe in either of those methodologies, I tried not to be too negative and attempted to impart key, prepurchase procedures concerning such necessities as market research. There were two things that concerned me in 75 percent of the situations where my audience held a somewhat fixed idea about what they wanted to do in regard to real estate.
First, they had given no thought to investigating competitive market conditions other than to ascertain nearby properties values. Consequently, they didn’t know, for example, if they were to buy a house as a rental investment property, whether an existing glut of apartments in that community would make their purchase difficult to rent and thus unprofitable. They didn’t know whether they were buying into an up economy or a down economy.
Second, these novice investors had no concept of the inherent price of capital—what it would cost to borrow, what form the loan would take, and how it would eventually affect the value of the investment. Fortunately, the year of my book, interest rates were still very low, and this gave even the most naive investor a forgiving climate to indulge in outright stupidity.
For investors starting out, venturing into a first property acquisition, the margin of error was relatively wide, considering where interest rates were at the time. Nothing stays the same, obviously, and interest rates would eventually rise, while demand for property would push up pricing. The margin of error would quickly erode with subsequent investments, subsequent leverage, and any change in market conditions. If the financing was expensive, a reversal of fortune for the investor was definitely at hand. This is what the new Donald Trumps didn’t understand.
As I mulled over these issues, I came to see I should do a follow-up book on the subject of financing and ancillary necessities such as corporate formations. Unlike my first book, in which many of the people I profiled were household names, the names in the world of real estate finance aren’t as well known to the general public. Conversely, if you work in the industry, you will recognize all the people profiled in Maverick Real Estate Financing. After all, who is more important to know, another investor or the person who will lend you money?
I spent an unusually long time deciding which chapters should be included, because I came to realize that how the investment is organized is equally as important as how the investment is financed. Think of these as the approach and the endgame. The quest for the right kind of real estate financing eventually moves the machinations forward. With luck, a portfolio of investments is created. The process does not end there. Entrepreneurs have continually searched for the most convenient, legal, tax-advantaged vehicle to hold those investments. As much financial engineering goes into the latter as the former.
Finally, there was the question about what to do with William Sanders. I knew I wanted him in the book, but he didn’t fit neatly into a real estate financing chapter. In some regards, he really should have been in the first book, because he has been one of the most successful and imaginative real estate investors this country has produced. However, he was not successful in creating a vehicle for holding those investments. He wanted public valuation with what should have remained a private structure. His company, Security Capital Group, was never very well understood by Wall Street, and in the end he dismantled it, but not before creating some of the biggest real estate companies in their individual sectors, such as ProLogis in industrial.
My solution was to create a first chapter about William Sanders that would in many ways sum up all the chapters.
That freed me to do two things. First, I expanded my list of people to be profiled to include developers and real estate entrepreneurs, because they represent the best users of capital and finance tools. Second, I was able to set the book’s structure.
The earlier chapters (after the Bill Sanders chapter) involve true real estate finance—how to get the capital necessary to pay for whatever type of investment you want to make. Obviously, there are myriad ways to make that happen, and I tried to cover the most apparent as well as some of the more esoteric, from simple bank loans to agency loans to equity to low-income-housing tax credits. Most of the gentlemen interviewed here would be considered financial guys of one sort or another. This group includes Jack Cohen, Brian Stoffers, Michael Mazzei, David Twardock, and W. P. Carey. Although now known as a developer, Stephen Ross is in this group because of his pioneering use of low-income-housing tax credits, which is a financing mechanism with which he is still associated through cross-corporate relationships.
The middle chapters cover investment strategies based on corporate finance techniques, and the two gentlemen interviewed here are as different as they can be in the real estate world. After decades in real estate investing, Thomas Barrack prefers the opportunity fund structure, while Milton Cooper remains one of the best corporate chieftains in the real estate industry, having built Kimco Realty Corporation into the largest nonmall retail REIT in the country.
The later chapters cover what I call corporate formations, essentially different organizational strategies for holding those investments you struggled so hard to find and acquire. Again, this is a mixed bag of individuals. Maury Tognarelli is a true finance guy, whereas Robert Taubman is of the corporate stripe, the chief executive officer of the mall REIT, Taubman Centers Inc. The last fellow in this group is Leo Wells, who splits the difference—part corporate and part finance.
