Santa Ana-based real estate investor NNN Realty Advisors Inc.’s yearlong bid to go public is set to close amid a dramatically different commercial real estate market.
NNN Realty,parent company of Triple Net Properties LLC,is nearing completion of its buy of Chicago-based brokerage Grubb & Ellis Co., which is publicly traded.
The deal was announced in May and received the go-ahead from the Securities and Exchange Commission earlier this month. Shareholders are set to vote on the deal at a Dec. 6 meeting in Costa Mesa.
A group of NNN Realty executives who own 28% of the company’s shares have agreed to vote in favor of the deal. A block of Grubb & Ellis shareholders with a 40% stake in their company also has said they’ll vote to approve the deal.
The acquisition could wrap up by year’s end.
The deal appears set to go through, even though the acquisition looks different than when inked in May.
Back in May, the combination was valued at $725 million, with Grubb & Ellis making up about $300 million of that.
But Grubb & Ellis’ shares have lost nearly half of their value since May,similar to drops seen by competitors after the credit crunch of this summer. The company now counts a market value of about $160 million.
It’s unclear how NNN’s valuation has changed.
After the acquisition, the combined company is set to keep the Grubb & Ellis name and continue to trade on the New York Stock Exchange under “GBE.” NNN Realty’s shareholders are set to own 59% of the combined company, which will be based in Santa Ana.
Industry watchers still are waiting to see how compatible the two companies’ operations and cultures will be.
Triple Net is the country’s largest arranger of tenant-in-common deals, where investors pool money to acquire buildings. Grubb & Ellis brokers sales of offices, industrial buildings, apartments and shopping centers.
Both companies manage buildings.
The deal is concluding after one of the more challenging quarters in some time.
The value of commercial real estate owned by big investors in the U.S. fell 2.5% in the third quarter from the second, according to a study released last week by the MIT Center for Real Estate.
It’s the first quarterly downturn since third quarter 2003, when prices fell 2.4%.
“The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets,” said MIT Center for Real Estate Director David Geltner.
A similar report last week by Moody’s Investors Service showed commercial real estate values declining 1.2% in September from August. Office buildings in most areas outside California and apartments on the West Coast were among the worst performers in September, according to Moody’s.
Effects on Deals
One potential casualty of the changing market could be Triple Net’s tenant-in-common deals, according to competitors.
“We’ve seen a wholesale exit of the (tenant-in-common) buyers who were very highly leveraged and more exotic-type buyers who are using capital stocks with 80% to 90% leverage,” said Brett White, chief executive of Los Angeles-based CB Richard Ellis Group Inc., in his company’s latest quarterly earnings call.
“The folks who are in the marketplace today are using more traditional levels of debt financing,” White said.
NNN Realty showed little effect of the slowing market, based on its third-quarter results.
The company posted revenue of $53.1 million in the third quarter, more than double that of a year earlier.
Net income was $4.1 million in the latest quarter, compared to a loss of $500,000 a year ago.
NNN Realty raised $547 million to buy office, apartment and retail buildings so far this year, a 50% increase from the same period in 2006.
Fundraising includes $341.3 million in tenant-in-common funds and $206.1 million in the handful of real estate investment trusts it manages.
Grubb & Ellis this month reported revenue of $126.5 million in its latest quarter, a 7.9% increase from a year earlier. The company posted a net loss of $1.5 million in the quarter.
Executive Changes
There will be a few top-level changes at the combined company.
Most notably, Mark Rose, chief executive of Grubb & Ellis since 2005, plans to step down after the deal closes. He’ll be replaced by Scott Peters, NNN Realty’s chief executive and president.
Tony Thompson, founder and chairman of NNN Realty, will be chairman of the combined company. NNN Realty officials will fill six of the nine members of the combined company’s board.
How much, if any, local turnover results from the acquisition remains to be seen. Other acquisitions of brokerages have resulted in some notable area changes.
Most recently, CB Richard Ellis’ $2.2 billion acquisition of Trammell Crow Co. last December resulted in roughly three quarters of Trammell Crow’s area brokers leaving the company in the past year.
Another 200 non-broker positions in CB Richard Ellis’ Newport Beach office were transferred to central and Midwest states following the acquisition.
A similar exodus of local Grubb & Ellis brokers isn’t expected, since NNN Realty hasn’t been an particularly active buyer in Southern California as of late, instead focusing on areas such as Texas, Georgia and the Carolinas.
