Portfolio & Business Strategy

Author: Stijn G. Van Nieuwerburgh

In the grip of the COVID-19 pandemic, what risk factors need to be considered when bidding for an iconic piece of New York real estate that was already in distress before the virus hit?

Authors: Lisa Cations and Tomasz Piskorksi (2020)

Stella Reyes, a recent graduate from Columbia Business School, joined a London-based commercial real estate investment company in October 2020, while the world was still in the throes of the COVID-19 global pandemic. In the United States, 40% of its workforce were working from home, leading to significant decreases in commercial real estate values, especially in large cities. In many countries, including the United Kingdom, most estate agents had shut down their offices, with in person viewing of properties banned, and construction of new homes and offices suspended. As a result, commercial real estate investments fell by 29% globally in the first six months of 2020 compared to the previous year.
Facing these challenges, the investment company was forced to reevaluate all of its investments. Reyes was tasked to focus her research on the viability of the co-working business model where companies typically took long term leases and then offered flexible memberships to customers that could rent desks or private offices on a month by month basis. Reyes' firm had recently signed long-term leases with several co-working operators and the firm leadership wanted to assess the outlook for these investments in these uncertain times.
As she began her assignment, Reyes enumerated the key questions that would direct her research: How viable was the core business model of co-working? What were the key drivers of its revenue? Could a co-working company's operations be restructured so that they could survive the pandemic and adapt to a post-pandemic world?

(Lynne B. Sagalyn, 2015)

Andrea Olshan was one of a small set of women to move into leadership roles as second- or third-generation members of New York-based, family-owned real estate companies. Olshan joined Olshan Properties, the 60-year-old firm her father had founded, in 2004 and stepped up to the CEO position in 2012. Reevaluating her father's "buy, hold, manage" business model, Olshan took steps to de-centralize decision-making and to transition to a more institutional platform. This case provides background on the firm's organizational design, business model, and asset profile and asks students to consider what the firm's best path to continued growth should be

(Camille Douglas, Ankur Gupta '12, 2013)

In October 2009, Godrej Properties Limited (GPL), a leading Indian real estate development company, announced its plans for an initial public offering (IPO), seeking to raise approximately $100 million. In the past, GPL has also raised funds by partnering with several financial sponsors and private equity funds, selling up to a 49 percent stake in some of its development projects. Which investment option offers the most attractive risk-adjusted returns? Does a "going-concern" in the development business create more value for the investor than a "selective" project level investment?

(Lynne B. Sagalyn, 2012)

In February 2008, Madison International Realty is presented with the opportunity to buy an additional equity position in the partnership that owns the Mayfair House—a 10-story, trophy-quality office building located in the Mayfair submarket of London's West End. The pricing for this acquisition would be at a discounted price to par value and an attractive cost basis. In this case, students are presented with information on the UK real estate market, the terms of the partnership agreement, and an investment spreadsheet in order to determine how much Madison should pay for this interest and what conditions in the partnership agreement might impact the valuation.

(Rona Smith MBA '99 and Lynne B. Sagalyn, 2012)

In early 2012, Lee Neibart, head of global investments for AREA Property Partners, considered the imminent changes to the real estate investment fund business. Since the early 1990s, the real estate private equity industry had experienced explosive growth--yet for many investors, their allocations to real estate had proven to be riskier than anticipated. Going forward, what fund models should AREA consider and what management challenges might these new investment models pose for the firm? This case asks students to consider various modifications to the firm's business model, taking into consideration the macroeconomics and microeconomic drivers of the real estate market. Special thanks to Lee Neibart and Andrew Holm, Area Property Partners, for assistance preparing this case.

