Bridge Partners
Updates
August 6

March 11, 2011

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Dear Bridge Investment Group Owners and Investor Partners:

 

We at Bridge Investment Group want to provide an overview of our activities since our update last September with respect to our company and our sponsored investments.  This report will review our company outlook and our progress with the Real Estate Opportunity Capital Fund (the “ROC Fund”).  We have also enclosed supplemental reports for our sponsored apartment investments (including our private equity co-investment funds), and/or our sponsored development projects, as applicable for these owner/investors.  As always, Dean Allara and I are available to discuss your individual investments in greater detail as desired.

 

 

BRIDGE INVESTMENT GROUP, LLC (“Bridge”) COMPANY OVERVIEW

 

Since the company’s inception twenty years ago, our focus has been on finding apartment, office and development opportunities that we could acquire at an attractive price, add value through capital improvements, marketing/leasing and expense controls and then realize that value through a successful sale.  Gross returns for completed investments since 1991 (through December 2010) have achieved a 22.0% IRR [1], which have benefitted both our investor partners and Bridge’s owners.  The economic, financial and credit landscape since the advent of the Great Recession has presented significant and, in some ways, unprecedented challenges over the past few years.  Yet, this environment has also provided attractive opportunities.

 

Consistent with our September 2010 update, the Bridge team remains focused on five key areas:

 

  1. Managing our existing apartment and development investments to maximize value and position ourselves for improving capital market conditions.

  2. Developing new capital sources to take advantage of attractive value-added apartment investment opportunities.

  3. Expanding the ROC Fund, which targets investments in distressed commercial income producing real estate and first mortgages backed by such properties

  4. Growing our property management fee services business to add more contracts from third-party owners, particularly with apartment projects.

  5. Accelerating Bridge Realty Capital’s mortgage banking platform

 

Maximize Value with Existing Apartment and Development Investments

 

Our development investments (Rainmakers, Stoneridge and Villa de Paz) are operating relatively well in the post-Great Recession environment but continue to experience marketing and financing challenges due to the continued dislocation in the single-family housing and capital markets.  Over the past few years, we have been successful in working with our existing project lenders, in large part due to Bridge’s demonstrated operational and financial commitment (including the company’s mortgage guarantees). The separate development report (provided to all investors in these projects) describes our refinancing and recapitalization issues along with our strategies and plans to resolve them.  We are very encouraged with our progress on a number of new financing initiatives we are pursuing but uncertainties exist regarding a final resolution for each of these three projects.  At present, we are not considering new development opportunities for investment.

After experiencing challenging market conditions in 2008 and 2009 due to difficult economic and employment circumstances, apartment supply and demand fundaments turned in our favor last year.  A confluence of positive demographic factors and constrained new multi-family development lead us to believe that we will experience strong occupancies and rent growth at our apartment projects over the next several years.  As a result, we plan to retain most of our existing apartment assets to benefit from expected rising revenues, cash flow and property values.  The exception to this are our two properties in Provo (UT), and two projects in El Paso (TX), where our assets are fully valued and we view the downside risks as exceeding further upside potential (particularly relative to other available apartment investment opportunities).  In fact, we completed the sale of Riviera Apartments ( Provo ) in February and expect to close University Villa ( Provo ) by the end of this month.  We are evaluating several new apartment investment opportunities, with attractive projected cash distributions and overall returns, in which to re-invest proceeds from the Provo sales and defer recognition of capital gains taxes utilizing the provisions of IRS Code Section 1031.  

 

We are also working to recapitalize four properties in Denver where our institutional partner (Buchanan Street Partners) needs to exit and we believe further upside potential exists given a significant infusion of new capital to complete major renovations.  We have agreed to terms with a new institutional joint venture partner (Angelo, Gordon & Co.) and hope to finalize contracts later this month.  In addition, we are exploring institutional and individual investor equity capital sources to expand our apartment investment portfolio given the compelling value-added apartment opportunities available today.  In short, we are upbeat with respect to our current apartment investments and potential new acquisition opportunities.  Details on the foregoing are provided in our accompanying Apartment Investments update report.