Real estate financiers are not well known, although they are equally important, successful, and wealthy. Also, some of the financiers are not entrepreneurs but corporate employees who, through either hard work or unusual vision, have helped to create new arenas in real estate finance. I had to make room in this book for both kinds of people.
One final note. Lest you think real estate finance is not very important, consider this: It’s because of our country’s diverse, deep, and inventive ways to create financial products that we have been able to build a commercial real estate industry that is strong, effective, viable, and different from almost all other countries in the world today. Not only have we been able to create individual wealth, but more important, real estate finance has allowed more people to invest in real estate than at any time in world history.
William Sanders isn’t as well known as Donald Trump or Sam Zell, but no single person has created as many important real estate companies as Sanders. Now in his sixties, Sanders is attempting to build one more great dynamo. For better or worse, his new venture won’t be anything like Security Capital Group, his fantastic but flawed real estate company that tried to be all things real estate.
When I stepped outside the airport terminal and into the white light of an El Paso morning, I looked around for my ride, which hadn’t yet arrived. I must have stood on the curb for a long time, because I drifted into a sunlight-induced somnambulant state of waiting and didn’t see the man approach me. “Steve Bergsman?” he asked. I nodded and shook hands, I guess somewhat reluctantly, because he laughed and said, “Don’t worry I’m not the FBI.”
He easily could have been, because arranging an interview with William Sanders took a lot of work, a lot of time, and probably a full body scan and scrutiny of my personnel records as kept by some secretive governmental organization.
While researching Sanders before my meeting with him, I came across an old story written during his heyday as chief executive of Security Capital Group. It read: “In a business dominated by unabashed self-promoters, Sanders is an oddity. His name doesn’t even hang on his small office buildings. There is not a single color photo of him available. He is said to make anyone who works with him—inside the company or out—sign confidentiality agreements. ‘We don’t want anyone to make off with our ideas. I am shocked at what my competitors say publicly,’ he says in a polite phone conversation to explain why he won’t be interviewed.”
The unheralded and selectively secretive Sanders, who next to the legendary Sam Zell stands as probably the most influential and storied real estate investor in the country, is hard at work on his next project, which has been rumored about in the business press. I was going to get a first peek, which is why I was invited down to El Paso.
While Sanders is more of an investor than a finance wizard, this book is not only about raising capital, but also about corporation formation. Sanders, more than any other real estate maven, has wrestled with choosing the best type of corporate format to hold real estate. His firm, Security Capital Group, a company that was actually a holding company for investments in private real estate companies and other REITs, was neither liked by Wall Street nor understood by the investment public. As efficient as Security Capital might have been in regard to ownership, it turned out that it was much too complicated for outside investors.
After numerous attempts at simplification, Sanders eventually folded his tent. The last of the company was sold to GE Capital, but that wasn’t exactly a giveaway: The deal closed at $5.4 billion.
Even if Sanders had then retired, he still would be one of the great men of modern real estate history because of the number of companies he founded and impacted through investments.
The global real estate firm, Jones Lang LaSalle, had part of its beginnings in LaSalle Partners, Ltd., an innovative company founded by Sanders in El Paso, Texas, in 1968, which moved to Chicago in 1970. Then there was, of course, Security Capital, and in creating Security Capital, Sanders also formed the huge multifamily REIT, Archstone-Smith Trust. Soon afterward, in a de novo development, he created the company that would become ProLogis, the largest industrial REIT in the world.
That alone would make a real estate man famous, but it was only a piece of Security Capital’s immenseness. Through Security Capital, Sanders created, expanded, or invested in more than a dozen other companies, including CarrAmerica Realty Corp., Storage USA, Inc., Regency Centers Corp., Homestead Village, and BelmontCorp.
All that may eventually pale next to his latest corporate challenge, Verde Realty, based in El Paso.
The man who tapped me on the shoulder at the El Paso airport was Christopher Lyons, a former Lehman Brothers guy who was now serving as a vice president with Verde Realty. I opened the car door and climbed into the front seat. The driver, a trim, distinguished-looking man, greeted me with an enthusiastic handshake, “Steve, how are you doing?” My driver for the day was going to be William Sanders himself.
As we wheeled into the streets of El Paso, I reached for the bag holding my tape recorders. Whoops. Ground rule number one. I could take notes during our car ride, which was going to be extensive, but I could not record the interview. Hours later, when we were back at his offices I was finally able to turn on the recorder and get Sanders on record.
