January 2012 didn't ring in as an especially happy New Year for Dallas-based Behringer Harvard, even if the issues weren’t centered on its much-publicized Multifamily REIT I. Its Behringer Harvard Opportunity REIT I had a "technical default" at Frisco Square, a mixed-use property north of Dallas, in late Jan, by defaulting on the balance of $44.1 million in loans it took out Frisco Square, according to the Dallas Business Journal.
In two separate articles in Janurary, Investment News wrote stories about the the nontraded real estate investment trust losing confidence of broker-dealers, seeing its funds decline, and losing key executives.
Robert S. (Bob) Aisner, president and CEO of Behringer Harvard, regards the criticism as unfair, pointing out that a new co-investment partnership with the National Pension Fund of the Republic of Korea Government shows confidence in the company. Aisner took some time to chat with MFE about issues surrounding the company:
MFE: I saw Michael J. O'Hanlon was brought in to lead The Opportunity Fund. What’s his role?
Aisner: We’ve grown as a company and as our investment programs have expanded, I just didn’t have time to continue to be the CEO of all of our funds. I wanted to be able to continue to focus on our multifamily funds. I’m continuing as the CEO of Behringer Harvard Multifamily REIT I, Inc. and am the CEO of our new fund, Behringer Harvard Multifamily REIT II, Inc. Michael is very experienced, and a tremendous addition to our executive team. By serving as CEO of the funds in our opportunity platform, he is helping me remain focused on our multifamily platform and the continued evolution of our investment programs.
MFE: You’ve gotten criticism about losing broker dealers, American Portfolios Financial Services, because of how you were paying your dividend. Is this a cause for concern?
Aisner: With gross proceeds of approximately $1.65 billion, Behringer Harvard Multifamily REIT I was tremendously successful in raising capital. For all practical purposes, that REIT stopped raising money from the general public in July 2011. When that offering ended, we had about 200 broker-dealers who were raising capital, including some of the largest broker-dealers in the United States. Most continued to sell this REIT’s securities throughout the offering period. American Portfolios decided in spring 2011 that they had concerns over coverage of distributions, but this small firm had not been a significant factor in our capital-raising.
MFE: There’s also been a lot of criticism that unlisted REITs can’t make the returns to investors that they promise. How do you sustain this model?
Aisner: In a non-listed REIT’s early phase of capital-raising, it’s generally understood that distributions must be paid to investors before assets are acquired, and therefore, before operating income covers distributions. Distributions at that phase are largely a return of the investor’s capital.
As proceeds are invested, the challenge becomes achieving the right balance of yield and appreciation that will provide the total return that investors expect. Investment strategies might include development, lending activities or acquisitions. For us, this choice is often dependent on market conditions such as cap rate trends because they are closely related to our capacity to achieve the yields we want to provide for investors.
MFE: What is the reaction to the default with the Frisco deal?
Aisner: Behringer Harvard’s commitment to the Frisco Square project remains strong and we intend to use all options available to us to protect our interests at Frisco Square. We are current on interest payments due and continue to fund operating expenses, tenant improvement expenses and leasing commissions at the property. We recently paid approximately $1 million in 2011 property taxes. For these reasons, we expect this technical default to have minimal short-term impact on current operations as we continue to negotiate almost daily with the lenders to extend or modify the terms of the Frisco Square loans. We’re hopeful that we’ll reach an agreement soon.