Legendary real estate investor Tom Barrack warned in his “Chairman’s Corner” blog on the Colony Capital website that the commercial real estate sector was in a “massive meltdown” and will “suffer greatly in the near term.” Barrack, who many call the “world’s greatest real estate investor,” wrote on November 23:

We thought now was a good time to re-examine something we should know more than a little bit about – the Commercial Real Estate (CRE) market in general and the health of the CRE loan market in specific.

Here is the Cliff Notes summary – Real estate is experiencing a seismic liquidity shock as a result of a complete closure of the credit and capital markets for both debt and equity. CRE and the debt which fueled its growth are in a massive meltdown.

The chairman of Colony Capital, one of the largest private-equity firms devoted solely to real estate, added:

CRE is rapidly depreciating in value across all sectors and geographic regions. For the past 14 years CRE has benefited from an expanding economy and cheap and plentiful debt that was lent on aggressive terms with no recourse to the borrower. The emergence of securitization dramatically increased available leverage and reduced its cost. New equity participants flooded the commercial arena, escalating real estate values. Equity REITs became popular and produced great decade-long returns and thus increased the equity pool available for acquisitions. Supply and demand remained in check, but only because construction financing didn’t fit neatly into the securitization model. For well over a decade, values continued to climb and pension funds and endowments correspondingly increased their allocations to CRE as a diversification tool and an inflation hedge. The market had seemed to have finally recovered from the hangover of the last CRE crisis and capital was pouring into the sector. As always, more capital drew novices and speculative investors that bid up all the markets. Real estate was forgiven for being the “drunk driver” along the road of the USA economy.

Because of the closure of credit and capital markets for both debt and equity, Barrack predicted:

CRE will suffer greatly in the near term, will struggle for refinancing options in the mid term, but will excel in the long term as a result of limited supply and eventual renewed demand. Well positioned properties in A and B markets which have been reasonably leveraged will be fine.

Realized losses in CMBS portfolios may hit or exceed subordination levels previously thought impossible and the complications of working through unproven structures with a special servicer will not be simple.

Many regional and small banks will be crushed by the weight of failing loans, especially of the CRE flavor.

The greatest opportunity is in surgically carving through complicated debt structures and being prepared to fund “non-milking cows” in the short term. This will be a $2 trillion redistribution of real estate wealth to those who have patient, non-mark-to-market capital and a restructuring tool kit.

Most real estate investors will be on the sidelines. Institutions will be over-allocated, core and value-added funds will be handling their own issues, REITs are not structured to take advantage of this part of the cycle, foreign investors are stymied by FIRPTA and volatility in exchange rates. This crisis will be more complicated than the early 90s, given the multiple constituencies involved with present structures: borrowers, master servicers, special servicers, trustees and myriad classes of investors with different motivations based on the specific priorities of their tranches within the securitized debt stack.

Source:

“Today’s Debt is Equity PLUS a Few Suggestions to Help President-Elect Obama Ease the Pain”
Thomas J. Barrack, Jr.
Colony Capital (Chairman’s Corner blog), November 23, 2008

New Book!

It’s been a while since any material regarding Thomas Barrack, Jr., appeared on Investorazzi.com. Which is a real shame, considering he is seen by many as the world’s greatest real estate investor. Well-known real estate magnate Donald Trump said the following about Barrack:

Tom has an amazing vision of the future, an ability to see what’s going to happen that no one else can match.

Barrack’s Colony Capital, one of the largest private-equity firms devoted solely to real estate, has achieved a 24% annualized internal rate of return (IRR) over the last 17 years.

Getting back on track, earlier today the latest installment of Barrack’s “Chairman’s Corner Blog” was posted on the Colony Capital website. His global investment outlook isn’t pretty. The legendary investor wrote:

Let’s review the state of play for the last week and attempt to re-calibrate where we are. Clearly the storm clouds are gathering across the world, establishing the worst global recession in six decades, blended with a financial and banking crisis which is accelerating daily. What we all want to know is “how much worse can it get?” For those of you who have better things to do, read no further, the answer is “much worse”.

What is happening???

