Santa Ana-based Grubb & Ellis Co. is starting to see gains in its core commercial real estate brokerage business as it gets more distance from its ill-fated 2007 combination with NNN Realty Advisors Inc.
Grubb felt the effects of the real estate downturn as much as any national brokerage during the past few years. It started to see the tides turning last year, helped in large part by its resurgent brokerage business.
The company saw a 25% rise in leasing deals last year, while brokered sales jumped 92%, Grubb officials reported earlier this month.
All told, Grubb’s transaction services division—which includes its brokerage, appraisal and consulting businesses—saw a 36% gain in revenue to $236 million for 2010.
Grubb’s total revenue rose 9% to $575 million last year.
The bulk of the company’s remaining revenue came from Grubb’s management division, which handles more than 250 million square feet of real estate for other companies and was flat on revenue last year.
“Transaction services had a solid year,” said Chief Executive Tom D’Arcy, who took over the company’s top spot about a year ago.
Grubb “is capturing its share of the improving commercial real estate market,” he said.
That hasn’t been enough to bring the company, which counts a market value of about $80 million, to profitability.
Grubb reported a loss of $19.7 million before interest, taxes, depreciation and amortization for 2010. That’s on top of a $24 million loss in 2009.
The company broke even on an adjusted basis during the fourth quarter.
Cash on Hand
Grubb ended last year with more than $30 million in cash on hand. Officials said they’re comfortable that’s enough to run the business this year.
Another year of heavy losses stands to bring scrutiny to the company and its executive team.
“Simply put, we know we must translate revenue into profit,” D’Arcy said on a conference call with analysts earlier this month. “This is far from where we need to be.”
The company hasn’t given specific guidance for 2011. It said it expects to be generating profits by the second half of the year.
Grubb reduced corporate overhead costs by $10 million last year. Co. Officials said they expect to improve the bottom line on the company’s brokerage operations and boost marketing.
The company isn’t counting on any big gains from its combination with Santa Ana-based NNN Realty, which came near the peak of the market in 2007.
Grubb was the surviving entity in the deal, which prompted a move of its headquarters from Chicago to Orange County.
The company said earlier this month it’s starting a company—Daymark Realty Advisors—to manage the assets it got through the deal with NNN Realty.
Daymark will run as a separate business and be based in Santa Ana. It will manage about 8,700 apartments and 33 million square feet of commercial space bought through NNN Realty-sponsored tenant-in-common funds.
The company is being headed up by Chief Executive Steven Shipp, a former executive with Grubb & Ellis’ realty investors business.
The announcement is the latest move that Grubb has made to distance itself from NNN Realty, which bought Grubb in the 2007 deal valued at more than $700 million.
The deal combined NNN’s Triple Net Properties LLC, which pools investors to buy office and other buildings, with Grubb’s real estate brokerage operations.
Officials at the time of the combination touted the ability to cross sell each others’ businesses as a big benefit of the deal.
The deal closed just in time to feel the brunt of the downturn in the commercial real estate market, leaving little opportunity for the company to test that plan.
While Grubb’s brokerage business now is showing signs of improvement, NNN’s tenant-in-common business remains troubled.
“The (tenant-in-common) industry itself is in a fair amount of distress,” Chief Financial Officer Michael Rispoli said.
Several national tenant-in-common sponsors have failed during the downturn.
This month saw one prominent player, Los Angeles-based SCI Real Estate Investments LLC, file for bankruptcy.
“Obviously, the origination of the tenant-in-common business has, essentially, stopped,” Rispoli said. “What was a $4 billion business in 2007 is now probably $100 million a year (business) from an equity-raise perspective.”
Starting Daymark—which would have seen about $22 million in revenue on a stand-alone basis last year—allows Grubb “to focus on our core businesses, (while) also providing greater clarity into our financial reporting,” D’Arcy said.
Strategy
Daymark said it hired Arlington, Va.-based FBR Capital Markets as its financial adviser to help seek “strategic opportunities.” Those are likely to focus on raising money to help prop up or sell troubled assets.
Grubb estimates the tenant-in-common industry overall holds some $15 billion to $20 billion in assets. Grubb alone accounts for about 20% of the national total.
In filings with the Securities and Exchange Commission earlier this month, Grubb disclosed that about 30% of its tenant-in-common managed programs were not maintaining “a specified level of minimum net worth” required under some of its loan agreements.
That hasn’t resulted in any defaults. Grubb said it is “exploring a number of measures” to address the issue.
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THE NEWS:
Grubb & Ellis forms Daymark Realty Advisors to handle assets acquired in 2007 deal with NNN Realty Advisors.
BACKGROUND:
Move follows cost-cutting at Grubb & Ellis as it bids to return to profitability.
WHAT’S AHEAD:
Company looking to further cut costs, generate profits by second half of 2011.
