Attached files
| file | filename |
|---|---|
| 8-K - Behringer Harvard Short-Term Liquidating Trust | v171537_8k.htm |
| EX-99.2 - Behringer Harvard Short-Term Liquidating Trust | v171537_ex99-2.htm |
SCRIPT
FOR
BEHRINGER
HARVARD SHORT-TERM OPPORTUNITY FUND I LP
CONFERENCE
CALL
JANUARY
15, 2010
OPERATOR:
Welcome
to the conference call for Behringer Harvard Short-Term Opportunity Fund I
LP. Let me now introduce Stan Eigenbrodt, counsel for the
Fund.
STAN
EIGENBRODT:
Before we
begin, please note that statements made during this call that are not historical
may be deemed forward-looking statements. Future events and actual
results, financial or otherwise, may differ materially from events and results
discussed in the forward-looking statements due to a variety of risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Please refer to Behringer Harvard
Short-Term Opportunity Fund I LP’s filings with the Securities and Exchange
Commission, specifically the annual report on Form 10-K for the year ended
December 31, 2008 and the quarterly reports on Form 10-Q for the quarters ended
March 31, June 30 and September 30, 2009, for a detailed discussion of these
risks and uncertainties.
It is
also important to note that today’s call may include time sensitive information
that may be accurate only as of the relevant date to which it
relates. Behringer Harvard Short-Term Opportunity Fund I LP assumes
no obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
I will
now turn the call over to Mr. Bob Aisner, the Chief Executive Officer and
President of Behringer Harvard Advisors II LP, a general partner of Behringer
Harvard Short-Term Opportunity Fund I LP.
1
BOB
AISNER:
Thank you
operator and thank you to everyone who has taken time to dial into this
valuation conference call for Behringer Harvard Short-Term Opportunity Fund I
LP. With me today is Sam Gillespie, the Chief Operating Officer of
the Fund’s advisor. Sam will have some remarks later in this
call.
As you
know, this call is to discuss the new and revised per unit valuation of
Behringer Harvard Short-Term Opportunity Fund I LP. There are various
circumstances that could cause a fund to provide an estimated value of its
units, such as a fund requirement, or a desire to assist broker dealers and
custodians with FINRA 09-09 and ERISA reporting requirements. In this
case, the Fund’s partnership agreement requires that beginning with the fiscal
year ended December 31, 2009, the Fund’s general partners provide its limited
partners annually an estimate of the amount a holder of limited partnership
units would receive if the Fund properties were sold at their fair market values
as of the close of the Fund’s fiscal year, and the proceeds from the sale of the
properties (without reduction for selling expenses), together with other assets,
were distributed in a liquidation of the Fund.
Before
discussing the estimated valuation that has been established for the Fund and
some specifics regarding financial performance, debt maturities, and specific
asset reviews, I thought it might be helpful to give you a high-level review of
recent economic indicators.
2008 and
2009 have been rough years for our economy, as you can all attest, as well as
for the real estate industry, which is the ultimate reflection of the
economy. On the positive side, GDP in 2009 was virtually flat in the
second quarter after being negative 6.4% in the first quarter, and recorded a
recently revised 2.2% growth rate in the third quarter. From a GDP
growth point of view, we appear to be past the bottom of the
recession. Unfortunately, GDP growth does not necessarily imply job
growth, and in fact job growth generally turns positive approximately 12 to 18
months after GDP turns positive. The most recent figure pegged the
national unemployment rate at just over 10% at the end of the third quarter, and
if you count those people no longer searching for jobs, the figure is closer to
17%. December’s job numbers, just released, showed a loss of
85,000. Since employment peaked in 2007, our economy has lost more
than 7.2 million jobs. As we know, jobs are the key to office
occupancy, hotel occupancy and consumer spending. Consumer spending
accounts for more than two thirds of GDP and until jobs return and the consumer
feels confident and starts to spend, all real estate asset classes will remain
weak. We thus await the return to positive job growth with
baited breath.
