Grubb & Ellis Co. has solved its near-term debt problems, thanks to a $90 million infusion in late October from as yet undisclosed institutional investors.
But the Santa Ana-based real estate brokerage and investor still is looking to solve its long-term problems by getting its management team settled ahead of what’s looking to be a challenging 2010 for the commercial real estate industry.
“It’s still a tough time in the industry, but we’re optimistic about where the company is positioned,” said Richard Pehlke, Grubb’s executive vice president and chief financial officer.
The company has some breathing room after finding investors willing to help Grubb pay off two credit lines totaling close to $67 million. The debt is due by the end of November.
Grubb had been searching for a financial partner and working on a refinancing plan since May.
“We looked at all the alternatives,” Pehlke said.
The new investors only recently came aboard after Grubb got a two-month extension on its credit lines from its lender in late September. Details of the deal were hammered out during the past few weeks, according to Pehlke.
The investors are buying 900,000 shares of 12% convertible preferred stock, which will raise $90 million for Grubb.
The investors also have an option to buy another 100,000 shares, or $10 million of preferred stock, by mid-December.
That money largely will be used to pay off two credit lines Grubb had with a unit of Deutsche Bank AG, as well as provide the company cash to work with.
A reworked agreement between Grubb and Deutsche Bank in late September gave Grubb the option to pay off one $38 million credit line plus a related $29 million line at 65 cents on the dollar.
Retiring the debt “is the No. 1” benefit of the deal, Pehlke said. Beyond that, the deal should set the company up well to handle the challenges of a down commercial real estate market.
“Companies in our industry have to earn every dollar every day. Now, we’re in good shape to address” the market, he said.
Strings Attached
The deal comes with a few strings. Assuming the investors end up purchasing all 1 million shares of preferred stock, which counts a 12% interest payment per year, Grubb could be required to pay up to $12 million worth of dividends every year to those stockholders.
That’s well above the norm. Convertible preferred stock issued to private investors these days typically has dividends that average about 5.7%, according to Woodbury, N.Y.-based research firm PrivateRaise, a unit of DealFlow Media Inc.
Each share of preferred stock could be converted by the private investors to 60.6 shares of common stock, which would be equivalent to a conversion price of $1.65 per share of common stock. At recent check, Grubb’s stock was trading at about $1.50, giving the company a market value of about $100 million.
If the preferred stock is converted, it would effectively double the amount of Grubb shares that are outstanding, giving the new investors a sizable ownership stake in the company.
Grubb now counts about 65 million outstanding shares, with 32% of those shares held by insiders, including Chairman C. Michael Kojaian, and 27% held by institutions.
Investors
The company hasn’t disclosed the names of the institutional investors. Some of the investors in the convertible stock already were investors in Grubb, according to Pehlke.
A report last month in industry newsletter Real Estate Alert pointed to private equity giant Blackstone Group LP of New York as well as Andrew Farkas’ Island Capital Group LLC as potential investors.
Grubb officials said the report was inaccurate.
Paperwork disclosing the investors should be filed with the Securities and Exchange Commission in the next few months.
It’s possible that Grubb’s December board meeting will see the investors push new board candidates. They’ll also likely recommend a candidate to take over the chief executive role at Grubb—if that position hasn’t yet been filled.
Grubb has been operating without a full-time chief executive since July 2008, when Scott Peters stepped down from the position he’d had since the company’s late 2007 acquisition by Santa Ana-based real estate investor NNN Realty Advisors Inc., which kept the better-known Grubb name.
The combined company now provides property and management services for close to 300 million square feet of space, and it counts a portfolio of assets under management that’s valued at about $7 billion.
Peters’ position was taken over on an interim basis by Gary Hunt, a former executive with Newport Beach’s Irvine Company.
Peters now runs Healthcare Trust of America Inc., a healthcare-focused real estate investment trust that was started under the Grubb banner but that now operates independently in Arizona.
Neither Hunt nor Pehlke says he is interested in the chief executive position.
A new chief executive will be taking on a company still dealing with a down commercial real estate market.
Grubb said in late October it expects third-quarter revenue to be $132 million to $136 million. It had sales of $159 million in the third quarter of 2008.
The company’s also projecting that it will generate gross revenue of $149 million to $161 million in the fourth quarter, about the same as a year ago.
The fourth quarter is typically the strongest one for the brokerage business, according to Pehlke, so the projected uptick shouldn’t necessarily be seen as a sign that the market’s rebounding.
The company’s brokers are starting to see some increased activity, although deals still are slow to come by, he said.
