Commercial Real Estate Direct Staff Report

William Sanders and C. Ronald Blankenship, who have taken public a number of real estate entities, such as ProLogis and Security Capital Group, are tapping the public markets for a portfolio of apartment and industrial assets.

Those assets, 14 apartment complexes with 4,790 units and 87 industrial properties with 12 million square feet, are owned by a partnership that Sanders and Blankenship formed in 2003. In addition to the developed properties, the partnership also owns nearly 2,000 acres of land suitable for industrial and apartment developments. The real estate is carried on the company's books at a value of $1 billion and is encumbered by just over $600 million of debt.

The public entity, Verde Realty of El Paso, Texas, would be a REIT.

Like a host of other entities looking to raise public capital - 24 other entities have filed to raise a total of $8.9 billion of equity through traded REITs - Verde expects that market conditions are ripe to acquire high-quality apartment and industrial assets at prices that are below replacement costs.

The company would use proceeds of its proposed stock offering to pay down debt and to make fresh investments.

While two dozen companies have filed to go public in recent weeks, a number have postponed their offerings or scaled them back sharply. Most of those have been blind pools. Working in Verde's favor is the deep background of its sponsors as well as the fact that it is starting life with a sizable portfolio that generates cash flow.

In its prospectus, the company said, "favorable opportunities will be found in the acquisition of existing class A and B+ properties in our targeted markets" of major Southern areas. Its current portfolio is in Austin, where the company owns three properties; Dallas, with two properties; Houston, with seven, and San Antonio, with two. It plans to eventually broaden its scope to include markets such as Los Angeles, Las Vegas, Phoenix, Riverside, Calif., San Francisco, Seattle and Denver.

It said that while the industrial sector has not been as hard hit as others, it is growing and "distress in this sector will continue to rise well into 2010 and into early 2011." As a result, it said it would be able to acquire properties at "very attractive prices" that would "experience increasing rental and occupancy growth when the market recovers."

Its current portfolio of industrial properties is in areas - primarily Texas and the northern parts of Mexico - that take advantage of trade with Mexico. That's not expected to change.

The IPO has not priced yet. Registration materials use $300 million of equity raised in determining the amount of fees it would pay to regulators. Goldman Sachs, BofA Merrill Lynch and Wells Fargo Securities are lead underwriters.

The IPO would allow Verde's existing owners to eventually cash out of their investments. A year after the IPO, each operating partnership unit they own would be converted to a common share or an equal value in cash.

Verde is led by Sanders, who is chairman. He is best known for founding Security Capital in 1991. He sold it to GE Capital in 2002 in a deal valuing the company at $4 billion. In 1968, he founded LaSalle Partners Ltd., which is now known as Jones Lang LaSalle. Security Capital was known for acquiring interests in real estate companies and at one point owned interests in 18 that had capitalizations of $26 billion. Among them were Regency Centers and CarrAmerica Realty Corp.

Blankenship previously was vice chairman and chief operating officer of Security Capital. He also was chief executive of Archstone Communities Trust during the late 1990s. He serves as Verde's president and chief executive.

Other Verde senior executives who were previously with Security Capital are David C. Dressler, chief investment officer of the new REIT, A. Richard Moore, its chief financial officer, and James C. Poots, who is in charge of its multifamily operations.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.