2
As an
opportunity fund, we are owners of multiple classes of assets, so I’m going to
provide a quick overview. Office vacancy rates for both downtown and
suburban offices have continued to climb. The national vacancy rate
as of the end of the third quarter, depending on the data source, indicates
overall vacancy at 17%, with downtown vacancies at 14% and suburban vacancies at
19%. Early forecasts show that the fourth quarter did not show any
improvement. Vacancy rates have climbed for eight consecutive
quarters, and as job losses continue to mount, all indications are that these
rates will continue to climb through 2010.
We
believe that office occupancy is a lagging indicator in the
economy. Businesses reduce their space needs or give back space as
the economy slows and are reluctant to expand until they are sure that the
economy and their business are both in recovery. PPR projects
that office absorption will be a negative 229 million square feet from 2008 to
2010. As Sam will discuss later, if there is a bright spot in our
portfolio, it is the fact that Dallas and Texas have held up better than most
parts of the country during this deep recession, and our office assets are in
Dallas.
As a
hotel owner, it is obvious that no single asset class has been hurt more than
hotels. This is likely due to the fact that success and stability of
hotels are based upon both healthy consumer discretionary spending and corporate
hospitality-based activity, both of which are obviously down significantly
during recessionary times. During the first nine months of 2009, the
average occupancy rate of U.S. hotels dropped to 57%, which was down 10% from
the same period in 2008. Average revenue per available hotel room
(which is the key tracking indicator in the hospitality industry) also was down
18% during the first nine months of 2009 when compared to the same period in
2008.
3
However,
it is our opinion that several economic indicators suggest that the worst is
over, and we expect hotel metrics to bounce along the bottom for the next few
quarters before stabilizing and then slowly rebounding. The people
whose job it is to forecast hotel business trends—such as
PricewaterhouseCoopers, PKF and Smith Travel Research—are forecasting that
business will be relatively flat in 2010, in a range from down two to three
percent to up two to three percent.
We expect
continued price compression on our corporate negotiated rates in 2010 as large
corporate clients press hotels to keep rates low for their business
travelers. Fortunately, the corporate price compression is being
offset by small increases in advance bookings for group business and leisure
travel.
Finally,
as you all know, the residential real estate market has fallen off the
proverbial cliff. Our two condominium projects have a measurable
weighting in this Fund. As we have repeatedly reported, the Palomar
condominiums have not sold as anticipated and we have started a rental program,
to be more fully explained by Sam. Fortunately, our Telluride
condos are still under construction and we are hopeful they will hit the market
as the world turns brighter.
While we
have continued to deal with the operating deterioration brought about by the
recession, debt market availability continues to be both limited and
inefficient, and financing continues to top the list of the most pressing
current challenges for the commercial real estate market. Despite
these concerns, we are pleased with our efforts to provide solutions to the debt
in this Fund and Sam will provide you with the details.
As we sit
here today, we believe there are signs that the economy may be bottoming out, or
at least it is not getting worse as fast. GDP growth has turned
positive; the pace of job losses has lessened although we are still losing jobs
each month; the housing market in many cities appears to have bottomed out with
recent sales at higher prices, albeit well below the prices seen at the peak of
the market; but the consumer is still bearish. There may be green
shoots showing, but we believe 2010 will be another demanding
year.
4
In the
wake of the deepest economic recession since the great depression, we have come
to a time for valuing the units in this Fund. As some of you may
know, FINRA 09-09 does not stipulate a valuation methodology, but as I mentioned
previously our partnership agreement requires us to value our units assuming
that the assets are sold as of December 31, 2009. Because of this, we
have been forced to produce this number at a time when values are at or around
the bottom.
Our
partnership agreement also requires us to use an expert independent third party
advisor in connection with this estimated valuation. To comply with
this requirement, we hired Robert A. Stanger & Co., Inc. to work with us on
the valuation and have arrived at an estimated value of the units of
$6.45. To put this in perspective, you need to remember that we have
already distributed $0.56 in special distributions because of the sale of
several properties, and if this is added to the estimated value of $6.45, the
result would be a total of $7.01. Also, the Fund distributed an
annual 3% distribution for almost 5-1/2 years from March 2004 until last
summer.
Robert A.
Stanger & Co., founded in 1978, is a nationally recognized investment
banking firm specializing in real estate, REITs and direct participation
programs such as the Fund. As required by our partnership agreement,
the general partner has obtained from Robert A. Stanger & Co. its opinion
that this valuation is reasonable and was prepared in accordance with
appropriate methods for valuing real estate. I should note that as
with any estimated valuation, this valuation is subject to a number of
estimates, assumptions and limitations, which are discussed in detail in the
Form 8-K we filed yesterday with the Securities and Exchange Commission
regarding this valuation.