One of the first questions I asked as I looked around El Paso—it didn’t appear much more appealing to me than the first couple of times I visited the city—was why the heck he was there. This would be revealed to me in the course of the car ride, but the simple answer was “lack of,” as in lack of competition, lack of capital, lack of REITs. As explained by Sanders, El Paso and Juárez, its sister city on the other side of border, constituted an international metropolitan area of more than 3 million people. Roughly two-thirds of those people were on the Mexican side, but it was obvious that El Paso was showing significant growth as well.
What Sanders meant was that, despite the growth and the significance of the population, El Paso was relatively off the map for national developers. In addition, all that capital currently lubricating the real estate market rarely washed into El Paso. And finally, most of the big REITs didn’t have investments in El Paso. The exception being ProLogis, an industrial REIT, but that was to be understood, because the company’s first development was in El Paso.
As Sanders saw it, El Paso was almost virgin territory for what he wanted to do with his new Verde Realty, the first hint of which came as we passed a number of what I thought to be handsome-looking ProLogis industrial buildings (some of them were probably constructed when Sanders controlled the company). This day, however, he was somewhat dismissive of them. “These are good buildings, but they are not where I want to be,” he said. “Where’s that?” I asked. The answer was, not just near the border with Mexico, but right on the border. That’s where Verde Realty was going to be.
You have to understand, if there was ever a real estate investment intellectual, it is Sanders. None of his great creations has simply been about making money. They all fulfilled a purpose or need. LaSalle Partners was started to capture the real estate business corporations needed but didn’t want to do. This was outsourcing before outsourcing existed. Security Capital was an experiment in real estate ownership. All that might pale in regard to the latest venture, Verde Realty, which was poised to invest in the most unrealized trendline in real estate.
Here’s a quick version of what Sanders explained: For many decades, the Midwest reigned as the country’s industrial heartland. And although much production has been shipped overseas, the remaining industrial base has been gradually relocating to the southern states near Mexico because of the inexpensive labor on both sides of the border. This, of course, is the old maquiladora concept.
The classic meaning of maquiladora is a factory located in a Mexican border town that imports materials and equipment on a duty-and tariff-free basis for assembly or manufacturing.
The maquiladora programs were weakened by the rise of China and its even cheaper labor, but there is something to be said for proximity. As Sanders pointed out, a number of companies that had shifted manufacturing to China were already coming back to the U.S.-Mexico border area to be closer to their North American customer base. On my tour of the outskirts of Juárez, a very large manufacturing facility was being constructed for a company that was moving some operations back to North America from China. This company wasn’t closing its China operations, because the shear size of that market demanded a presence there. But some time-sensitive operations and heavy-weight-to-value products destined for the North American marketplace were better suited for the U.S.-Mexico border region.
Sanders contends the U.S. manufacturing that remains in the country will shift more to the border in a great swath stretching from San Diego on the west to Brownsville, Texas, on the east. In between will be some important nodes, such as El Paso–Juárez.
“In U.S. industrial parks, most of the buildings are for bulk distribution,” Sanders maintains, “but down here only about 20 percent fall into that category. The rest are incubator, supplier, manufacturing, and customer service centers.”
He prophesies that El Paso will become the epicenter for Hispanic business in the country.
After lunch we headed east of the twin cities. The El Paso–Juárez area was tied together by just four border crossings: two within the city, one to the west, and the fourth, called the Zaragoza point of entry, on the outskirts of the population to the east. It was here we encountered the first of Verde Realty’s holdings, a number of industrial buildings and land right against the border crossing to be built out for incubator, supplier, distribution, and manufacturing development.
On the U.S. side of the border, Sanders explained once more to me that the most prime land is close to the actual border and as close as possible to an international crossing, which certainly included the Verde Realty holdings. The reasoning was there was much shipping of goods between related facilities on each side of the border. If assembly was done in Juárez, then suppliers and distribution would be out of El Paso. The twin-plant concept has been a feature of maquiladora almost from the beginning because the U.S. “twin” is often used for such tasks as procurement, distribution, marketing, and some high-tech manufacturing.
