The executive team of Santa Ana-based Grubb & Ellis Co. feels it finally has got the real estate brokerage and investor on stable ground after a wild ride in the past year,both in the boardroom and on Wall Street.
The company’s spent nearly a year battling the down commercial real estate market, as well as plenty of “our own drama,” said Rich Pehlke, executive vice president and chief financial officer.
With internal issues settling, the company has started to hire brokers and raise more money. But it still has a long way to go before it reaches profitability again.
Grubb’s late 2007 reverse merger with Santa Ana-based NNN Realty Advisors Inc. marked the start of a tailspin. The deal, valued at the time at $700 million, combined then Chicago-based Grubb’s brokerage operations with NNN Realty’s business that raises money and sponsors real estate investment programs.
Grubb now counts a market value of about $50 million, as it and other commercial real estate brokerages’ stock prices have been hammered during the past year.
Upheaval played out in the boardroom as well.
The company’s been without a permanent chief executive since last July. And late last year its board dealt with a headline-making proxy battle featuring Tony Thompson, the company’s former chairman and NNN Realty’s founder.
Accounting Issue
The company faced another issue. Grubb executives last month said the company finally resolved accounting errors pertaining to NNN Realty’s operations before it acquired Grubb. The company had to delay and restate past earnings as a result of the errors. That was like “an anchor around the ankle,” officials said.
The company’s “spent the last 10 to 11 months identifying and cleaning up a lot of issues” tied to the way NNN Realty recognized revenue, interim Chief Executive Gary Hunt, a former Irvine Company executive, told analysts late last month.
Hunt took over the top spot on an interim role last July, following the departure of Scott Peters, a former NNN Realty head who still runs the company’s most successful non-traded real estate investment trust.
On top of the corporate issues, Grubb has been struggling with “one of the weakest transaction markets in decades,” which has cut company revenue by more than 20% in the past year, Hunt said.
The end result is a company that has seen its stock price fall by roughly 90% since December 2007.
It’s seen a bit of a bounce recently with the overall market’s rally.
Good News
The good news for the company is that executives now say they have it in good shape to take advantage of a turnaround, whenever that may be.
Grubb’s added top brokers, cut expenses and continues to raise money for future investments, Pehlke said.
“I can’t wait to take this company out for a drive in a good market,” he said.
The bad news is that they aren’t expecting a turnaround anytime soon.
“We are not counting on any short-term relief,” Hunt told analysts late last month, following the release of Grubb’s first-quarter results.
Grubb posted a net loss of $41.5 million, worse than the loss of $6.3 million reported a year earlier. The company reported $118.3 million in revenue for the quarter, down from $150.4 million a year earlier.
Two of Grubb’s core business lines,brokering property leases and sales and raising money from investors to buy properties,took big hits in the quarter.
Transaction services revenue dropped more than 40% from a year earlier to $33.5 million, while investment management revenue fell 39% to $15.5 million.
That’s not reassuring for investors of Grubb, including the company’s second-largest individual investor, Thompson.
Thompson lost a bid to rejoin the board in December and since has sold off more than a million shares of the company,or about 18% of his holdings in Grubb,according to filings with the Securities and Exchange Commission.
At the time of the proxy battle, Thompson pushed Grubb to better take advantage of the down real estate market.
His latest venture, Irvine-based Thompson National Properties LLC, has been raising money from investors to buy distressed assets. The company’s also taken over the management of some failed tenant-in-common sponsors.
Faulty Strategy?
When he was reached for comment last week, Thompson again questioned his former company’s strategy.
“The facts are the board of directors of Grubb & Ellis has led the company to unprecedented losses (and) cash, even after a large income tax refund, is just $14 million as of March 31,” Thompson said.
Thompson also said that Grubb voted down his plan to expand its appraisal and valuation business. That portion of the real estate business now is growing rapidly, with the lion’s share of the business going to Grubb’s competitors, he said.
Grubb to date hasn’t made any moves to get into the appraisal or distressed asset markets. The company’s biggest changes during the down market are on the personnel side of its brokerage business,hiring talented brokers from competing companies.
It’s added several dozen brokers as vice presidents, who’ve averaged about $35 million in annual revenue per person, well above the company norm, officials said.
Pehlke said last week that the company’s exploring starting a new fund to buy distressed assets, but no plans are confirmed.
Changes the company’s made during the downturn are tactical, rather than strategic, Pehlke said.
The industry’s “going to have ups and downs. People here are tied into the (current) strategy. They think we’re touching all the right buttons,” he said.
Grubb is currently the largest sponsor of real estate investment funds that aren’t publicly traded, based on investment sales from February to April, the company said. It raised $210 million last quarter, down from $264 million a year earlier.
Losing Fund
Its largest fund, which targets healthcare properties, is set to change management structure this September, which could impact revenue. Grubb has another healthcare fund in the works that could pick up some of that slack.
That doesn’t sit well with Thompson either.
“They have allowed a major asset I helped create, Grubb & Ellis Healthcare REIT, leave the company with no compensation, a rare event in the non-traded REIT industry,” Thompson said.
Another big business of NNN Realty’s legacy operations,pooling together money from individual investors to buy properties in tenant-in-common deals,has largely gone away thanks to the slow market.
About $3.7 billion of tenant-in-common equity was raised in 2006, according to Salt Lake City-based research company Omni Real Estate Services Inc. In 2008, about $1.2 billion was raised, and for 2009 only about $300 million is projected to be raised based on current activity.