There is nothing good to find:

• Commodity prices freefalling at a pace never before seen
• Dramatically reduced industrial output
• Consumption and sales evaporating
• Disappointing earnings in all sectors
• Unemployment at staggering levels and numbers are still padded
• Defaults in housing mortgages accelerating
• Foreclosures on single-family residences increasing
• Corporate defaults on various debt instruments increasing
• Commercial real estate values falling and commercial real estate loan defaults on the horizon
• Regional banks the next to fall
• Previous capital infusions and all writedowns by big banks will prove to not be enough
• Citibank mystery still unsolved
• Auto industry in meltdown and on verge of nationalization and the airline and insurance industries right behind it
• Japan, China and Europe all undergoing economic disruption and an explosion of protectionist maneuvers
• TARP has been mired in capricious stealth and has not addressed the mortgage securitization market or its liquidity at all
• The toxic dump will now include CLOs, CDOs, CMBSs and CDSs
• Consumer confidence at historic lows
• Government debt levels and deficits at historic highs
• In spite of the deficits the dollar is increasing in value because the market views everything else as worse
• Gold prices falling
• Many Europeans in search of Bretton Woods II
• Bush administration in paralysis, Obama administration using training wheels

The affect of all of the above is just starting to trickle down to the normal person in the economy. Now let’s take a look at some other factors which further exacerbate the situation…

Barrack, an avid polo player who sold off his U.S. real estate holdings in 2005 because of too many “amateurs” on the playing field, discussed the “other factors” that were complicating the global financial situation. These included:

• Fair Value and Mark-to-Market
• TARP
• Hedge Funds
• Private Equity
• Real Estate
• Sovereign Wealth Funds
• Stocks and Bonds

Regarding his “specialty,” real estate:

The real estate sector, beyond residential, appears to have less volatility due to the fact that financing vehicles are designed to be patient and very few transactions are taking place. As we have discussed, it takes awhile for user trauma at the occupant level to drift to the landlord and ultimately from the landlord to the lender. There is nothing healthy happening in commercial real estate and if this holiday season is as bad as predicted for retailers there will be a new wave of trauma amongst owners of retail real estate. Not many firms are planning expansions or contemplating add-on facilities at this point in the cycle. The long term nature of leases has always helped real estate be a good co-variance diversifier against stock and bonds. However, much of the vintage 2006 and 2007 office acquisitions were financed against “to be leased” pro formas at now unfathomable rental levels. Once the interest reserves expire the CMBS will become self detonating.

On the topic of stocks and bonds, he pointed out:

Valuations of equities most likely have nowhere to go in the short-term except down. The bear market rallies only afford a moment of escape for all the prisoners.

Barrack summed up his thoughts about current and future conditions when he wrote:

Bottom Line

The governments of the world are “in”. The financial institutions of the world are “out”. The market is not yet clearing the “toxic waste” and the trickle down effect into the consumer economies is just beginning.

Course of Action

Patience and advanced survival techniques.

You can view Barrack’s post on the Colony Capital website here.

Source:

“A Dose of Reality”
Thomas J. Barrack, Jr.
Colony Capital, November 10, 2008

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Back on September 2, Zoe Hughes of Private Equity Real Estate magazine reported that private international real estate investment firm Colony Capital, LLC, is looking to diversify into energy and infrastructure. Hughes wrote:

Colony Capital is considering long-term plays in the energy and infrastructure fields as part of a bid to diversify the private equity real estate firm’s brand, according to president Richard Saltzman.

In an exclusive interview published in the September issue of PERE magazine, Saltzman spoke about the firm’s strategic push, revealing energy and infrastructure were two spaces that could have “deep opportunities” for the firm in the future. He also spoke about Colony’s opportunistic investments, notably in the distressed arena.

Fukuoka Dome Baseball Stadium
Acquired by Colony Capital in 2004

Source:

“Colony gears up for diversification drive”
Zoe Hughes
Private Equity Real Estate, September 2, 2008

According to the Forbes website this morning, legendary real estate investor Tom Barrack may be looking to buy Italian property company Aedes. From the piece:

Shares in Italy’s Aedes rise as much as 6.1 percent after a report says that a deal to aid the property company, which last month admitted a ‘rocky financial position’, is close to being finalised.