Sanders believes in the development potential for the whole corridor of border lands, and that means on the Mexico side as well, so as one travels around central Juárez to the east and south where development begins to scatter into the desert landscape, much of the land is undeveloped. However, one can see the expansion already happening as new residential, retail, and industrial developments pop up madly. It’s here where Verde Realty has taken a stand, acquiring six tracts, one of which is designated retail, another housing, and the rest (including a tract closer to Juárez Airport) industrial. As we drove along Juárez’s International Beltway, through the heart of Verde’s holdings, Sanders spread out his left arm, “Within four miles of here, 20,000 to 25,000 homes are being built.”
Even closer are the new industrial complexes. Two Verde properties surround the new manufacturing campus, which itself is near a very large Electrolux campus nearing completion.
All this is just small potatoes compared to Verde’s immense project to the west of El Paso. It’s here that Sanders’s vision will play out in full. Verde Realty now controls more than 21,000 acres of land surrounding the Santa Teresa port of entry, which was formally dedicated in 1998. The company’s land is actually in New Mexico, not Texas, abutting Verde’s land to the south in Mexico, a 46,500-acre, to-be-developed project called San Jeronimo, which is owned by Eloy Vallina, a Verde Group director. Verde is coordinating plans for a binational project of enormous scale and importance for both countries.
Santa Teresa was first envisioned as a transportation and industrial hub by a flamboyant developer named Charlie Crowder, who also owned the nearby Santa Teresa Country Club and most of the water rights in the area. The project, more than 22,000 acres, was just too big, and as some people noted, Crowder was a difficult man to deal with. In any case, financial and political problems vexed the development and Crowder filed for bankruptcy.
That’s where Christopher Lyons comes in. Remember, he was the fellow who greeted me at the airport. The family of the former Lehman executive and Verde Realty vice president was a major investor in Santa Teresa, and after the bankruptcy they took it over in 1993. Lyons moved to El Paso to run the operation. His family held the property until selling it to Verde Realty a decade later.
Santa Teresa and San Jeronimo will end up as vast mixed-use developments, a border version of Irvine Ranch in Orange County, California. This actually is an important comparison, because Sanders stressed a key issue for Verde: The company will sell no land for short-term gain. Verde Realty will be the master developer and owner of all the land in the development. “I want to sell fully developed lots to small- and medium-sized homebuilders and develop and retain long-term ownership interest in all income-producing commercial properties with our master-planned communities,” Sanders exhorts—with gusto. Projects this big and with such Texas-sized objectives will take a lot of capital.
Verde Realty was founded in November 2003 and is the owner of all real estate assets of Verde Group LLC. Among the partners are a group of old Security Capital managers, directors, and investors, including Ronald Blankenship, former vice chairman and chief operating officer of Security Capital Group; Jay Light, dean of Harvard Business School; Ray Hunt, chairman and CEO of Hunt Consolidated; Jack Frazee, former chief operating officer of Sprint; Laurance Fuller, former cochairman of BP Amoco; and business luminaries such as Eric Dobkin, advisory director of Goldman Sachs and former head of equities, and Steve Roth, chairman and CEO of Vornado Realty Trust.
Some came into Verde with checkbook in hand. However, for such long-range developments, capital will have to be long range as well. Verde Realty is currently, and will in the future, raise additional capital through a series of private placements done via Wall Street. The idea is not to raise a lot of capital all at once and be pressured into using it all immediately, but rather to raise the capital as needed through private placements, with targets of $250 million at each offering.
Birth Date: | 1941 |
Occupation: | Cochairman and Co–chief Executive Officer of Verde Realty |
Education: | BS, economics and Latin American studies, Cornell University |
Sanders didn’t think he would have trouble raising capital, and considering his track record, he is probably right. In fact, he alluded to me that he could easily raise much more than he was seeking in his offerings. Strategically, it didn’t make sense, so Sanders says he is going to stick to his plan. “We will capitalize in stages,” he stresses.
That leaves the question of organizational structure. In the 1990s, many of Security Capital’s companies tried the REIT approach. However, for companies as complicated as Security Capital Group and Verde Realty, the REIT wasn’t going to work out. Sanders chose instead the master limited partnership, or MLP, sometimes known as the publicly traded partnership.
