BY Cathy Cunningham, Commercial Observer
Deal-making is bloodsport.
Thankfully, Mike Maturo, the president and CFO of RXR Realty, has come prepared.
“On Saturdays, I box,” Maturo, 56, told Commercial Observer from his office at 75 Rockefeller Plaza. “I train with a professional mixed martial arts fighter, and once a week I go into the ring, which is fun as long as I don’t go too far down in the age group. Because when I fight the younger guys, it gets a little rough.”
That’s on top of the Pilates he does three times per week. Oh, and the basketball he plays on Sundays before church. (Maturo has a license to marry people. He already has one ceremony under his belt and another in the pipeline.) Finally, a Peloton bike is his latest personal acquisition, and he’s gearing up to compete against Scott Rechler, RXR’s founder and CEO, in online classes.
And that’s just what he does in his free time.
By day, it’s a different kind of competition, as he makes sure to dot all the i’s and cross all the t’s as the finance head of a multibillion dollar real estate empire.
Right now, RXR has what Maturo describes as, “big things in our pockets.” One of those big things is a new joint venture with a Canadian pension fund (Maturo wasn’t at liberty to name it quite yet), adding even more capital power to the real estate powerhouse that is RXR.
Commercial Observer: What can you tell us about this new joint venture?
Mike Maturo: We’ve been actively lending, but I think you’ll see us penetrate the market far more deeply in that respect soon. We have partnered with a Canadian pension fund and formed a joint venture, which will seek opportunities for structured finance investments in the New York metro region. It’s starting with $300 million of equity—with the ability to expand over time—and will invest in a cross section of real estate including office, residential, industrial and retail.
Where in the capital stack will you play?
The joint venture will generally make mezzanine debt and preferred equity investments. Most will involve complex capital structures where we can use our business and real estate skillsets to mitigate risk.
Why is now the right time to increase your lending activities?
The investment market still has this bid-ask gap so we see it as a good opportunity to participate in the lending market. There are good developers and sponsors out there who are smaller players but have a good history in their respective markets and have difficulty accessing both equity and debt capital. We can play into their situations.
We can also write large checks; our size goes from $50 [million] to $500 million. Our deal with [Extell Development Company’s] Gary Barnett [for One Manhattan Square in 2016] was $465 million, and so we don’t shy away from that [size of loan]. We have a big appetite not only in this venture that I’m referring to but from our broad base of investors to do co-investment in these types of transactions. So I think that’s another competitive advantage for us.
If the investment activity on the acquisition side starts to heat up you’ll see us actively playing here. That could also be in combination with banks and other players. It’s going to be active and diverse and on the lending side you’ll see us play across multiple products.
More so than previously?
When we were a public company [prior to 2007] we were very pigeonholed in one sector and that never made sense to us because we’re so deep in this region. We have over 1,500 tenants so think about how many companies we’re touching on a daily basis. We all live here, we raise our kids here, we participate in the community here. We’re really ingrained in these markets. We see a lot across multiple sectors so it makes sense for us to participate. We understand what tenants and customers want, so it’s easy for us to underwrite the market and the economics.
How would you describe your lending appetite?
We have a pretty wide view and we don’t restrict ourselves. Would we do hotels? Probably not. But if we found something we really liked—because we have underwritten hotels in the past—we wouldn’t shy away. But, I think you’ll see us lend more on residential, office, mixed-use and industrial properties.
And you’ll continue to target the New York metro area?
Yes, but we’ll be casting a wider net. We’re looking at a lot of opportunities in the boroughs. We have one deal in Westchester, [N.Y.] where we’re providing construction financing to a developer who is building a St. Regis-flagged gated super luxury condominium community. The project is very similar to our very successful Ritz Carlton Residences project on Long Island. We are lending both the senior loan and the mezzanine loan. The developer selected RXR because of our experience developing the Ritz Carlton project and determined RXR could be value-add to the development. We are also providing recapitalization financing in the form of preferred equity to a three-property portfolio located in Manhattan and Long Island City.
How busy a year was 2017 for you?
We had over $5 billion in new financings last year so we were very active on that side of the business. On the investment side we weren’t so busy in terms of actual transaction closings, but we bought Worldwide Plaza with SL Green [The duo purchased a 48.7 percent stake in the trophy asset with an agreed-upon property value of $1.73 billion], which is obviously a very big transaction. We underwrote probably $30 billion in transactions but in the market there’s a reasonable bid-ask gap that’s been there for the past 18 months or so. So while we were active looking at deals, we only transacted on buying One Worldwide Plaza.