Newspaper Il Sole 24 Ore says Colony Capital LLC Chairman Tom Barrack and Italian real estate magnate Vittorio Casale will meet in coming days, probably by Friday, to detail an offer for Aedes real estate and the offer could be presented around Sept. 8…

Source:

“Stocks News Europe”
Forbes, September 3, 2008

It’s been quite some time since Investorazzi.com has gotten wind of something in the pipeline for Colony Capital’s Tom Barrack. However, last Friday Zoe Hughes wrote a piece for London-based Private Equity Real Estate about the famous real estate investor. According to Hughes:

Colony Capital has closed its distressed real estate debt fund on $900 million (€587 million) of commitments after spending just one month fundraising , PERE has learned…

PERE reported in April Los Angeles-based Colony was quietly lining up $1 billion in equity to take advantage of the current market dislocation. Founder and chairman Tom Barrack led efforts to raise the fund, which is expected to start investing in distressed property debt and operating companies with strong real estate components. The fundraise took around 30 days, sources told PERE.

In his latest “Chairman’s Corner” newsletter on Colony’s website, Barrack predicted commercial real estate would continue to suffer from the credit crisis, with commercial loan spreads continuing to widen and North American developers suffering a string of defaults. In housing, he forecast, the “real problems [were] just beginning and [there is] no clear solution in sight.”

He went on: “The best place to prospect for ‘long’ emerging opportunities is most likely at home. It contains all the ingredients of an intriguing opportunistic investment: volatility, lack of transparency, confusion, over-leverage abound, lack of homogeneity in products, long-term stability, and government intervention.”

Source:

“Colony closes debt fund on $900m”
Zoe Hughes
Private Equity Real Estate (UK), August 8, 2008

It’s great to be back after several days away from Investorazzi.com. However, I expected a little bit more from my “leads” than a story about pop star Michael Jackson and his Neverland Ranch. Nevertheless, I decided to address this because legendary real estate investor Tom Barrack, Jr., somehow got involved with a last-minute deal to save the 49-year-old American entertainer’s property in Santa Barbara, California, from foreclosure. Barrack is famous for calling the top of the U.S real estate market in 2005.

E!Online’s Gina Serpe wrote this morning:

The seemingly perpetually indebted Michael Jackson narrowly escaped a foreclosure auction on his Neverland Ranch Sunday after the real-estate investment firm Colony Capital bought the loan to the property in a last-minute deal to save the estate.

The purchase of the 2,700-acre ranch was said to have set Colony back $23.5 million, and the company has wasted no time getting into discussions about possible repayment terms with the onetime king of pop, with founder Tom Barrack Jr. saying they were already speaking “with regard to the ranch and other matters.”

“Blame it on Tito”

Barrack’s Colony Capital, one of the largest private-equity firms devoted solely to real estate, has achieved a 24% annualized internal rate of return (IRR) over the last 17 years.

Source:

“Neverland Saved From Auction Block”
Gina Serpe
E!Online, May 12, 2008

Welcome to Investorazzi.com, a new financial weblog that tracks the investment activities of the world’s greatest investors. At the present time, the list of legendary investors includes:

• Tom Barrack, “The World’s Greatest Real Estate Investor”
• Warren Buffett, “The Oracle of Omaha”
• Jeremy Grantham
• Bill Gross, “The King of Bonds”
• Eddie Lampert, “The Next Warren Buffett”
• T. Boone Pickens, Jr., “The Oracle of Oil”
• Jim Rogers
• George Soros, “The Man Who Broke the Bank of England”

See “The Investors” page for more information about these investment legends.

My name is Christopher E. Hill, and I am the creator and editor of this blog. As an independent financial research analyst based out of Chicago, Illinois, I came up with the idea for Investorazzi.com during the 2007 holiday season. Using the Internet and other resources, I will attempt to shadow these legendary investors, much like the dreaded paparazzi and their celebrity targets. Which is, by the way, how the weblog got its name.

The word “paparazzi” is derived from a character in the Fellini film La Dolce Vita. The character, a photographer named Paparazzo, reminded Fellini of “a buzzing insect, hovering, darting, stinging.”

-Source: Howstuffworks

As the creator and editor of Boom2Bust.com, “The Most Hated Blog On Wall Street,” I’ve had prior blogging experience. Boom2Bust is an independent financial blog that seeks to warn and educate readers about a coming U.S. financial crash. Making its debut over the 2007 Memorial Day Weekend, material from Boom2Bust appears regularly on Reuters.com (over 100 posts) and has featured in the online editions of the Wall Street Journal, Fox Business, Chicago Sun-Times, West Orlando News, and Palm Beach Post.

I hope you enjoy reading Investorazzi.com. Please do not hesitate to contact me with any suggestions for improving this blog.

Sincerely,

Christopher E. Hill
Editor
editor(AT)investorazzi(DOT)com