Says Sanders, Verde Realty is a master limited partnership for the following reasons:
As the name implies, the MLP is partnership in form, consisting of a general partner who handles the day-to-day operations and limited partners who provide the investment funding. It is publicly traded and, as with any public corporation, shareholder risk is limited to the investment in the partnership. Unlike the corporation structure, the MLP carries some interesting benefits: For example, it pays income taxes but files a partnership return; the MLP is exempt from taxation if 90 percent or more of the income is “qualifying income” as defined by the IRS; and, since it is traded, it is a liquid investment. It should also be noted that MLP agreements provide that if the general partner is able to build the business and its returns, the distributions to the general partners may increase in terms of their percentage of the whole, a strong incentive to the general partner to grow income.
That is what Sanders intends for Verde. “We are going to be the dominant real estate developer creating new communities and thoughtful, planned environments in the U.S.-Mexico border region, from San Diego to Texas,” he says confidently.
Marty Robbins’s famous song begins this way: “Out in the west Texas town of El Paso . . .” Bill Sanders’s story begins the same way. As a youth he grew up in El Paso. Except for some stints in other cities, he has always come back to his roots.
His first shot at leaving El Paso was college, and he shipped off to Cornell University in upstate New York. That was followed by some Peace Corp–type summer programs that acquired land for agricultural co-ops in Central America. It must have been interesting work because when he arrived back home he joined a local real estate company. His fist job was selling lots to builders, but he soon graduated to managing the preparation of building sites. “It was something I knew nothing about,” he reminisces, “which was running six to eight pieces of earth-moving equipment.”
Then he moved to another real estate company, where he spent the majority of his time traveling around the western United States looking for motel sites. The best part of the job was meeting others in the real estate brokerage business, especially those who worked for big companies like Coldwell Banker (now CB Richard Ellis) and Grubb & Ellis. This was in the late 1960s, and the very sharp Sanders observed that the real estate industry lacked professionalism and questioned why it couldn’t be run with the expertise of a company like Merrill Lynch. He tried to get his own bosses to move along these lines, but they wouldn’t bite, so in 1968 Sanders talked four investors into bankrolling a new company called International Development Corp. “I didn’t have any money, so each investor/director put up $25,000,” says Sanders. “They each got 25,000 shares, and basically we were off to the races.”
IDC was a successful real estate company from the start, and that caught the eye of another local developer who was doing construction work around the globe. He pitched Sanders an opportunity. Sanders’s associate had a contact in Chicago who wanted to develop regional shopping centers for Montgomery Ward, so in 1970 Sanders moved to Chicago. As it turned out, the Montgomery Ward work never panned out, but there were a number of Fortune 500 companies in the Chicago area, and the ever-insightful Sanders spotted opportunity.
The first thing he did was change the name of his firm. No one knew what IDC stood for, so he created an entirely new moniker, LaSalle Partners, Ltd., because he wanted the name to sound more like an investment bank.
Second, he went after the corporate business. “In that era, big companies had 24 percent of their balance sheet in real estate, and it was totally unmanaged. I felt there was opportunity,” he remarks.
Chicago was home to a number of big real estate brokerage and development companies, so to carve out a slice of business Sanders had to be different. Most real estate brokerages were deal shops, and people in the business worked on commissions. He decided LaSalle Partners would be a true service company and that his key employees would be on salary. “We lost a meaningful number of employees, but we were able to attract a totally different caliber of individuals,” he says, “This allowed us to be highly professional and service the customer in a strategic and thoughtful way.”
LaSalle Partners was so successful it became the second-largest property manager in the United States.
In the late 1980s, Sanders noticed a change in the real estate world. There was a lot of capital flowing into the industry, and the future, he surmised, would be dominated by two phenomena: public capital and specialized operating companies. Sanders wanted to move into the next stage, and at that point he had to decide whether to turn LaSalle Partners into something different or start again.
In 1988, he cashed out of LaSalle Partners (which in 1999 merged with Jones Lang Wootten to form Jones Lang LaSalle) and pocketed, according to the financial press, $20 million. He actually retired as CEO from the company on the last day of 1989.
By 1988, the U.S. real estate markets convulsed. According to myth, Bill Sanders was smart enough to see the recession coming and get out ahead of the crash. The truth, he says, is that he saw change coming, but it wasn’t the recession; it was a market shift regarding ownership of commercial real estate in the future. Instead of big commercial real estate remaining in private hands, it would be gathered in by publicly traded organizations. “I wanted to play a key role in that,” he says.
