Bargain hunter
Investor Jay Rollins hits commercial real estate markets as others are running away.
JCR Capital is back in Houston with the purchase of a Greenspoint office building out of foreclosure earlier this year with partner Lincoln Property Co.
The Denver-based commercial real estate finance company targets the middle market of properties valued from $5 million to $50 million, investing funds from wealth advisers, pension funds and insurance companies in the form of equity and debt. On many deals, it partners with local investors.
Managing principal Jay Rollins talked about the climate for investing in Houston. Edited excerpts follow.
Q: How much of your portfolio is in Houston? A:
Not much. We’re very transactional oriented. We get in and get out of markets. We had been in Houston on a number of things over the past five years. We exited all of those 12 to 18 months ago. We hadn’t seen anything interesting in Houston for a while. Then in February when oil prices bottomed, a lot of people were running away from Houston. Typically when people run away, we run in.
Q: What kind of opportunities are you seeing in the market now? A:
We’re looking at an apartment deal in Houston which the seller maybe a year ago would have gotten a lot more for it, but has to sell and is willing to sell it to us at a lower price. The macro market, a lot of players have redlined Houston and just won’t go there. We’re seeing values dip, and that’s attractive to us. We’re also looking at another office play that has recently been foreclosed upon because the ownership had leveraged it up too high. The opportunities typically are related to the financial health of the owners. When occupancy drops and (net operating income) drops, then it’s about how long can they hang on and pay the debt, and how are they capitalized.
Q: What kind of discount do you look for? A:
It’s all over the board. The office space has been hurt the hardest in Houston. The buildings are 40 percent leased that we’re buying. So the leap of faith is we’ve got to fill them back up. When you buy them at these kinds of prices, to make money you don’t have to fill them up to 100 percent. You can lower their rent and be the cheapest guy in the market for renters.
Q: With so much Class A space available, companies have more options to upgrade. How is that affecting the “B” market you’re investing in?
A:
Typically what drives people first is location. “A” buildings can’t go down to the rent levels where we are. We don’t think Houston now is a tenant move-up market. People are more saying: “We’re still in business. We’re here. We have an opportunity to cut our operating costs. Let’s move to cheaper space.” We give them a B building with C rents.
Q: Do you see more foreclosures on Houston’s horizon? A:
I do in office. As people’s loans mature in Houston, it’s really going to depend on how leveraged they are. The buildings with debt coming due in the next 12 months are going to be the ones at risk. You’re going to be hard-pressed to refinance that debt. If you can’t write an equity check to pay that debt down, people are going to give the keys back. I think it’s going to be a slow grind in Houston for a while.
Q: What are you favorite markets in the U.S.? A:
We like major metro markets. NFL cities, NBA cities. The demographics are covered when you say that. We’re in Southern California, Phoenix, Tampa, Orlando, the Pacific Northwest. We’re also in Austin.
Q: How much do you plan to invest in Houston? A:
It really depends on the opportunities we see. It could be $50 million of equity. It’s selective. We need the right asset with the right story at the right time. The opportunities set in Houston for us was much better in February than it was in July. Houston has firmed up a little bit. We’re not seeing the fire sale that it was in the first quarter.
Q: Why do you like to exit quickly? A:
We invest on behalf of third parties. If this was your money or your family’s money, I would say, “Yeah, own it forever.” If you’re using other people’s money, you always want clarity on the market. You want to understand the market we’re in or could be in 24 months from now. It’s much easier for me to see the world 24 months from now than seven years from now. That short time period has worked for us for over 30 years. We’ve done over $2 billion in more than 300 transactions. We’ve lost principal one time.