RealPage's Judgment Day & Korean Skyline Sins Pt. II

Why Did the Koreans Fail? Part II

(This is the 2nd in our 2-parter on Korean mezz getting torched in US CRE. See Pt. 1 here.) 

On Monday, we discussed the first cardinal sin made by Korean investors who dove into US mezz debt: a failure to understand capital-stack dynamics. Today, we’ll address the other critical error: valuation

To put it crudely, Koreans came in when the office market was frothy AF. In ‘16, for e.g., an investor group led by Teachers’ Pension did $220M in mezz for 787 Seventh in ‘16, which Calpers had bought for $1.9B, or $1,100+/foot. Mezz “is relatively safe compared with equity investment while offering higher yields than senior loans,” Kim Chang Ho, who ran alts for Teachers’ Pension, said back then. The tower was most recently valued at less than half that – $917M or $540/foot. 

Koreans (Cont.)

Or take Meritz, which did $226M in mezz for HNA’s 245 Park, which the Chinese “gray rhino” 🦏 purchased in ‘17 for a whopping $2.2B, or $1,300 a foot 😓. HNA lost the tower to pref investor SL Green in ‘22. (Meritz will also likely take a bath on DTLA’s Gas Company Tower, where it had a $65M mezz position before Brookfield defaulted.)  

“They bought into these positions not fully prepared structurally to deal with the downside scenario,” said one debt broker.  

As new-ish investors to the US, Koreans needed a shorthand to understand which buildings to invest in – cross-streets & submarkets didn’t mean much to them. Brand-name tenants 👜 became that shorthand, explained a source familiar with Korean institutional investors.

Back home, a lease agreement was ironclad. In America, everything is negotiable, and the Koreans were blindsided by renegotiations & mods. “If they were more experienced, they would have done multi-tenant buildings,” the source added. “But they had no skillset to underwrite those buildings.” 

Some opted for JVs w/ blue-chip local partners like SL Green and Tishman Speyer. That might have led to better property picks, but JV agreements are often heavily skewed in favor of the local partner. 

Much has been made of the “death by consensus” aspect of K-Trusts, onshore vehicles used for many of these deals. Getting everyone on board for key decisions on soured deals did indeed hurt, but the source described it as a tertiary concern. Unlike the US, where tens of thousands of banks, broker-dealers and financial institutions are in the mix, only a few dozen Korean institutional LPs make US CRE bets.

“Pockets are deep but players are limited in number,” the source said, which gives LPs a lot of clout.

There’s certainly a bit of a people disconnect: CRE is a relationships business, and because Korea is a land of constant exec rotation – Korean C-suites don’t like rock stars – it’s harder to develop market expertise and the tactical nous needed in hairy situations. Put simply: the institutional investors lacked institutional knowledge. 

But don’t write an epitaph just yet 🪦 Though the losses were heavy, the Koreans weren’t the only ones who went through this. The tale of the American skyline is also a tale of international investors, from the Japanese to the Germans to the Canadians to the Chinese, who’ve taken their knocks.

“It’s early days,” said the source of the Koreans. “Their history has been short.” 🇰🇷 

Judgment Day: DoJ Sues RealPage

This is the big one: The DoJ has hit RealPage w/ an antitrust lawsuit, alleging that the software used by many of the nation’s largest apartment landlords is enabling a rent-fixing conspiracy. The DoJ was joined in its action by several states including California and Connecticut, and AG Merrick Garland said that “Americans should not have to pay more in rent because a company has found a new way to scheme with landlords to break the law.” (Full remarks here). The DoJ got pretty intense in the investigation, even commissioning data scientists to review RealPage’s code, the agency’s head of antitrust Jonathan Kanter said Friday, per the Times.

“The modern machinery of algorithms and A.I. can be even more effective than the smoke-filled rooms of the past,” he added. 🚬 

In response, a RealPage spox gave a bizarre statement, saying that the software was “purposely built to be legally compliant.” 👏 

It’s been a year of hell for RealPage, which is owned by PE firm Thoma Bravo and a core part of an institutional landlord’s toolkit. The DoJ had previously upgraded its investigation to a criminal matter; many of RealPage’s customers are dealing w/ class-action tenant lawsuits; state politicians are seeking to ban algorithmic rent-setting altogether; Veep Harris went after it on the campaign trail last week; and at least one major RealPage customer, Cortland, has been tickled by the FBI. RealPage has sought to fight back, decrying what it calls a “false narrative” around its software and setting up a “resource center” to counter bad press – in this, it borrowed a page from the Blackstone playbook.