Almost from the day he left LaSalle Partners, Sanders threw himself into the task of creating Security Capital—although the real estate world was by this time deep in the doldrums.
Security Capital Group, officially based in Santa Fe, New Mexico—a day’s drive from the old Sanders homestead in El Paso—was a tantalizing combination of fantastic success and disappointing failure. The company did everything Sanders intended it do when it was created, but Security Capital never captured the munificence of Wall Street or the attention of retail investors. Security Capital Group went public in 1997 at $28 a share, and just four years later sold to GE Capital at $26 a share—a 25 percent premium over its closing price when the deal was announced. Like many public real estate companies at that time, the stock for the most part traded below its opening share price and sometimes at a full 30 percent discount off the underlying value of the company.
Not that it was a grim and painful experience. The GE Capital deal was valued at $5.4 billion. If Sanders failed, then he definitely failed upward, considering the original company was capitalized at about $108 million.
“People referred to us as a holding company or a conglomerate of real estate, and that hurt us in the public markets,” says Sanders. Still, Sanders makes it clear that Security Capital’s investment in individual firms “did not hurt the companies in which we were the principal shareholders.”
By all accounts, Security Capital was truly an amazing concept, the likes of which we probably will never see again.
The idea behind it was that Security Capital would buy controlling interests in small real estate companies or create entirely new companies. These companies would then become, through hard work and investment, the dominant leaders in their focused real estate space. Some of the individual companies would also be REITs. Organizationally, it would be Security Capital Group at the top, and below would be other companies and REITs, all unrelated, in which Security Capital owned a controlling interest.
Eventually, it became much more complicated than that, with Security Capital Group owning some companies directly, some of which were holders of other companies, and in addition maintaining a controlling interest in an overseas investment company, which also owned companies. Within all that mass were operating companies, management companies, and a European group that owned interest in a different set of operating companies.
When I asked Sanders about being based in Santa Fe, which was relatively isolated, at least in terms of air connections and access to capital, he replied that he was rarely there, having spent most of his time traveling to places like London, the domicile of Security Capital’s European company.
This was all a bit later. In the beginning, he had to find a way to capitalize his great scheme.
Sanders always thought big, which meant he needed big money. His first estimate for Security Capital was a mere $150 million in capitalization. To get that funding, he put together a private placement memorandum (used to raise growth and expansion capital by issuing stock in accordance with Securities and Exchange Commission), and for investment dollars Sanders turned to many of the companies he had dealt with at LaSalle Partners.
“We brought in 13 institutions, and every single investor, with the exception of one, thought I was nuts about real estate being securitized,” Sanders recalls. “It was a gentleman by the name of Peter Lincoln, who ran a key part of the U.S. Steel pension fund, who bought into my strategy. None of the other companies did, but they knew I was a hard worker and I was putting money in on the same basis, which was the only reason they came in.”
There were some blips. Prudential wanted to put in $90 million, but as the money was being raised, Kuwait was invaded by Iraq which set off war, and the big insurer cut its investment down to $25 million because of uncertain times. Other insurance companies, such as Allstate and Aon, maintained their positions.
“On the last day of the year 1990 we closed with over $108 million,” says Sanders.
The company’s first deal was the acquisition of a controlling interest in (no surprise here) an El Paso–based REIT called Property Trust of America, which had a little piece of everything: retail, industrial, multifamily, and hotels. Sanders and the new Security Capital management team sold off everything except multifamily and created Security Capital Pacific Trust, a Denver-based West Coast apartment developer and manager. For the East Coast, Security Capital Atlantic Inc. was created from scratch.
In 1998, when Sanders and his management team started simplifying the company, he merged the two entities into a new company called Archstone Communities. Today, the company is Archstone-Smith Trust, the second largest multifamily REIT in the country, with a total market capitalization of $12.1 billion. (Also in 1998, he merged two shopping center companies in which Security Capital was the major stockholder, Regency Realty Group and Pacific Realty Trust. Today, Regency Centers Corporation is the fifth-largest shopping center owner, with a total market capitalization of $5.4 billion.)
Early in the 1990s, Security Capital began in El Paso by developing an industrial park, and this small development became the basis of Security Capital Industrial Trust. It went public in the mid-1990s when it had a value of about $250 million. In 1998, the firm changed its name to ProLogis, which today is the world’s largest holder of industrial properties. Its total market capitalization at midyear 2005 reached $12.5 billion.