(Eric Johnson and Christopher Mayer, 2011)

As the subprime mortgage market flourished in the 1990s, innovative lenders turned to a new type of loan: the 2/28 mortgage, designed to allow borrowers with less-than-ideal credit to buy a home and to repair their credit histories. This mortgage offered a fixed two-year "teaser" rate, followed by 28 years of payments that would adjust according to market rates such as LIBOR. As an example shows, the teaser rate was relatively affordable, but when the adjustable rate kicked in, borrowers might see their monthly payments eventually increase by as much as 50 percent. Lenders saw this type of loan as a temporary fix; borrowers were expected to refinance as their credit scores improved. This case discusses aspects of consumer psychology — specifically, the personal discount rat — in light of the popularity of the 2/28 mortgage, and later, its extraordinarily high default rate once housing prices collapsed.

(Jeffrey Barclay MBA '83 and Jeff Giller, 2011)

In early 2009, Don Moser, the co-founding partner of Moser Capital Management (MCM), a successful real estate investment manager, pondered the best growth strategy for his six-year-old business. The highly respected Global Equity Placement Group (GEPG), which was considered by most to be the industryâ??s leading real estate private equity placement agent, was interested in taking MCM on as a potential client to raise what would be their first fund. While raising a discretionary private equity fund through GEPG was an enticing option for MCM it would require a substantial up-front capital outlay and a restructuring of both their business model and corporate culture that were already profitable and culturally appealing in their present form.

(Camille Douglas, 2011)

In 2009, in the midst of the international financial crisis, Benjamin Griswold and his team of investors were days away from purchasing a warehousing company in Argentina for $14.5 million. Shortly before the closing, the New York-based private equity firm that was selling the property demanded that Griswold personally enter into a $4.5 million "bad boy" guarantee that Tigre Logistica, once acquired, would not engage in activities that could put at risk the seller's collateral package for its financing. Griswold had promised himself he would never enter any such agreement, but the warehouse represented two years of work, several hundred thousand dollars of research and legal costs, and a $191,000 option payment he'd already made to the private equity firm. In this case, students weigh the risks and opportunities as Griswold negotiates the deal.

(Camille Douglas, 2010)

In March 2009, Equity Residential was contemplating selling its Los Angeles real estate portfolio for $1.5 billion. While the sale would generate liquidity to repay debt at a time when it might have been expensive or impossible to refinance, EQR's executives wanted to explore other options. Selling assets might be dilutive from a balance sheet and earnings perspective, and Los Angeles represented one of the company's core markets. EQR could tap government-sponsored enterprise financing or issue equity, although the Dow Jones Industrial Average had recently hit a 12-year low. In this case students evaluate and create rationales for each option after examining valuations for the company's assets, its debt service and dividends, and the health of the equity and debt markets.

Special thanks to Yasmine Uzmez '01 for providing research and writing assistance in preparing this case. We also thank David Neithercut '82, President and Chief Executive Officer of Equity Residential, for his support.

(Glenn Rufrano, the Peabody Group, 2000)

It is first quarter 1999, and The Peabody Group has been offered the opportunity to invest in and with Grupo Acción, a Mexico City–based public real estate company with holdings in retail, office and industrial assets in several markets in Mexico. Recently the company has shifted its focus to acquiring leased industrial properties in prime northern border markets. Students are asked to evaluate the proposed $68-million equity investment and devise a structure for the venture. The case poses issues of business strategy and questions of foreign investment, including tax and currency issues.

(Bernard Winograd, Prudential Real Estate Investors, 2000)

Adopting the role of a research analyst for an income fund, students are asked to evaluate the business strategies of three regional mall companies — General Growth Properties, Simon Property Group, Taubman Centers — and make a recommendation as to which is most likely to do well in light of the challenges from Internet retailing. The emphasis of the assignment is on business strategy, not valuation of real estate or company financials. The fund's portfolio manager has decided to cut back on the number of stocks he holds and concentrate his position in just a few names. All of the companies predominately own regional malls, but there are substantial differences among them in the nature of their properties. All appear to be pursuing initiatives that take advantage of Internet retailing, with some similarities and differences in their approaches. In coming to a conclusion as to whose strategy they like best, students must consider two aspects of the question: real estate and corporate strategy.