 

The ROC Fund

 

The banking and credit crisis, along with the effects of the Great Recession, have created a ripe environment to acquire income-producing commercial investment property, and loans secured by such assets, at very attractive prices.  Bridge teamed up in 2009 with some highly qualified and capable partners, including Primus (a Hong Kong-based financial services/private equity firm managing over $2 billion) to form the Real Estate Opportunity Capital Fund, L.P. (the “ROC Fund”).  Bridge offers extensive capabilities to evaluate/underwrite, finance, operate, manage, construct, operate and sell investment real estate.  Our partners bring very deep fund-raising, investment sourcing, construction, development and fund-management skills and experience.   Please visit www.TheROCFund.com for additional information on the Fund.

 

Fund operations formally began in March 2009.  Since then, the team has raised over $60 million in capital commitments and, with judicious use of debt, acquired over $100 million in assets.  Through December 2010, the Fund has achieved over a 40.0% annualized Internal Rate of Return (IRR) on the fund’s investments, delivered more than a 28.7% IRR to its investors (after the payment of Fund expenses and carried interest to the General Partner) and made cash distributions each quarter. 

 

Current expectations are that the fund will reach approximately $100 million in equity funds under management.  The Fund Managers have reduced the minimum investment from $1 million to $500,000 and interested parties should be Qualified Investors (essentially the SEC defines this as having $5 million or more in investable assets).  If you are a Qualified Investor, or know of others who are, we would appreciate the opportunity to present additional details on the Fund for your/their consideration.  The final closing of the Fund will be at the end of this month (March 31, 2011) after which time no new investors can be accepted.

 

Bridge is benefitting from its ROC Fund affiliation in several ways.  First, the Fund’s General Partner, PFH, receives a management fee equal to 2% of total investment subscriptions.  This amount is used to pay PFH’s expenses, including reimbursing Bridge for our staff members who are directly involved in the Fund.  Second, as an owner of PFH, Bridge receives a material portion of the “carried interest,” which is the General Partner’s portion of profits after the limited partners receive their capital back and an 8% annual preferred return.  Finally, Bridge receives certain approved fees for services including sourcing investments, underwriting and due diligence work, and loan originations. 

 

Given an estimated fund size of approximately $100 million, and assuming a gross annual investment return (IRR) of 35%, our projections suggest that Bridge’s portion of the carried interest over the next seven years (the life of the fund) would total over $5 million and the services fees would total approximately over $1 million.  When the forecast compensation paid to Bridge and/or its associates is considered (around $5.5 million), the ROC Fund is projected to provide more than $11.5 million to Bridge over the life of the fund.  We view this as a key strategy to build future value with Bridge.  In fact, discussions are underway on the formation of ROC Fund II later this year.

 

Bridge Property Management

 

Revenues at our 10,800-unit western U.S. apartment portfolio are increasing at a moderate pace and these properties are generating a steady stream of management fee income for Bridge Property Management (“BPM” is wholly owned by Bridge).  Our commercial office leasing and management division has been stable as well and we have maintained all third-party management contracts (totaling 460,000 square feet in Salt Lake City ) despite the challenges in the office market.  BPM’s senior team is focused on expanding our apartment fee management business for third-party owners.  At present, BPM manages four properties for the ROC Fund and three other properties for an affiliate of Pacific Coast Capital Partners, one of our institutional joint venture partners.  These total more than 2,500 apartment units with combined annual fees in excess of $400,000.  The ROC Fund has five additional apartment properties under contract totaling over 800 units that BPM plans to begin managing over the next few months.

 

Our clients have been very pleased with the substantially improved operational performance resulting from BPM’s oversight of these assets.  Their track record of successful execution is impressive.  Consequently, we expect additional contracts will be forthcoming later this year from both the ROC Fund and other owners.