That was about as simple as it got for Security Capital. It created a holding company in Europe called Security Capital U.S. Realty and took that public. Although it was Europe-based, it owned U.S. operations. For example, when Sanders shifted from just creating companies to buying into existing REITs, this was done through this company, which was eventually known as SC-U.S. Realty. In the mid-1990s, SC-U.S. Realty bought a controlling interest in CarrAmerica Realty Corp., an office/industrial REIT, Storage USA, and Regency Centers.
Security Capital went public in 1997, and due in large measure to the dot-com bubble, the stock price slumped along with all real estate–related stocks at that time.
Sanders had built the company he wanted, a securitized real estate venture that owned controlling interests in other real estate companies, some publicly traded, some not. Unfortunately, no one else bought into this vision. The stock drifted downward. Wall Street viewed Security Capital as a holding company; investors never quite understood what they were supposed to be buying into. Security Capital had become a hydra-headed monster. By 1999, Sanders realized he had created a complex structure of unrealized value, and he began to dismantle it.
Before that happened, when Security Capital was at its apex, it was for a moment the most amazing real estate company ever created.
In a very simplified schematic the company looked like this: At the top was Security Capital Group and it stood on two legs, the largest of which consisted of directly owned companies, including Archstone (multifamily), ProLogis (industrial), Homestead (hotels), BelmontCorp (senior housing), Strategic Hotel Capital, SC-Capital Management Group, and SC-European Realty. The last was itself a holding company for companies such as Access Storage Solutions, Interparking, EuroOffice, City & West End, and London & Henley.
The smallest leg of the company was no slouch, a separate publicly traded company, SC-U.S. Realty. It included controlling interest in CarrAmerica, Storage USA, Regency, plus CWS Communities, InterPark, Center Retail Trust, and other assorted special-opportunity investments.
Since Wall Street had a bias against holding companies, Sanders decided to first combine similar operations within the company. When those maneuvers failed to lift the stock, he opted to dismantle some of it.
In a 1999 management letter, Sanders wrote under the header, “simplifying structure to eliminate the public/private discount and clarify public market perception,” that he would simplify Security Capital’s structure and create a valuable currency in the stock “by making it the best way to invest in our family of outstanding, high-growth real estate operating companies.”
An analyst who followed Security Capital noted, “Security Capital’s goal is to try and make the company appear less complex in nature. We understand Security Capital’s goal of simplifying its structure—intelligently reducing the number of public and private investments it holds to become a cleaner company that is easier to understand.”
The analyst concluded that the new structure would allow investors to make easier decisions on an investment in Security Capital. They could invest in Security Capital Group or in one or more of the six companies it controlled on the New York Stock Exchange.
First, Security Capital Group bought its affiliate, SC-U.S. Realty for $1.4 billion; then, over the next two years it sold Archstone, privatized Homestead, sold Strategic Hotel Capital, sold City & West End, sold London & Henley, sold City Center Retail Trust, and got rid of most of its opportunistic investments under the old SC-U.S. Realty.
In 2001, analysts estimated Security Capital held combined assets valued at $17.2 billion, but it continued to dismantle. That year, Homestead Village, the extended-stay lodging company, was sold for $740 million to an affiliate of Blackstone Real Estate Advisors.
Then it was all gone, much faster than it was acquired.
In the post–September 11 environment, a group of executives representing different industries met in New York on September 25. Sanders attended, representing the real estate world. The one executive who impressed Sanders the most, basically because of his optimism, was General Electric’s chairman and chief executive Jeff Immelt. After the dinner was over, Immelt and Sanders made small talk.
Immelt must have been impressed with Sanders, because soon afterward he received a call from General Electric offering to buy his company. At first Sanders thought the price too low, but he eventually negotiated a price that was appropriate for Security Capital Group shareholders.
“General Electric was one of the few companies in the world that could pay cash for us,” says Sanders, “and they paid a fair price.”
. Suzanne Woolley, Kathleen Morris, Richard Melcher, and Stephanie Anderson Forest, “The New World of Real Estate,” Business Week, September 22, 1997.
. “Maquiladora Impact on Yuma,” .
. “Crowder Files for Chapter 11 in Bankruptcy Organization,” Lubbock Avalanche-Journal, April 7, 1997.