(David T. Hamamoto, NorthStar Capital Partners, 2000)

What started out as an acquisition/rehabilitation project to create the flagship hotel for Ian Schrager Hotels (ISH) changes course as market forces require that the principals reconfigure their strategy for maximizing the value of the asset. Students are asked to analyze the steps ISH took throughout its ownership of the St. Moritz, determine what would have been the optimal strategy for maximizing the value of its asset, consider how market forces affected the course of the investment, and evaluate whether the Millennium/Ritz joint venture is the best deal for ISH. The case draws on detailed investment materials on the acquisition and raises questions of business strategy.

(Joseph Macnow, Vornado Realty Trust, 2000)

It is 1997, and Vornado Realty Trust has recently embarked on a new strategic direction to invest in office properties when its head of acquisitions is presented with a compelling investment opportunity in a regional mall, an out-of-favor asset class, in Puerto Rico. Students are asked to value the proposed acquisition, make a recommendation as to whether the company should acquire or pass on the asset, and lay out the arguments for their conclusion as if making a presentation to the company's CEO and president.

(Susan Nagler-Cohen MBA '90 and Gregory Tosko MBA '90, Insignia/ESG, 1998)

It is early 1996. Condé Nast Publications (CNP) has asked its advisers, Insignia/ESG, to develop a comprehensive Situation Analysis that will enable the company to select and implement a real estate housing strategy. Publisher of 14 upscale magazines, CNP has been inefficiently housed in several disparate locations in midtown Manhattan. In 1994, Insignia/ESG made a maverick proposal to CNP — that it consider space in the office towers planned for 42nd Street at Times Square, but every CNP senior executive rejected Times Square in favor of staying at the company's east midtown location. CNP is now willing to consider tenancy in the area, but any deal for new space has to be economically compelling. Adopting the consultant's role, students are asked to prepare a preliminary presentation for CNP's middle management delineating the relevant issues in selecting an occupancy strategy. They are expected to estimate the gross rental rate required to support new construction at Four Times Square, identify for CNP specific risk factors associated with a proposed tenancy at Four Times Square, and identify strategies that Insignia/ESG should utilize in representing CNP in negotiations for space.

(Mark Caplan MBA '84, The Time Group and Lynne B. Sagalyn, 1998)

In this case, a young, conservative real estate investor with a strong track record of success faces an unsolicited offer to purchase his 271-unit high-rise apartment building from a REIT seeking to expand its portfolio. The property, H House, was acquired out of a distress situation and after eight years of tedious effort is now economically healthy. The investment promises continual profits. While the REIT's purchase offer is tempting, the decision whether to sell or hold is far from clear-cut. The entrepreneur has been able to increase his residential portfolio by 250 to 750 units per year, but it is becoming increasingly difficult to find appropriately priced acquisitions. On the other hand, the ability to monetize his investment gains is real. Should he trade an illiquid investment like real estate for publicly traded stock in a real estate company by selling for some combination of cash and REIT stock now that the federal tax rate on capital gains has been reduced? If he wants to liquidate the investment, though, this is not his only option. Others exist. The students' task is to evaluate the situation and recommend a course of action that takes into consideration the broader strategic implications and investment opportunities (near-term and beyond) associated with this sell-vs.-hold decision.

(Ralph Rosenberg, Goldman, Sachs & Co., 1998)

This case presents an overview of the strategic questions facing the senior managers of Whitehall, the opportunistic real estate fund of Goldman, Sachs & Co. in 1994–95 as they consider whether to allocate capital for investments in European real estate markets. After several years of declining real estate values, these markets remain largely depressed. The anticipated opportunities are highly speculative and dependent upon numerous political and economic variables. Drawing on information available to Whitehall management in 1994, students are asked to formulate an opinion on the most efficient and potentially lucrative strategy for Whitehall to follow in positioning itself for opportunistic investment in France by addressing four big questions: (1) How might the changing economic climate affect Whitehall's ability to finance acquisitions at its customary high level of leverage? (2) Could the tax, legal, and currency-related issues of risk management be effectively handled? (3) Would the potential returns and profits justify the costs and inherent risks associated with operating under foreign political, social, and economic systems? (4) How should Whitehall proceed with asset management operations — through the creation of an in-house asset management organization or an out-sourcing operation?

