When the local investment vehicle of a prominent Mexican real estate developer didn’t make good on a loan it had taken out to acquire a big portfolio of Southern California office buildings, a Texas developer last month wound up with the 56 buildings.
As a result, Hines of Houston now is among the biggest owners of Los Angeles-area office properties. And Hines’ acquisition of the so-called Cabi portfolio of 4.5 million square feet of space was done essentially by buying a portion of the distressed owner’s loan and then taking the properties in lieu of foreclosure. This is viewed as a fairly risky strategy that some believe will become a more common tactic as this recession wears on.
With the purchase, Hines now has a 13 million-square-foot office portfolio in and around Los Angeles County. That’s smaller than Maguire Properties Inc.’s 18 million-square-foot portfolio in the area; the same as Thomas Properties Group Inc.’s portfolio, and larger than Santa Monica-based Douglas Emmett Inc.’s 11.8 million-square-foot portfolio of mostly L.A. County properties.
Some of the more conspicuous buildings that Hines got include 9911 W. Pico Blvd. in Los Angeles and Beverly Atrium in Beverly Hills.
The story of how Hines got the portfolio, a former piece of Arden Realty Inc.’s local holdings, has been of interest in local real estate circles.
In July 2007, Cabi Cal Resources LLC an entity controlled by the heads of Mexico City-based real estate developer GICSA paid $1.5 billion for the portfolio by putting up $150 million in cash and financing the deal with a large loan. In retrospect, it is now viewed as too steep a price.
Although Cabi was relatively unknown in the local real estate scene, GICSA is far from obscure in its home country. The massive company was founded in 1989 and is headed by Abraham Cababie and Elias Cababie. It has interests across Mexico, including office, residential, industrial, hospitality and retail developments. It also has an East Coast U.S. subsidiary that has been building residential, retail, hospitality and office projects in South Florida for about a decade.
The very private Cababie family emigrated from Syria to Mexico in 1922 and the brothers’ father, Isaac Cababie, started a clothing business in the 1950s before the family began pursuing real estate, according to a Miami Herald story. A third brother, Jacobo Cababie, an Orthodox Jew who headed the company’s South Florida operations, died of a heart attack at age 39 in January, the Herald reported.
“They are nice guys private,” said Seth Gordon, U.S. spokesman for GICSA. “They keep their own counsel and go about their business and don’t blab a lot.”
Gordon said the Cababie brothers were not available for comment.
Cabi Cal Resources, the purchasing entity, was comprised of 32 independent investors from around the world, including at least one person from Israel and another from China, said Gordon, who pointed out that GICSA did not own the portfolio. However, the Cababie brothers and Henry Shahery, the head of Cabi Developers California LLC, a GICSA subsidiary set up in 2007 to handle local real estate acquisitions, headed the purchasing entity and personally guaranteed some of the debt.
Shahery, an investor with the Moinian Group on its Figueroa Central downtown mixed-use project, did not return calls seeking comment.
Steep price
Cabi’s deal for $1.5 billion came at the top of the market. While the high price was an impediment to making the investment work, the real problem for Cabi and the reason it lost the portfolio was an “onerous” portion of the loan agreement, which required Cabi to make two payments of $150 million in consecutive years to pay down its debt, according to a real estate industry source who asked not to be identified because of ongoing business relationships.
Cabi had been current on its monthly loan payments, but went into default in September because it couldn’t make the first $150 million payment, the source said. Cabi had tried to raise cash by unloading properties. It sold two pieces of the portfolio, but it wasn’t enough.
Once it was apparent that Cabi couldn’t meet its loan obligations, it began to negotiate with the lenders on the deal. Cabi was in a tough spot because selling more properties in the portfolio would dilute it, said Rich Mayo, former executive vice president of Cabi Developers California.
“I’d speculate that it wasn’t in the bank’s interest to force the sale of assets to pay (the loan) down because if you only sell the good, Westside assets that are close to their loan value, you are left with inferior buildings, and the security on the loan isn’t as strong,” said Mayo, who was an investor in the portfolio with Cabi.
But long before the portfolio had started slipping from Cabi’s control, Hines had already maneuvered to snag it.
To make its original deal, Cabi had gotten a loan through Wachovia Corp., and the loan was chopped up and sold to a number of investors. In fall 2007, Hines bought a piece of that loan at a discount.
But Hines’ piece was the so-called “first loss” position in the debt stack, which allowed it to pursue what’s known as a “loan to own strategy,” said Tom Bohlinger, a CB Richard Ellis Group Inc. senior vice president and industry observer.
“If you want to buy property, you are the first to get the keys (in a foreclosure),” he said. “The first loss position is the most risky and is best only taken by astute operators of real estate.”
By October, it was clear that Hines would take over the portfolio, and it then entered into negotiations with Cabi.
“We became the owners of the portfolio and assume the debt ahead of us, which is still a very high amount,” said Colin Shepherd, a Hines senior vice president.
Hines has already made monthly payments on the loan, which is held by 10 different companies and institutions, including Wachovia, according to Shepherd. The deal is a sign of a shift, Mayo said.
“Companies like Hines are becoming lenders, and it changes the dynamics,” he said.
“It is now the investors or operators and not the typical banks, insurance companies and pension funds that are buying debt,” Mayo said.
Because traditional lenders are doing fewer deals, the real estate companies are stepping into the breach because “they haven’t found good hard assets to buy because of where the market is,” said Mayo, who was not involved in arranging the financing for the deal.
The portfolio
Hines wound up with a big portfolio; a total of 56 buildings in 31 properties across four counties. Of the 4.5 million square feet, 3 million is L.A. County office space of varying quality.
Besides the building on Pico and the Beverly Atrium, Hines now owns Gateway Towers in Torrance. The portfolio also includes a number of properties in smaller markets, such as Fountain Valley.
None of the real estate professionals contacted by the Business Journal were willing to quantify how the drop off in L.A. County real estate values might affect Hines’ holdings.
Richard Ziman, chairman of AVP Advisors LLC and the former chief executive of Arden Realty, said that core office properties have dropped in value but non-core assets have been hit even harder.
“It varies building to building,” said Ziman, who sold Arden Realty to GE Real Estate, a division of General Electric Co., for $4.8 billion in 2006.
Ziman did say that he expects more non-traditional buyers to get into the debt market.
“That will either get them the yield they want as the debt is paid off or they will get their hands on the real estate at the price they want it at,” he said.
Kevin Shannon, a CB Richard Ellis vice chairman who brokered the sale of four South Bay assets in the portfolio when Cabi purchased it, said he expects to see more debt deals done next year, because banks and lenders will have to continue to get riskier loans off their books.
“The vintage ’06, ’07 loans were what I call ‘high octane’ loans with frequently 90 percent loan-to-value (ratios),” said Shannon. “As banks and lenders clean up their balance sheets, the only way to get rid of that vintage of loans, which were made at the peak of market, is to sell them at a substantial discount.”
Mayo left Cabi in September when it was clear the company wouldn’t be making any additional acquisitions. For now, the L.A. real estate veteran is weighing opportunities before jumping back into the real estate business.
“I’m sitting back and waiting to see where the markets are going and where opportunities are,” Mayo said. “I’ve been looking at a lot of different things but I haven’t found the perfect opportunity yet.”
Mayo said it is still unclear what will happen to his investment in the portfolio. In hindsight, he said that Cabi “arguably overpaid” for the portfolio.
“But there were other buyers willing to pay roughly the same amount,” Mayo said.