 

Bridge Realty Capital

 

Given the lack of new acquisitions and turmoil in the credit markets, Bridge Realty Capital’s (“BRC”) mortgage banking business has been moribund for the past three years.  However, we experienced a nascent resurrection of the commercial mortgage backed securities market (“CMBS”) last year and the industry expects to increase new mortgage originations five-fold in 2011 (compared with 2010).  We have been actively meeting with several new CMBS issuers including Berkadia, Citigroup and UBS to develop correspondent relationships and expect to expand our offerings and services in this growing area. 

 

In addition, commercial banks are expanding their real estate lending businesses and becoming increasingly competitive.  BRC had a long-standing association with Wells Fargo and recently developed a relationship with US Bank that culminated in the latter providing a $22.9 million loan for our Villages property.  Overall, we expect significant growth from BRC over the next few years, particularly given the significant volume of loans coming due that will need to be refinanced.  Beyond Bridge and the ROC Fund, BRC features an extensive list of third-party clients.

 

Strategic Alignment and Bridge Owner Distribution Projections

 

Bridge’s key principals are aligned to support its business units as follow:  

  • Apartment Acquisition and Disposition Division
  • Bridge Property Management, LLC (Property and Asset Management)
  • Bridge Realty Capital, LLC (Commercial Mortgage Banking)
  • Bridge Development, LLC
  • The ROC Fund (joint venture owner of the Fund’s General Partner)  

Russ Minnick leads our Apartment Acquisition and Disposition Division, which is focused on making new investments in value-added apartment opportunities and maximizing investor returns through timely property sales.  Russ is supported by Rick Andrus, Director of Acquisitions and Dispositions.  In addition, Russ has primary responsibility for the Arbors and Bridges at Citifront projects. 

 

Chris Young is responsible for developing institutional and individual investor relationships for our conventional apartment acquisitions strategy.  Chris and Dean Allara will continue to oversee our current investment projects and manage relationships with all existing owners.

 

Rich Stayner is president of Bridge Property Management, LLC, and oversees both the apartment and office sectors.  BPM manages 38 apartment properties located in 9 western states consisting of 10,800 apartment units, along with 460,000 square feet of commercial office space in Utah .  Rich is supported by Matt DeGraw, BPM’s Vice-President.  In addition to maximizing performance of Bridge’s owned and sponsored properties, Rich and Matt are responsible for growing our fee management business from third-party property owners.

 

Brad Andrus is the president of Bridge Realty Capital, LLC, which provides debt financing for both Bridge’s, and the ROC Fund’s, current and future acquisitions, as well as for third party clients.  Beyond his extensive contacts with Fannie Mae, Freddie Mac, FHA and top insurance companies, Brad is expanding his relationships with commercial banks and emerging commercial mortgage backed securities lenders.

 

Dan Stanger’s primary focus is overseeing the ROC Fund’s investments as its Chief Investment Officer.  Dean Allara is engaged in raising equity capital for the Fund as its Managing Director of Capital Markets.  Two of Bridge’s Analysts/Underwriters have also moved over to the ROC Fund, which now compensates/reimburses Bridge for the relevant and appropriate salary, bonus and benefits expenses.

 

In addition to the foregoing, Dan will continue to oversee our Rainmakers golf community, Dean will continue to supervise our Stoneridge resort community and Brad has taken primary responsibility for our Villa de Paz golf course operation.

 

Kevin Anderson will continue in his role as Bridge’s Chief Financial Officer, including supervising our accounting, Treasury, cash management, insurance and administrative reporting functions and processes.  Kevin is supported by Controller Val Peterson.

 

Company Outlook

 

Bridge was profitable in 2010 despite significant expenses incurred for the REIT IPO project pursued in the first half of the year.  All excess cash flow was utilized to repay a majority of the principal owed on the company’s two lines of credit and support other company obligations.  As a result, for the second year in a row, Bridge did not pay bonuses to any of its employees or officers.  Also, no owner distributions were paid in 2010.  Nonetheless, staff turnover has been minimal and our lender relationships remain strong.

