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Unemployment is showing no signs of improving, foreclosures keep piling up and stresses are just now emerging in the commercial real estate sector.
To Tom Barrack, that sounds like an ideal time to lend money to real-estate developers. Barrack is chief executive of Colony Capital, a large commercial real-estate investor, and he has started a Real Estate Investment Trust looking to buy up debt and lend to developers of shopping malls, office building and single family homes.
The REIT, called Colony Financial, last week announced its first deal, a $206 million secured loan to William Lyon Homes, a closely held home builder in Newport Beach Calif. Barrack says he can take advantage of high spreads and lack of competition from conventional lenders such as banks that still are licking their real-estate wounds. No kidding. Colony is charging William Lyon Homes an interest rate of 14% for the loan. Deal Journal spoke to Barrack about his recent investment.
Deal Journal: Why is this a good time to be making real estate loans?
Barrack: There is a big liquidity crisis. The banks and financial institutions are being conservative about lending new money, which history shows us is the wrong option. Now is the best time to be a lender. You have the highest quality assets and highest spreads. Assets have been written down to realistic levels and there is a low potential for further write downs, and you sense the trough.
DJ: What are some of the risks?
Barrack: The big guys Morgan Stanley, Goldman Sachs, Merrill Lynch are out of the business right now. The fear is that we are going to do very well in the initial years then all the banks will be healed and the spreads will come in and competition will grow. What happens when they do come back is that they buy guys like us or we move into another space in terms of geography and asset classes……People say how can there be a housing recovery before employment improves. History shows that a housing recovery comes a year before employment recovers. By the time unemployment improves, it’s too late (to invest). There has never been an economic recovery that hasn’t been accompanied by a proliferation of home sales. Home sales are turning up.
DJ: The REIT has had a difficult start. Its shares fell from their offering price on opening day. What happened?
Barrack: We hadn’t made any investment at that point, and the market looks at your cash, minus the IPO underwriters’ fee. We had $290 million in cash. The market will re-price our shares over the next six months as we make more investments.
DJ: Why are you lending to this particular home builder?
Barrack: We think William Lyon is the best home builder in the markets that we like, California and Arizona, and they focus on first time home buyers which is the strongest part of the market. Our loan is secured by 12,000 lots — the majority of which are finished. There is shortage of finished lots because no one is investing to develop land. This is going to give Lyon the ability to build up a war chest of low cost lots. When you see it and need it you can never get it. Once the bureaucratic large banks see that the market is turning then land sales become competitive and prices move up.
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Trev… I think sir you ar absolutly “Corecttoo Mun-Doo”! We are no where close to the bottom, as will become very aparent in the UN-employment #’s next spring of 2010!
Lemme get this straight: in the entire universe of commercial real estate oppotunities in this country, a bridge loan to a California homebuilder is the best investment they found, over cmbs, distressed whole loans, REO, and so on? If that’s the case, then we’re no where close to hitting bottom yet.
as the reit will recover as soon as early as this decemeber, is a buy buy buy for reit industry ^^.
Around $18K a lot. That’s about a 80 - 90% discount from where lenders were appraising lot values at the height. I still think that’s too high. If he was $5K/ lot I’d say it’s a safer bet. Land is still pretty much worthless in both these markets regardless of whether they are graded and have wet and dry utility hookups.
Cash is King today…those who have it, will make the rules…and Mints for themselves…
Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal's Michael Corkery is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.
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