Noncompetes Back On

Power to the people C-suite: After the FTC ruled in April to ban noncompetes, the Chamber of Commerce, the country’s largest business lobby, went full-tilt, suing to block the ban and describing it as a clear case of govt. overreach. In July, a federal judge had temporarily blocked the ban, and this week blocked it for good. “Arbitrary and capricious,” is how judge Ada Brown described the FTC’s proposal (when a judge drops the word “capricious” on you, you’re in trouble) and said it would cause “irreparable harm.”

Most CRE brokers are independent contractors rather than employees, but noncompetes have still popped up in disputes (Newmark vs. CBRE, Cushman vs. JLL). More recently, sources said Meridian dealmakers had to wait for clearance from the firm before moving on to greener pastures. And senior execs across the CRE ecosystem are often bound by noncompetes, so this is quite a big deal. It’s at the national level, though – states can still move to do their own thing. California, for example, has basically obliterated noncompetes (as have Oklahoma & N. Dakota, but they’re not relevant).

Birds of Prey

The fallout from Nightingale’s crowdfunding scandal continues: We reported Monday on the Nakash family being subpoenaed by the bankruptcy judge (full story here), and now there’s new activity at the jilted property at the center of the scandal: Cushman is marketing the note on the Atlanta Financial Center, a complex which Elie Schwartz’s Nightingale was in contract to buy for $182M, raised $50M+ from CrowdStreet investors for, and then just bounced.

The property owner Sumitomo 🇯🇵 owes $123M on the loan, per the Atlanta Business Chronicle, which seemed mad reluctant to mention the Nightingale nugget (buried right at the end of the piece). Sumitomo received an extension on the loan this summer after kicking in more equity. The loan was originated by Crédit Agricole, but it’s unclear if they still hold the paper. It will almost certainly sell at a hefty loss.

Thank You for Smoking: Vector’s $2.4B M&A

“It’s easy, if you work like a dog.” - Howard Lorber

Vector Group, the Howard Lorber-run holdco that is a major player in the US tobacco industry 🚬 , is being acquired by Japanese giant JT Group in a $2.4B deal. JT is paying $15/share in cash for Vector’s O/S shares, per WSJ, representing a 30% premium, w/ the deal set to close sometime this year.

Vector spun off resi brokerage Douglas Elliman in ‘21, so the most interesting RE piece here is New Valley, a Vector subsidiary that is a behind-the-scenes investor in glitzy new development projects. It’s a repeat backer of Steve Witkoff (111 Murray, WeHo Edition, Vegas Fontainebleau) and has also backed JDS’ Michael Stern in South Beach and Ziel Feldman’s HFZ at 11 Beach St. New Valley was part of the OG investment group in the long-stalled supertall 125 Greenwich, but exited as part of the Northwind/Fortress recap last year.

Lorber is among the more intriguing characters not just in real estate, but in American business: he met corporate raider Bennett LeBow in the 80s, and helped him make a king’s ransom restructuring Western Union. He also served as CEO of Nathan’s Famous 🌭 Oh, and he’s lads w/ Carl Icahn, part of his regular steak dinner posse along w/ Mike Milken, Leon Black, Rich Handler and LeBow.

Quickies

• Assemblage wizard Dov Hertz settles sexual-assault case brought by family babysitter – sitter alleged abuse began when she was 13 

• Pastis 🍟 opening outpost in West Palm Beach (Landlord will be folks behind Hotel Chelsea/Mercer) - more on WPB’s alpha 🐕️ Steve Ross here)

• FPA buys Little Tokyo multifamily in LA from JPM at 25% ✂️ 

• Tishman scores $300M refi from Starwood at DoBro Macy’s

• RSVP for our Chicago Happy Hour w/ Iman Jalali on 9/10 🍸️ 

• Dallas metro area to see 33K apartments completed by year-end - right in line w/ Greater New York 🤠 

• 7K+ CRE obsessives are now bingeing The Promote: A snapshot of who else is in the mix 

Unquotable Quotes