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A panel moderated by Benjamin Harris, a managing director and head of domestic investments for W.P. Carey & Co. LLC, weighed in on whether real estate is still a viable leverage tool in private equity deals. A panel including Gregg Chiota, a managing director of real estate for Fortress Investment Group; Stuart F. Koenig, a partner and the CFO of Apollo Real Estate Advisors; Robert Micera, a senior vice president and national head of net lease investments for First Industrial Realty Trust; and Paul Halpern, a partner and general counsel for Versa Capital Management, kicked the question around Tuesday at The Deal's Innovative Deal Financing Conference. The consensus leans toward yes.
Apollo's Koenig said you need to focus on how real estate fundamentals are performing and what's changed. "I think we have a kind of dichotomy," he said, with real estate fundamentals continuing to be strong, weighed against a credit crunch. Versa's Halpern said that while leverage is going down on an operating asset by 20% to 30%, leverage going down on real estate assets is 10% to 15%. Fortress' Chiota said that given the markets, real estate will continue to be a viable source of financing. While there may not be monster deals, "people want to move toward real hard assets." OPPORTUNITIESFor funds in liquidation, buyers aren't being as aggressive, Koenig said. For funds in investment phase, it's a tremendous opportunity to take advantage of dislocation across the board. "Clearly there's got to be some price adjustments." Apollo is doubling assets on lending platform, rather than the equity side. The longer the liquidity crisis takes to resolve itself, the more opportunity there is to take advantage on the equity side. For Versa, a PE firm focused on distressed and troubled middle-market companies, real estate assets are holding up valuations. But while the pool of buyers is thinner, they are just as aggressive, Halpern added. LOOKING AHEADKoenig called the current situation, "more a crisis of uncertainty than a crisis of liquidity. There's still plenty of money out there." Pension funds are still enamored of real estate. He points to two buyouts that will be particularly telling. Blackstone Group LP's acquisition of Hilton Hotels and Tishman Speyer's Arch W. Smith buyout will show how much. "We were in a market that was somewhere between irrational lending and exuberant underwriting standards," but will swing back the other way, six months before we can really say what the landscape will look like, Koenig said. A seller holding onto a stable asset is probably better off sitting on the sidelines, he added. People will return to core competencies. Mezzanine lenders and insurance companies will come back to the financing market, Chiota said. Will hedge funds retreat? Those with real estate portfolios won't, he said. Short term, Chiota thinks if we don't see a lot of asset trading in the next 30 days, there will be a lot of paper trading by year's end. Ahead, Halpern said the dynamics the firm is looking at involve more debt-oriented plays, holders of debt or debt and equity by exit at quarter end. Harris said: Over time, cap rates will increase, and overall "the real estate market in general is much healthier than other parts of the debt market." —Carolyn Murphy and George White See the full coverage of the Innovative Deal Financing Conference Categories Deal Video
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