We’ve been very active on the development and redevelopment side, including this building at 75 Rock. We continue to work on Pier 57, which is a redevelopment of the site for Google and in Brooklyn we have a big redevelopment in the Navy Yard. That will be a primary focus this year, in terms of getting the redevelopment up and running. We also have a residential portfolio that was very active last year. We finished one project in downtown Stamford, [Conn.], that we’ve started to lease, and we have major projects in [other parts of New York including] Westchester, Downtown New Rochelle, Downtown Yonkers and Glen Cove in Long Island. Plus we’re developing the second phase of our North Hills Ritz Carlton Residences project. The first phase sold out last year. So, we’ve been very active across the board.
How did the Worldwide Plaza acquisition come about last October? And why was it the right time for the deal?
It’s a long story and somewhat complex, but we actually had the contract on that building when it originally sold to NYRT [New York REIT] and through a whole confluence of events it didn’t go our way. But we had significant interest in the building for a long time. When NYRT got into its issues [its gradual winding down via a liquidation plan] I think their plan was more geared toward a liquidation than having an ongoing business. We were a natural player to step in and work through the acquisition with them because we had a very good understanding of the asset. We had actually looked to work with SL Green on a potentially broader purchase of assets in the NYRT portfolio beyond just Worldwide Plaza, and that’s how the relationship with SL Green with respect to the property came about.
What was the property’s biggest selling point?
It’s a great asset and one that would be very difficult to build again—the bones of the building are very strong. The West Side of Manhattan continues to flourish—it’s not part of Hudson Yards, but it’s coordinated into that West Side area that’s getting more popular and more populated on both the residential and office sides. We think as a long-term asset there’s potential there with some of the tenant base that may want to extend and renew, and there’s also potential with the retail. So there’s opportunity to create value, and honestly we’re buying at a good price per foot. We bought it in the upper $800s per square foot, and when you look at pricing in New York and the replacement value for a building of that nature, it feels like a solid deal. It was attractive in terms of what our investors are looking for: a good current yield with potential for upside in an iconic building. So, we checked a lot of boxes.
Was there a lot of competition for the $1.2 billion refinance of Worldwide Plaza?
We went out to a small crowd because in the [commercial mortgage-backed securities] world the pricing isn’t that different, everyone prices off the same model. So we went to our relationships—a handful of CMBS players we knew could execute quickly. Everyone had a strong relationship with Goldman Sachs, so it came together pretty fast, as opposed to 1330 Avenue of the Americas where we went out and had a distribution through a brokerage process. It wasn’t that complex a deal, the building is fully leased long-term and NYRT had some timing requirements that we needed to meet so I think we were done within 60 days—in today’s world that’s quick.
Why was CMBS the best execution?
At that particular time, the bid in the CMBS market was very strong and it’s a very large loan. So, in order to execute that size of loan, the CMBS market tends to be more favorable for that. That being said, we’ve done billion-dollar loans in the bank market, too. But it just seemed right. And remember we had three parties—RXR, SL Green and NYRT—everyone had to agree on CMBS as the best execution.
Are you eyeing any other key acquisitions?
We have our fingers in the mix of a bunch of things but we look for opportunity. Scott [Rechler] and my other partners are always out in the market speaking to people. I don’t want to name any specific buildings [laughs], but we keep a good chart of what’s going on out there and where there could be potential for trading.
Are sellers becoming more realistic in terms of the prices they’ll sell at?
It’s interesting. If you look at it, we’ve already had a five to 10 percent reduction in valuations in New York City. But what you saw last year was a lot of refinancings. On 237 Park [Avenue] we surveyed the market and once we put New York Presbyterian Hospital in there we did the [$850 million June 2017] refinancing because we didn’t really like what we saw in terms of the market for investment sales. But if you look through to the valuations that underlie the refinancings, you can see that valuations that were done for these refinancings reflect that decrease in value. If I had to guess, I’d say that sellers will move more toward those values than the buyers moving up to the higher values. But, we’ll see what happens.
You refinanced 1330 Avenue of the Americas earlier this year with a $285 million loan from DekaBank. What was Deka’s competitive edge?
We saw a very strong bid for that deal; it’s a very strong asset that places well on Sixth Avenue, and it’s the type of asset that—in today’s market—lenders are attracted to. They see upside in terms of the [net operating income], and it’s a solid building that always performs well. Deka came in a little ahead of the pack. It’s interesting, in deals like this there’s always someone who has a feel for the building. Deka is actually in the building, and I think that makes a difference because they see how the building is operating on a day-to-day basis. So, they were pretty aggressive on the deal.
Did the competition for that financing include many foreign capital sources?
Yes, it was really across the board. Even alternative, private equity lenders are bidding into assets of that nature. We had foreign banks, we had foreign lenders, and we had the big U.S. banks. I think—particularly in today’s market—it’s desirable for a lender to get an asset like that in their portfolio. It was an easy deal to get done from an attraction standpoint.