(Lynne B. Sagalyn, 1997)

As a well-established REIT with a history of innovative strategic moves, in January 1997 United Dominion Realty Trust faces new challenges. The second-largest apartment REIT in the business at the time, it had recently completed a merger with SouthWest Property Trust and had added more than 33,000 apartment units to its portfolio since 1991. The challenge is future growth: intense competition and slower growth in the apartment sector, in general, has reduced the likelihood of strong FFO gains, especially for apartment operators in southern markets, where many fear a reappearance of overbuilding. The company has lost its premium pricing, and share-price performance is flat, though analysts continue to praise the quality of management. The company's CEO is concerned that the current vision and plan for the company might not produce the desired growth and value for shareholders. In this case, students are presented with the situation and asked to evaluate the strategic issues facing the company as an operating real estate business and to suggest future strategic directions.

(Steve Ullman, The Harlan Company, 1996)

In this case a major New York realty concern (NYRC) is seeking to sell a large self-storage facility. The NYRC made an ill-fated entry into the self-storage market in the late 1980s with the purchase of this facility and then leveraged it heavily through corporate borrowing. By 1994 the patriarch and largest shareholder of the company has become increasingly anxious to see improved operating performance and his company's value climb. To accomplish this, the NYRC is ordered to divest itself of all noncore businesses. Disposition of the lone remaining asset, a 1,580-unit lock-and-load facility in Queens, N.Y., that has been on the market for two years, presents several significant problems. Students are asked to analyze the financial performance of the asset and identify the key issues surrounding the disposition. Using materials on the self-storage market provided by the case, the assignment calls for them to analyze the distinct target markets of potential buyers for the asset, determine likely acquisition bids from these buying segments, and propose ways to handle the disposition problems.

(Lynne B. Sagalyn and Citicorp Real Estate, Inc., 1995)

Facing a window of opportunity in the capital markets in mid-1993, Citicorp Real Estate (CRE) has decided to depart from its one-off strategy for disposing of OREO assets in favor of a portfolio-sale approach. Bundling the multifamily properties might allow CRE to capture the synergies of a multiasset sale as well as the bond premium associated with the tax-exempt debt on nine of the portfolio's 12 properties. CRE also hopes to capture some upside in the portfolio's future performance. To evaluate the kinds of bids the bank might receive if the assets were put up for sale as a portfolio, the case poses a mock-auction situation. Students are divided into groups representing each of three likely bidding groups — a bulk buyer, an existing REIT, a REIT IPO — and asked to prepare a bid; adopting an in-house position, another group makes the case for a continuation of the one-off strategy, explaining how the one-off approach will best meet the bank's objectives. The structure of the assignment reveals at least two fundamentals: that the private bulk buyers cannot bid as much as the public buyers and that the bank faces very high risks if it goes with a REIT IPO.

(The Yarmouth Group, 1993)

To win the position of portfolio manager for a $3.5-billion national corporate pension fund, the investment advisory firm must evaluate the problems of the fund's $100-million portfolio (invested in real estate equity) and come up with a corrective strategy. The fund desires to liquidate the portfolio on a rational basis, over time. Acting as the adviser, the student's task is to develop a strategy for implementing that objective.

(The Yarmouth Group, 1993)

To win the position of portfolio manager for a $3.5-billion national corporate pension fund, the investment advisory firm must evaluate the problems of the fund's $100-million portfolio (invested in real estate equity) and come up with a corrective strategy. The fund desires to liquidate the portfolio on a rational basis, over time. Acting as the adviser, the student's task is to develop a strategy for implementing that objective.

(Nancy Lashine MBA '81, The O'Connor Group, 1992)

After a distressing experience with the late 1980s downturn in real estate values, the chief investment officer of a $5-billion domestic public pension fund is reconsidering the fund's real estate allocation. Students take the position of the investment adviser to the fund, who must present a strategy for going forward in light of the fund's experience with its existing $50-million investment in a commingled real estate fund.