Executives with Santa Ana-based Grubb & Ellis Co. say they’re making progress forging a unified real estate investment and brokerage company.
Getting Wall Street to understand those gains has proven to be a bigger challenge.
“I can’t imagine a scenario where we’re more misunderstood,” said Jeff Hanson, Grubb & Ellis executive vice president and president of the company’s real estate investment division.
The misunderstanding, according to executives, starts with the company’s stock price. With a market value of about $225 million last week, Grubb & Ellis has seen its stock decline by nearly a third this year.
The company was created last year with the acquisition of Chicago-based brokerage Grubb & Ellis by Santa Ana-based real estate investor NNN Realty Advisors Inc., which kept the Grubb name.
The combined company was valued at close to $700 million when the deal was announced in mid-2007.
“We think our stock is significantly undervalued,” Grubb & Ellis interim chief executive Gary Hunt said.
One analyst agrees with Hunt.
For “longer-term investors, the stock represents a compelling buying opportunity,” JMP Securities analyst William Marks said.
In a report last week, Marks described the company as “dirt cheap.”
Others are more critical.
Tony Thompson, Grubb & Ellis’ former chairman and 14% owner, is seeking to get back on the board to stop what he calls the company’s slumping performance.
“During a period in which shareholders have been made to absorb significant losses, it is critical that they be afforded a meaningful voice in the company’s governance and future direction,” Thompson said in a letter to the company’s directors.
In July, Grubb & Ellis rejected Thompson’s bid for a seat, setting the stage for a potential board fight.
Company executives contend that Wall Street doesn’t grasp Grubb & Ellis’ mix of real estate investments and brokerage operations.
Analysts that follow brokerages such as Los Angeles-based CB Richard Ellis Group Inc. aren’t often up to speed with the investment business, according to Hunt and Hanson.
Grubb & Ellis pools investors to buy buildings, often as a way of deferring taxes on prior real estate sales.
The company counts about 15% of the market for tenant-in-common deals and 1031 exchanges and expects that to grow amid consolidation and the failure of smaller players in the tough commercial real estate market.
“There’s going to be a shakeout,” Hanson said.
There were nearly 80 major providers of tenant-in-common investment programs in 2006. By the end of this year, only a handful of companies are expected to remain, Hanson said.
Grubb & Ellis raised $252 million to buy buildings in the second quarter and completed 21 acquisitions totaling $497.5 million.
“When there’s volatility in the market, that’s when alternative investments explode,” Hanson said.
Hurting Brokers
The downturn has hit the brokerage side of Grubb & Ellis. The volume of sales and leases in the country is down nearly 70% from a year earlier, crimping revenue from deals brokerages work on.
Grubb & Ellis saw a nearly 30% drop in transaction revenue in the second quarter from a year earlier.
The company ranked No. 9 among brokerages in the first half of the year in terms of total broker sales of properties $5 million or larger, according to New York-based market researcher Real Capital Analytics Inc.
Last week, Grubb & Ellis reported a loss of $5.1 million for the second quarter. The loss included $4.7 million in integration costs related to the NNN Realty acquisition of Grubb & Ellis and $8.9 million in charges related to real estate the company owns.
The company had revenue of $167 million, down 9% from a year earlier.
Outlook
The near-term outlook for Grubb & Ellis “is somewhat bleak,” JMP analyst Marks said, due to the weak investment and sales market and the difficultly in raising investment money.
Grubb & Ellis is more diversified than CB Richard Ellis and Chicago’s Jones Lang LaSalle Inc., according to the analyst. But its business is focused on a relatively small number of U.S. markets, making it more exposed to the commercial real estate downturn here, Marks said.
Executives said they aren’t second-guessing the decision to combine the two investment and brokerage businesses.
“The merger makes as much sense today, and is just as sound, as when we announced it,” Hunt said. “It just happened when the real estate industry took a dive.”
The transition has come with a number of executive changes.
Grubb & Ellis is looking for its fourth chief executive in less than a year, following the resignation of Scott Peters in July.
Hunt, a Grubb & Ellis director, government affairs consultant and former Irvine Company executive, stepped in to the chief executive role on a temporary basis.
“The hardest part is overlaying the calendar demands (of the job) with my other life,” said Hunt, who also serves on the board of Newport Beach-based William Lyon Homes Inc.
Hunt said he expects the company to name a full-time chief executive in the next four months. He declined to say whether he’d take the job on a permanent basis.
