By Phil Britt
It may sound simple, but the tenet of "buy at the bottom, sell at the top" has been the driving force behind the solid returns produced by Boca Raton, Fla.-based office REIT CRT Properties. CRT Properties generated more than a 20 percent total return in 2004 (including a 6.7 percent dividend), above average for its office peers, says CRT Properties Chief Executive Officer Thomas Crocker.
Crocker joined the company, then known as Koger Equity, Inc., in 2000 after leading Crocker Realty Trust, Inc., a privately owned office REIT, which sold the remainder of its assets in August 2003. Koger changed its name to CRT Properties in June 2004 to recognize the firm's strategic shift in focus from one that had a large percentage of its holdings in Class B properties in tertiary, non-core markets to one that has a primary focus in Class A properties in the southeast United States, Texas and Maryland. The company adopted the CRT name because it has been synonymous with successful Class A office properties in the Southeast—which represents the core of the firm's portfolio today.
Since joining the company, Crocker and his senior executives, many of whom were on Crocker Realty Trust's management team, have systematically repositioned the company's portfolio, starting in December 2001 when the firm sold more than $300 million of non-core properties.
The company is also on the verge of embarking on another significant change—one that would take it private. CRT signed a definitive merger agreement as Portfolio was going to press to be acquired by clients advised by DRA Advisors LLC, a New York-based real estate investment advisory fund.
Under the terms of the agreement, holders of CRT's common stock will receive $27.80 per share in cash upon the closing of the merger (slated for late in the third quarter pending approval by CRT's common share holders and certain other customary closing conditions). The per-share purchase price represents a 15.4 percent premium over CRT's closing share price on June 16 (the date the deal was announced), and a 17.7 percent premium over the prior 10-day average share price. The total consideration paid to holders of CRT common stock under the agreement is approximately $936.7 million and the total transaction value is approximately $1.7 billion, which includes indebtedness to be assumed or repaid. CRT will pay a pro-rated dividend on its common stock through Sept. 30, 2005.
"We firmly believe that this transaction is in the best interest of CRT's shareholders," Crocker says. "This transaction demonstrates the value inherent in our business model and the enormous efforts of all of our employees."
Location and Service
Are Keys to Success
CRT's properties are centrally located in the suburbs of high-growth cities with easy access, usually by expressway, to downtown business districts, shopping and entertainment venues and preferred residential areas. The properties have been developed with campus-like settings consisting of low-rise, mid-rise and high-rise office buildings surrounded by extensive landscaping and ample tenant parking. Many of the properties use a short form lease agreement.
Crocker looks for areas that have significant barriers to entry for competitors as well as nearby residential properties, giving office tenants the ability to live, work and play in close proximity.
The properties are well maintained and feature professional on-site leasing, property management and tenant-service personnel. Approximately 70 percent of all CRT employees are on-site directly serving CRT's tenants.
Three Ravina Atlanta, Ga. |
Those personnel are supported by three regional offices in the company's prime centers—south Florida, Dallas and Atlanta. When its holdings in the Maryland-Washington, D.C. market grow sufficiently, CRT will add a regional office in that area, Crocker says. Seasoned professionals staff the regional offices, giving the company good first-hand knowledge of local markets.
Crocker credits these senior managers, led by Executive Vice President Thomas C. Brockwell, with keeping the company abreast of local market developments so that it can acquire prime properties when they become available or before they even hit the open market, which would increase their price and, therefore, decrease the return for any new buyer.
"We target in-fill locations with irreplaceable transportation access, proximity to desirable housing stock and other retail and cultural amenities," Crocker says. "Utilizing our leasing and management expertise to improve occupancies and operating margins, we can generate significant additional earnings and long-term value for our shareholders."
National and regional companies or government agencies occupy the majority of all office space owned by CRT. Crocker points to occupancy rates of the company's properties, which have increased from around 80 percent in 2004 to nearly 85 percent by the end of the first quarter of 2005.
Buy and Sell
CRT's approach to acquisitions follows a simple formula: buy low, sell high ... and "run away" when appropriate. Crocker says he follows that philosophy in certain markets, like Dallas, where the company looks primarily to trade office properties rather than hold onto them for any significant amount of time.
"I don't think anyone has made any money holding office property (long-term) in Dallas," Crocker says.
In other areas, however, Crocker sees good long-term possibilities, so it's more of a "buy at the bottom, sell at the top" philosophy. However, Crocker admits that it's much tougher to find attractive deals today than when the company first started buying Class A properties to readjust its portfolio due to increased competition.
CRT began aggressively buying Class A properties in the first half of 2002, at a time when most office properties were still feeling the effects of a poor economy as well as the impact of the Sept. 11 terrorist attacks. Those two factors combined to make office properties unattractive for most investors, which is why CRT found ample buying opportunities.
At the time, CRT was buying assets for $150 a square foot in places like Atlanta, according to Crocker. Highlighting the acquisition of Three Ravinia in Atlanta, Crocker says most analysts felt that it wasn't a wise acquisition at the time. Yet in 2004, Three Ravinia was named Atlanta's "Office Building of the Year" by the Building Owners and Managers Association. Now similar properties in the area sell for $250 per square foot, according to Crocker.
Even though prices have increased, the company still views Atlanta as a solid market—purchasing Atlantic Center Plaza in January 2004 to increase CRT's portfolio in the city to more than 3 million square feet (a total of six properties).
"We have concentrated our efforts on acquiring well-located ‘trophy' properties that can be purchased at or below replacement cost," Crocker says.
A Year to Build Upon
To be certain, 2004 was a busy year and one that saw returns from the company's revamped business strategy (not to mention its name change). The capital markets looked fondly on the company's performance. CRT raised more than $200 million in 2004 in a pair of successful equity capital transactions during the year, while also further strengthening the company's buying power by renewing and increasing its line of credit to $165 millio. The entire line of credit was available at the beginning of 2005.
Also in 2004, the company acquired $440 million of Class A office property, passing the $1 billion asset mark for the first time in its history. Almost $140 million of the company's 2004 acquisitions were purchased through joint ventures with three separate partners. The joint ventures enabled the company to buy high-quality properties while also enhancing shareholder return through management and leasing fees.
Crocker expects the company to enter into more joint ventures "when appropriate" in 2005. Last year also marked the company's entrance into the Washington, D.C. market with the acquisition of two Class A properties in nearby Rockville, Md.
The company's equity market capitalization topped $750 million in 2004 and its continued growth did not go unnoticed as CRT was added to the Standard & Poor's Small Cap 600 Index in July.
Looking ahead, Crocker said opportunities for strategic acquisitions will continue, although the strong demand for high-quality properties may limit the number of viable purchases. He noted the company is also looking at additional development opportunities.
Phil Britt is a regular contributor to Portfolio.
