Sonny Kalsi, Fred Schmidt and John Carrafiell, who ran Wall Street’s largest real estate investing group at Morgan Stanley until the market crashed, are seeking to raise $800 million to capitalize on the wreckage.
Their new firm, GreenOak Real Estate LP, has raised about $300 million for a debut U.S. fund and is about halfway toward its $500 million target for a Japan fund, according to marketing materials. The New York-based company expects to finish gathering pledges for the U.S. pool by the end of September and for the Japanese one early next year.
Investors are seeking to take advantage of lower property values to buy real estate and troubled loans and, in some cases, restore track records tarnished by the financial crisis. GreenOak’s founders left Morgan Stanley starting in 2009 after the bank reported $21.5 billion in writedowns and losses tied to the plunge in residential and commercial real estate. GreenOak focuses on so-called middle-market recapitalizations, providing $10 million to $50 million to borrowers in need of refinancing.
“We’re in the third inning of restructuring all this debt,” Kalsi, Morgan Stanley’s former global head of real estate, said at a presentation yesterday in Toronto hosted by Queen’s University. “You’ve got to be patient. You’ve got to really pick your spots and look for opportunities where you’re buying assets which are defensive, have good cash flow and are located in markets where tenants want to be.”
GreenOak expects most of its deals to be for office buildings, followed by retail properties and hotels, and will focus in the U.S. on large coastal cities such as New York, Boston and Los Angeles, according to the marketing materials. The company is working on a recapitalization of an office building in Washington, with borrowers known from Morgan Stanley days, said a person with knowledge of the situation.
GreenOak, with about 40 employees, touts the network of its founders in its fund marketing materials, saying their relationships will give them an advantage in finding deals.
The company has been raising money for two years. It has had challenges attracting investments, said Steve Coyle, chief investment officer of the global private equity fund unit of Cohen & Steers Inc., a New York-based real estate investor that oversees about $45 billion.
“They’ve got a model that is less in favor today,” which includes allocating capital to local operating partners that manage real estate, he said. “Then if you add in the fact these guys have a track record that is questionable, that makes it even more difficult.”
Coyle said GreenOak ultimately will raise the money it is seeking, given the executives’ long history in real estate and the firm’s assets in Manhattan, a favored location for property investors.
“They will likely get to or close to where they hope to be,” he said.
Kevin Robinson, GreenOak’s general counsel, declined to comment. Kalsi declined to be interviewed for this story.
GreenOak recently invested about $20 million in a troubled condominium project in New York whose construction was financed by a European bank, said the person with knowledge of the investments, who asked not to be identified because the information is private. The borrower turned to GreenOak after the lender refused to give it an extension on the construction loan.
GreenOak also teamed last July with East End Capital, a New York-based firm started by former executives of real estate investment company Broadway Partners, to buy a 15-floor office building at 256 West 38th St. in the city’s garment district for about $30 million, or $250 a square foot, about half the estimated replacement cost.
GreenOak and East End bought the building when it was less than 50 percent occupied and headed for possible foreclosure, said Jonathon Yormak, co-founder and managing principal of East End Capital, which manages the property. Occupancy is now almost 90 percent, he said. Green Oak owns 85 percent and East End 15 percent of the building.
“The seller had a debt maturity and capitalization problems so it afforded an opportunity to buy it,” Yormak said in a telephone interview.
The seller, Eretz Real Estate Group, was in the process of upgrading the building. East End and GreenOak spent about $4 million to renovate the lobby and elevators and install a new fire-alarm system. Facade work is still going on, Yormak said.
Like the GreenOak founders, Yormak has returned to real estate investing on a smaller scale after the market crash. He was a principal at Broadway Partners, which lost properties including the John Hancock Tower in Boston in 2009 after being unable to refinance short-term debt used in acquisitions.
Yormak’s new firm is buying office, retail and apartment buildings in the Northeast one by one and fixing them up for resale.
“We don’t have a fund,” said Yormak, managing principal of East End Capital. “We’re very much enjoying doing deal by deal at the moment.”
In addition to the garment-district deal, GreenOak and East End in March paid $18 million for a mixed-use property at 21-27 Mercer St. in New York’s Soho neighborhood, known for its boutique shops and hotels. Retail tenants include Nike, Japanese bathroom-fixtures manufacturer Toto and fashion label Surface to Air. The seller was New York-based Aion Partners LLC. GreenOak owns about 75 percent of the property and East End the rest.
“The retail was approximately 50 percent under market so there was an opportunity to create value on re-leasing,” Yormak said. “The apartments were undermanaged and there was an opportunity to raise rents. We’re also adding apartments to the top of the building.”
In January, GreenOak, with a partner, paid $60 million for 218 West 18th St. in Manhattan’s Midtown South neighborhood, one of the top areas for office leasing in the city. A U.S. bank had loaned about $80 million on the asset and GreenOak negotiated a deal to buy the building and restructure the debt. The new owners signed energy drink maker Red Bull Gmbh to be the anchor tenant, lifting the building from 35 percent occupancy to almost 70 percent.
GreenOak’s new funds are about the same size as the initial pools Morgan Stanley raised when it got into property investing two decades ago, when Kalsi joined the New York-based bank. In 1991, Morgan Stanley raised $490 million from investors to buy troubled loans backed by commercial properties on the U.S. West Coast and other assets. It amassed almost $12 billion of equity in seven subsequent funds from 1995 to 2005, and employed more than 1,000 people in real estate at its peak.
In 2006, Morgan Stanley raised an $8 billion fund, at the time the biggest-ever high-return real estate fund. The timing meant the firm was investing when commercial property values were near or at record highs. With cheap debt abundant, Morgan Stanley put money into everything from Japanese hotels to Hawaiian resorts, Hong Kong luxury apartments, Chinese shopping centers, San Francisco office towers and Ukrainian farms.
Commercial-property prices reached a high in December 2007, then tumbled as much as 38 percent, according to an index compiled by Moody’s Investors Service and Real Capital Analytics Inc. They remain about 20 percent below the peak.
Morgan Stanley may recover less than half of the money invested from the $8 billion Morgan Stanley Real Estate Fund VI International, after generating real estate fund returns of more than 20 percent from 1991 to 2005, according to a person with knowledge of the situation.
Matt Burkhard, a spokesman for Morgan Stanley, declined to comment.
“We got away from our knitting when the market got big,” Kalsi, 44, said at the Toronto presentation. “It’s a lot harder to make the investments, to do the due diligence and to manage the portfolio.”
GreenOak also plans to make investments in Europe next year, mainly in the U.K. and Germany, as European banks shed problem loans, Kalsi said yesterday in Toronto. “We’re actively, actively engaged in looking at stuff,” he said.
In five years, two-thirds of GreenOak’s investments probably will be in Asia, said Kalsi, who moved to Japan in the late 1990s to buy soured real estate loans from Japanese banks.
“Just the size and scale of China and the increasing scale of India, you do the math and I just personally think that’s where we’re going to have our greatest exposure,” he said.
General Motors Co.’s pension fund is the largest investor in GreenOak, according to a person briefed on the investment. GM’s pension fund was one of the original investors in Morgan Stanley’s first property fund in 1991.
Raising money for a first fund usually is a challenge. While GreenOak has kept some investors from Morgan Stanley days, it’s been harder for the firm to attract new clients, said Coyle of Cohen & Steers.
“We’re seeing a lot more local operators raise money directly,” said Coyle, citing the recent fund formed by Related Cos., the developer of New York’s Time Warner Center. Related said in January it raised $825 million for a fund to buy distressed property assets. “That’s more the future of private equity real estate.”