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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,
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:
- Managing our
existing apartment and development investments to maximize value and position
ourselves for improving capital market conditions.
- Developing new
capital sources to take advantage of attractive value-added apartment
investment opportunities.
- Expanding the ROC
Fund, which targets investments in distressed commercial income producing real
estate and first mortgages backed by such properties
- Growing our
property management fee services business to add more contracts from
third-party owners, particularly with apartment projects.
- 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, 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 |