This
estimated valuation, when taken together with the special distributions we have
already made, represents approximately a 29% decrease on an unloaded basis from
the initial unit price, and approximately an 18% decrease on a loaded
basis. In a world where mark to market real estate valuations are
down 25-40% and the stock market and public real estate markets are still down
50% from peak, while we are not pleased with this current valuation, we do not
believe it is outside of a range of reasonableness and good stewardship of the
invested funds.
5
A couple
of final comments before I turn this over to Sam to discuss the real estate
assets specifically. First, this valuation mandated the assumption
that these assets be sold as of December 31, 2009. We do not intend
to sell these assets until we feel that it is the right time and that we can
harvest increased value for our investors when prices
normalize. Second, Behringer Harvard Holdings, the Fund’s sponsor,
has continued to support the assets of the Fund.
As you
may remember, the original equity capitalization of the Fund was approximately
$108 million. As the market started to deteriorate and credit markets
tightened, our sponsor lent us $7.5 million. Our sponsor subsequently
forgave that loan. When the credit markets remained frozen, our
sponsor created a credit facility that ultimately has a capacity of up to $40
million, of which the Fund has borrowed approximately $29
million. Once again, in support of the Fund, our sponsor has decided
as of December 31, 2009, to forgive an additional $15 million of the outstanding
balance and approximately $500,000 in related interest. Furthermore,
you may remember that when we sold 4245 Central, our sponsor provided an
additional subsidy of $1.7 million to ensure the sale provided a positive cash
on cash return to the Fund. In total, the sponsor has contributed,
through loan forgiveness and subsidy, approximately $25 million which the
sponsor will never recover. This amount represents more than 20% of
the Fund’s initial equity capitalization. Behringer Harvard Holdings
is proud of its support of the Fund during this difficult
time.
Now let
me turn the call over to Sam.
SAM
GILLESPIE:
Thanks,
Bob. I also want to welcome all of you to the call. I
would first like to add my thoughts on the current real estate
market. We believe that 2010 will be marginally better than 2009, but
office space and hotel room demand will still be tepid. The financing
market has bifurcated, with multi-family financing readily available through
agencies such as Fannie Mae and Freddie Mac, while commercial credit remains
tight, with underwriting requirements also remaining very
onerous.
6
We think
property values have bottomed, but the recovery will be multi-staged and
gradual. We expect property values to remain relatively stable in
2010, perhaps even increase, but there is a chance that interest rates may move
higher, blunting any improvement in cap rates. As the job market
stabilizes and gradually gives way to job growth, improving commercial real
estate demand fundamentals will set the stage for NOI growth in
2011-2012.
Because
the Fund has a significant weighting in Dallas, it is important to review the
health of the local Dallas economy as compared to the balance of the
country.
The
Dallas-Fort Worth economy has weathered the economic storm much better than most
of the nation. As of November 2009, Dallas had an unemployment rate
of 7.9% compared to the national average of 10%. Since Dallas has a
relatively stable housing market, steady population growth, and job losses,
which as a percentage of labor force are just half of the national average, the
Dallas – Fort Worth market should hold up better on both fundamentals and
performance metrics moving forward. According to Moody’s economy.com,
the local job market has already bottomed and is forecasted to add 60,000 jobs
in 2010.
Tough
real estate markets demand active asset management. We have been
aggressively managing the assets of the Fund and the results have been very
favorable to the operations of the properties. Let’s take a minute to
discuss what we have been doing to preserve and protect the assets in this
Fund.
A
decision was made at the end of 2008 to bring the property management of all
Fund office assets in Dallas-Fort Worth in-house for 2009, joining the office
assets of the core office Behringer Harvard REIT as Behringer Harvard-managed
properties. As a result of this decision, the operating expenses for the Dallas
area properties in the portfolio were significantly reduced.
