The bursting housing bubble and credit crisis have not been kind to CBRE Realty Finance. The Hartford, Conn.-based firm was recently de-listed from the New York Stock Exchange, and is ending its relationship with CB Richard Ellis. Plaintiffs in a federal class-action shareholder lawsuit, however, are arguing that the firm began taking on water during the market’s boom days.
In court filings at the U.S. District Court for Connecticut, CBRE Realty Finance shareholders argue a pair of bad loans poisoned the firm’s books in the months before its September 2006 initial public offering. The suit is still being adjudicated, and a judge recently dis-missed one of the three counts facing CBRE.
And lawyers for CBRE Realty Finance’s management – CB Richard Ellis – have argued that since the firm can’t be expected to predict which loans will fall into default in the future, it should be held harmless.
Still, beyond the minutiae of securities law, public court filings from the case provide a rare, bottom-up look inside CBRE Realty Fi-nance’s unraveling. It’s an unraveling that began when the company, then flush with cash, jumped into one saturated residential market.
And then the roof began caving in.
Overextended
CBRE Realty Finance made a pair of mezzanine loans to a Maryland developer, Triton Real Estate Partners, in late 2005. One was for a 434-unit condominium conversion project in Rockville, Md., known as The Monterey. The second was for a larger, 508-unit condomin-ium conversion job in North Bethesda, dubbed The Rodgers Forge. Disclosures of those two projects’ problems contributed significantly to the battering CBRE Realty Finance’s stock took in 2007, when it shed $10 per share.
Prior to partnering with CBRE, Triton had taken ownership over a pair of other sizable condo projects. According to court filings, a for-mer CBRE underwriter who worked on the Triton loans believed that, with four large condominium projects in the metro D.C./Baltimore area, Triton was dangerously extended in a saturated market. Nevertheless, the two loans went through. [Plaintiffs’ lawyers declined to identify the underwriter or make the underwriter available for comment.]
The underwriter believed the area’s condo market was bottoming at the time of CBRE Realty Finance’s initial public offering. Court fil-ings contend that, at the time, Triton’s sales slowed dramatically, resulting in a “significantly impaired” cash flow. The developer soon ran into trouble paying its bills.
The head of a painting company working on Triton’s projects said that, by August 2006, “the money [had] dried up,” and as a result, contractors had begun pulling off the jobs. In October 2006, a Triton executive paid the painter with a personal check. A heating and plumbing contractor stopped work in September over nonpayment. Triton defaulted on payments to its other subcontractors, too, and suspended work.
Uh-Oh IPO
CBRE Realty Finance held an initial public offering on Sept. 26, 2006. The real estate investment trust opened at $14.50, and the sale generated $133 million in cash. At the time, the firm’s investment portfolio totaled $1.1 billion.
The owner of an electrical company, whom Triton stopped paying in August, said The Monterey and The Rodgers Forge began failing because of a “domino effect” that began when one of its four large Maryland condo projects went belly-up. That caused the lead lender on The Monterey and The Rodgers Forge to become concerned about the developer’s solvency. In fact, Triton fell into default on its lead loan, and, according to the underwriter, rang up “hundreds of thousands of dollars” in unpaid real estate taxes.
CBRE loaned Triton money to clear the default and pay their back taxes. The underwriter said the firm feared that if it hadn’t, the lead lender would foreclose and CBRE wouldn’t be able to recover its investment.
CBRE first mentioned the Monterey and Rodgers Forge loans on its 2006 annual 10-K filing with the SEC, filed in February 2007. That filing classified the Monterey loan as nonperforming, and put the loan’s carrying value at $31.8 million. It also moved the $19.7 million Rodgers Forge loan onto its watch list. The investment firm did post a $3.5 million profit for the fourth quarter of 2006, though that was down from the $5.6 million profit it had posted the previous quarter.
That same month, five months after CBRE Realty Finance’s IPO, Triton declared bankruptcy. CBRE foreclosed on The Monterey that May.
For the second quarter of 2007, the firm announced a $7.8 million non-cash impairment on The Monterey, and declared plans to spend another $17 million to finish construction on the project, service debt on the senior loan and sell the property. It posted a $4.6 million loss – a nearly $6 million swing from the previous quarter. The day after announcing those results, the firm saw its stock price tumble 32 per-cent, to $4.25.
The following quarter, CBRE announced $54.7 million in impairments from two foreclosures – the Monterey and Rodgers Forge properties – and posted a $50 million loss.