 

We are projecting significantly improved revenues, net operational income and cash flow for Bridget this year.  Revenues from acquisitions, dispositions, mortgage banking and carried interest are all expected to significantly exceed 2010’s levels.  In addition, property management income is projected to grow by 12% and ROC related income and reimbursements are expected to jump by 26%.  In total, revenue for 2011 is projected to grow 53% over 2010.  Expenses are budgeted to increase by 21% due primarily to higher insurance, information technology and payroll costs, including the resumption of staff and senior manager bonuses.  The company’s cash flow from operations in 2011 is expected to grow by 240% over 2010.  This is supplemented by projected distributions from Bridge’s ownership interests, including in PFH (the ROC Fund’s General Partner) and apartment investments, and offset by remaining REIT payables, principal amortization on our lines of credit and planned co-investments with joint venture partners.

 

We do anticipate resuming owner distributions this year.  As a reminder, the first distributions from the company will be to bring current the preferred return amounts (equal to an 8% annualized rate on your original investment) due to Bridge’s Class “C” Partners (those who acquired an interest in the company in 2004).  We believe we will have sufficient funds to pay at least one year’s 8% Class “C” distribution and expect to also fund a portion of the accrued preferred amounts from past years.  The final amount paid in distributions will be dependent on our actual operational performance, determinations regarding funding affiliated company obligations and developing an adequate level of cash reserves.

 

OVERALL SUMMARY

 

We are optimistic with respect to the performance of our current apartment assets and encouraged with the opportunity to make additional attractive investments in selective sub-markets.  We are engaged in expanding our current institutional and individual capital partner relationships to profit from this strategy as well.  We expect to be successful in recapitalizing the four Denver properties currently co-owned with Buchanan Street Partners and we anticipate realizing strong profits from our properties in El Paso and Provo (UT), which are outperforming their market peers and offer limited further upside.  Redeploying this capital in attractive new opportunities will be our highest acquisition priority.

 

Our development projects possess significant inherent value but these investments each face their own set of capitalization and funding challenges.  Our efforts are focused on maintaining our value and optimizing performance while we work with our lenders and analyze/pursue new sources of financing. 

 

As a well diversified operating company, Bridge is generating stable income from asset and property management fees generated by our existing sponsored apartment investments, the ROC Fund and new third-party multi-family and office property owners.  Our initiative to expand our property management business has met with success and we expect to increase this business over the foreseeable future.  We also anticipate significant growth with our Bridge Realty Capital mortgage banking platform as lenders become more competitive and willing to provide debt financing.

 

We are also energized by the ROC Fund’s success over the past two years – particularly with the 28% yields generated for our limited partners by our investments to date and the resulting profits and reimbursements to Bridge.  The number of “distressed” real properties, and loans backed by real estate, is already large, but we believe these represent just the “tip of the iceberg.” The ROC Fund anticipates raising approximately $100 million for its first fund, which we expect will provide very attractive future cash flows to its investors and to Bridge.  A ROC Fund II is also in the initial planning stages.

 

The strategies above are expected to substantially enhance Bridge’s value over the coming years.  If you have any questions regarding the foregoing, please don’t hesitate to contact me at (732) 212-0920 or on CYoung@BridgeIG.com; Dean Allara is also available on DAllara@BridgeIG.com or at (650) 579-1350.  For general questions, including those regarding our website, owner distributions from our sponsored investments, or K-1 tax forms [2], please contact Devanie Mensah at (801) 284-2905 or on DMensah@BridgeIG.com; We look forward to continued progress with our current investments and new initiatives over the coming year

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                                                                        Warm Regards,

                                                                        BRIDGE INVESTMENT GROUP, LLC

                                                                       

                                                                        Christian Young

                                                                        Chairman



[1] Internal Rate of Return is essentially the annual average compounded rate of return on investment

[2] K-1 tax forms for 2010 will be mailed out to all investors on March 15, 2011

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