Grubb & Ellis Co. officials hope the Santa Ana-based commercial real estate brokerage is halfway home on getting its financial house in order after shedding a troubled business unit.
The commercial real estate brokerage announced last week it was unloading its Daymark Realty Advisors subsidiary to a pair of companies—San Diego-based real estate investor Sovereign Capital Management Group Inc. and a unit of New York-based investor Infinity Group.
Daymark, formed earlier this year, runs Grubb’s tenant-in-common portfolio, which totals about 33 million square feet of offices, retail centers, apartments and other properties across the country.
The Sovereign Capital-Infinity venture is expected to keep Daymark’s operations based in Santa Ana.
The sale “is a significant event for us—it’s an exit from the tenant-in-common business,” said Tom D’Arcy, Grubb’s chief executive.
Next up for Grubb: finding another source of funding, and perhaps an outright buyer for its remaining brokerage and management services operations.
In March, Grubb brought on San Francisco-based JMP Securities LLC to advise on a potential sale of the company. JMP still is “hard at work” at exploring potential deals, D’Arcy said last week.
“There’s no real time frame” for when a deal might be struck, D’Arcy said.
The company is considering several possibilities right now, he said.
The most likely scenario, according to sources contacted by the Business Journal, is for Grubb to be taken private by Los Angeles-based hedge fund Colony Capital LLC, which inked an $18 million financing deal with Grubb in March, or some other investor.
Colony Warrants
As part of that $18 million financing deal, Colony was issued warrants to buy a large amount of Grubb’s stock if the company’s shares reached $1.10. That agreement was recently revised to put the strike price for those warrants at 71 cents.
Grubb’s shares currently trade around 60 cents; the company counts a market value of about $40 million.
Getting Daymark off of Grubb’s books could help attract a few investors besides Colony, as well as provide some assurance to its nearly 1,500 brokers that the company is serious about firming up its balance sheet.
Grubb entered the tenant-in-common business as part of the company’s ill-fated 2007 combination with Santa Ana-based NNN Realty Advisors Inc., better known as Triple Net Properties.
Triple Net’s business flourished in the boom years for commercial real estate by organizing and running tenant-in-common real estate deals that pool together smaller investors to buy commercial properties.
That line of business ground to a halt as the real estate market slumped over the past few years, pulling resources from Grubb’s core commercial brokerage operations and providing a drag on the company’s balance sheet.
The Daymark business had become “a distraction,” according to D’Arcy, who joined Grubb in late 2009.
The company’s shares are down more than 90% from 2007 levels. Grubb lost about $67 million last year and posted an $18 million loss in the first quarter of 2011.
Grubb was expected to file its second-quarter earnings report with the Securities & Exchange Commission on Monday.
The company’s not holding a quarterly call with analysts for the earnings announcement because of the possibility of a sale.
While operating under the Grubb banner, the Daymark line of business posted revenues of roughly $22 million in 2010—a fraction of Grubb’s $576 million in total revenues—and about $27 million in 2009. With loans tied to several Daymark-managed properties said to be on shaky ground, the business line was seen as a big liability for Grubb.
Limiting Exposure
The deal with Sovereign Capital and Infinity appears to be a case of limiting Grubb’s exposure to losses rather than raising any immediate capital, based on a reading of financial documents related to the transaction.
The buyers made an immediate payment of $500,000 in cash and took on about $10.7 million of current liabilities tied to Daymark, although Grubb is in turn providing the buyers a $5 million promissory note among other return payments, according to filings.
SEC filings tied to the Daymark sale also note that additional payments will occur between the two parties in the event Grubb gets recapitalized or sold. The contract sets a $30 million minimum price for that round of funding to be considered a recapitalization.