7
First,
because of current staffing requirements for the office assets already managed
by Behringer Harvard, we were able to share employee costs across the portfolio,
bringing staffing costs down $151,800 from 2008 levels. Second, we
bundled all of the service and product needs like janitorial and landscaping
across assets and across funds and aggressively bid out all of this work,
resulting in a $365,900 reduction in operating expenses from the prior
year.
In the
case of the Palomar condominium tower, as you might appreciate, this is not the
most favorable time to be selling luxury condominiums, and the debt service on
the construction loan for those condos and homeowner association dues on unsold
units represented a sizable and onerous carrying cost. In response to
this issue, we shifted our asset management strategy and established a leasing
program in March of 2009, and in just a few calendar quarters have leased 87% of
the 44 finished condo units at the Palomar, at an average rental of $3,000 per
month. As a result, we have successfully generated 70% of our 2008
carrying costs of $3.5 million, a savings of over $2.5 million on an annual
basis.
We also
re-doubled our efforts with the taxing authorities and challenged every assessed
value of every single asset of the Fund. We will spend over $1.1 million less in
real estate taxes in 2010 than we did in 2009, with three cases still pending
for the potential for further property tax savings.
Even with
credit tightening, our capital markets staff successfully negotiated the
extension of both Palomar loans with two different lenders. The
condominium tower loan was extended through September of 2011 and the hotel loan
was extended through 2012. In addition, we also just restructured and
extended the John Carpenter loan to the end of 2012, and the Telluride loan was
restructured to change the loan covenants so that we can continue to fund
construction. We are really proud of the success we have had so far
in managing our debt structure in this very challenging economy. In
total, we have restructured and extended approximately $108 million in principal
balance of the Fund’s commitments, which comprises approximately 63% of the
Fund’s loans (other than the loan provided by our sponsor).
8
The
maturities remaining for 2010 are the construction loans for the Bretton Woods
single family houses and the loan for the Landmark office building. Together
these loans total $27 million, and we are working with each lender to extend
these loans. As we have previously mentioned in other communications,
we are also negotiating with the lender at Plaza Skillman to restructure and
modify that loan.
Before we
close the call, I would like to address some questions that I know a number of
you may have:
1. Are
the Short-Term investors going to get their principal back?
I just
can’t really speculate on that. As both Bob and I have said, we are
working diligently to harvest value at the appropriate time for our investors,
and we will continue to do so.
2. What’s
the timeframe for liquidating this Fund?
As we
have previously disclosed, the Fund will not be liquidated in its original
estimated timeframe, which would have been early 2010. As we all
know, that’s right around the corner, and as you probably have gathered, we
don’t think it makes sense to liquidate the Fund in this economy. As
Bob and I have both said, we will be working to dispose of these assets when we
think it makes sense for the Fund and its investors.
3. When
are you going to start the distribution again?
If we get
the Fund to the point where we have sufficient NOI to support a distribution,
while we could reinstitute a distribution, however, the more practical
likelihood would be that these assets would be ripe for
dispositions. As such, rather than resume regular distributions, we
would expect that with the return of better times there would be sales of assets
and distributions of the proceeds of those sales.
9
Let me
thank all of you again for taking the time to call and listen to this discussion
of the Fund’s estimated valuation; we hope that it has been
helpful. If you have additional questions, please contact your
internal wholesaler, and we will work to answer them.
This
concludes our remarks. Let me turn it over to the moderator for a few
instructions regarding some housekeeping matters.
OPERATOR:
If you
would like a copy of the PowerPoint presentation and script from today’s call,
the Fund has filed it as an exhibit to its Current Report on Form 8-K with the
Securities and Exchange Commission, which can be accessed on the website
maintained for the Fund at www.behringerharvard.com or from the SEC’s website at
www.sec.gov. Access to the filing is free of
charge.
Lastly, a
playback of today’s call will be available on the password-protected portion of
the Fund’s website. The file will be titled “January 15, 2010
Conference Call Replay: Behringer Harvard Short-Term Opportunity Fund I LP
Estimated Per Unit Valuation” and will be the last link on the left sidebar once
you are logged in. Please note that in order to view the link, you
must log in using your DST Vision ID. The recording will be posted as
soon as possible and will be available until February 1, 2010. For
further information regarding the playback of this call, please contact a member
of your wholesaling team at 866.655.3600.
Thank you
for attending, and this call is now concluded.
10