And the Starrett-Lehigh Building’s debt refinance will be coming up soon, right?
The loan is due in June, and we’re in the early stages of the process. We will be looking at both floating-rate and fixed-rate options. We’ll be exploring floating-rate CMBS as well as a bank deal and we’ll likely look for five to seven years of term. That will be a very large loan, probably $1 billion-plus.
Google is reportedly in talks to lease a substantial amount of space at Starrett-Lehigh. How are those talks going?
They’re going. It’s very exciting. If you look at what Google is doing, it makes sense. They’re building up their presence, and that building has a great personality for them.
It’s a pretty good time to be a borrower, right?
Yes, and I think one thing that’s interesting is the presence of the alternative lenders that are in the market right now. That continues to be an expansive group, and we have used them. We borrowed $5 billion last year, and that’s probably split $3 billion to $4 billion in refinancings and $500 [million] to $600 million in construction financings and transition financings. You’re seeing those transitional lenders be really active in those markets because they understand the real estate markets and mechanics of development properties a lot better than more traditional lenders. The market has gotten very competitive, and spreads have come in with those alternative lenders who historically looked to value add-type construction of redevelopment projects.
The construction side is a little more difficult. Big banks and alternative lenders and insurance companies are looking to make those type of investments but more with sponsors that have a track record of execution and that they have relationships with. We’re fortunate enough to be in that group and we have terrific access to ground-up construction financing.
Has your construction financing primarily come from traditional or nontraditional lenders?
We were very active on the construction borrowing side and used a combination of both traditional and alternative lenders for our New Rochelle, Yonkers and [Garvies Point Long Island] projects as well as the second phase of our Ritz Carlton Residences North Hills project [in Long Island]. I think alternative lenders are still credit-metric focused and maintain that discipline, but they understand the complexities and can focus more on the real estate side of the project.
Additionally, foreign capital is much more willing [to invest] than it previously was and finds lending more attractive from the standpoint of risk benefit metrics. The alternative lenders are benefiting from foreign capital looking to get into lending and investments.
In addition to your New York City presence, RXR is betting on the suburbs.
Our business is New York City-centric but regional in scope, so we look to the suburbs strategically. On the residential side there is an affordability issue in Manhattan, and the notion of trying to solve that in New York City is difficult—foolhardy, even—because there’s just not enough space and it’s not efficient enough to create housing that people can afford. So we think the solution is regional. The suburbs are going through a period of transition and the suburban market of the 1980s and 1990s is slowly becoming a relic in terms of office parks and malls. There’s a re-urbanization not only in New York but across the entire country, and the suburbs really need to wake up and understand that. Unless they change their complexion in terms of their real estate and in terms of office, retail and residential they will continue to lose out to the cities, which has been happening over the last 10 years.
So, you have an interesting combination of the cities—which can’t solve their issues with the housing they can produce—with the suburbs that now need to recreate the housing produced. It’s no longer white picket fences; more densification is needed in downtown developments.
So, we’ve combined those two. We’ve put a lot of effort into working with municipalities and helping them create revitalization programs. What’s interesting is if you go back to the 1960s and 1970s, these downtowns were bustling commercial centers. So the streetscapes and the architecture are already there; they just were abandoned and need to be refigured and revamped.
How’s your Long Island University Brooklyn campus project coming along?
We’re helping LIU with their future plans to redevelop their campus, and that will include some housing options. That will be market housing, but we’re also thinking through some plans to have creative-type shared houses in there. We’ve finished our development agreement and are now in our planning stages.
Are you on the hunt for construction financing yet?
Not yet, but we will be. It’s a pretty major project. I’ve been out whispering about it but—particularly where there is some complexity to it—you want to go through your predevelopment process and have your budgets done so you know what things will cost before you go out and talk construction financing.
So, is it just nonstop action at RXR?
We’re 24/7 here. I say that half-joking, but all weekend long we’re all connected—whether through email or texts—there’s constant collaboration and a flow of ideas. We’re a tight group of people. We worked hard to get to this point, but people come to us for solutions, and they see how we can take a property and recreate it. It’s a good place to be.
Published: March 7, 2018
Filed Under: Company
The RXR platform manages 69 commercial real estate properties and investments with an aggregate gross asset value of approximately $18.1 billion, comprising approximately 24.6 million square feet of commercial properties, inclusive of a multi-family residential portfolio of approximately 2,600 units under operation or development, and control of development rights for an additional approximately 3,600 multi-family and for sale units in the New York Metropolitan area. Gross asset value compiled by RXR Realty in accordance with company fair value measurement policy and is comprised of capital invested by RXR and its partners, as well as leverage.