Boston Properties made headlines in April when it managed to extract, from some decidedly icy credit markets, a $215 million construction loan for its Russia Wharf office tower. The fact that the giant office landlord has yet to touch a cent of that loan shows how drastically commercial real estate finance has changed in the past nine months. It also highlights the chasm between well-capitalized REITs and their private competitors.
At $215 million, the Russia Wharf loan was the largest development loan to be issued after the collapse of Lehman Bros. and near-implosion of the global financial markets.
The loan also grabbed attention for its unusually tough terms. It represented just 40 percent of the total construction budget for the 31-story, 860,000-square-foot, mixed-use project. The price tag (LIBOR plus 3 percent annually) was relatively steep. Recourse provisions – long absent from commercial loans – ratcheted up risk considerably.
It took a club of five banks, led by Bank of New York Mellon, to commit the $215 million balance. Boston Properties had tried to finance more, but was unable to find lenders willing to touch new construction, even backed by a developer and anchor tenant (Wellington Management) with strong credit.
“We had banks that dropped out, not because they didn’t like the project, but because they had managers telling them, ‘Don’t get involved in real estate loans,’” Boston Properties’ former CEO, Ed Linde, told Banker & Tradesman at the time. “They didn’t care what the credit was or how good the product was, [loan officers] were being told, ‘Don’t make loans on real estate projects.’”
After all that pain, Boston Properties has yet to put its construction loan to use. Just-released fourth-quarter financials show the giant office landlord is funding the Boston office tower from its corporate balance sheet.
The firm’s two other current construction projects – Biogen’s 356,000-square-foot, build-to-suit corporate headquarters in Weston and a 780,000-square-foot, mixed-use project in Washington, D.C. – are also rising without construction financing. Weston is approximately two-thirds complete. The D.C. development is roughly one-quarter into construction. Neither project has a construction loan in place.
All told, as of Dec. 31, Boston Properties had financed $572 million of an estimated $1.1 billion investment without the aid of secured debt markets.
REITs like Boston Properties began 2009 battered by concerns over their capital levels. Investors worried companies wouldn’t be able to refinance their debt maturities, and the companies’ stock prices were battered. There was talk of asset fire-sales.
The industry responded by raising an astounding amount of cash. Secondary REIT debt and equity offerings raised a total of $37.5 billion, according to NAREIT data. New REIT IPOs produced another $3 billion. In an instant, REITs went from being sellers to buyers, and the stock and credit markets responded accordingly. Equity REITs’ stocks are up more than 120 percent from their March lows. Capital is suddenly cheap and plentiful. And REITs don’t have to put up chunks of real estate as collateral.
The net result of this turnaround has been a freedom from traditional commercial real estate financing strictures. Boston Properties raised $860 million in new equity in a June stock sale, and borrowed another $700 million in an October bond sale. Mike LaBelle, the company’s CFO, said the unsecured bond offering was intended to be smaller, but grew by 40 percent because of strong demand from the investor market. Boston Properties’ all-in costs for that offering were under 6 percent. Fourth quarter balance sheets show $1.45 billion in cash and cash equivalents sitting in Boston Properties’ coffers. Unsecured debt is even cheaper now.
LaBelle said on a recent earnings call that, while all that cash had “put us in an advantageous position to quickly act on new opportunities,” it was also putting a drag on Boston Properties’ earnings. The company recently downgraded its 2010 funds from operations guidance by 22 cents per share because it’s been unable to put much of its cheap new cash to work.
Except, that is, for its active construction sites.
