THE CAMPUS AT LONGMONT
Investment Highlights and Thesis:
$142 million acquisition in partnership with Invesco Real Estate for the repositioning of a 64%-occupied (at the time of acquisition), approximately 2 million square foot, 41-building portfolio of office and flex/industrial buildings located in Longmont Colorado. Investment entailed a combined equity investment of approximately $38 million.
Initial business plan called for a focused three to five year lease-up to a stabilized occupancy of approximately 90%, with two identified near-term sales comprising three properties which have since closed: (1) a $60.5mm (or $134/sf) sale of a 450,090 square foot building at the time occupied by Maxtor and net leased to Seagate and (2) a $6.8mm (or $94.25/sf) sale of two adjacent buildings comprising 72,000 square feet occupied by Array BioPharma. These last two properties were sold to BioMed as part of a sale leaseback transaction with Array. The Maxtor building was sold for approximately $5.0mm in excess of the underwritten value, and Array represented the successful culmination of a transaction largely negotiated during due diligence. Additionally the partnership was recently able to monetize a 62,200 square foot vacant building to one of its existing tenants at $80 per square foot, thereby enhancing net portfolio occupancy, reducing outstanding indebtedness and avoiding the potential for considerable expenditure of partnership monies in support of anticipated leasing within this asset.
Management and Execution:
Circle is responsible for execution of the business plan as well as the day-to-day in-house management of the investment.
Challenges:
The market has moved away from a historically predominant manufacturing use, and it is now dominated by primarily office and research and development oriented tenants. However, the properties acquired can easily accommodate this new use.
Tenant improvement costs continue to escalate and, along with leasing costs, have exceeded the initial underwriting.
Despite overall leasing and net absorption not meeting the initial underwriting, the portfolio continues to outperform the broader market with some continued examples of organic growth within the existing tenant base at what we consider to be attractive rental economics.
Recent Successes & Near-Term Opportunities:
Successful takeout of the original $54.8mm Morgan Stanley financing with a new $78.6mm on book loan with GE Capital in October 2007. This loan was structured with an initial fixed-rate funding of $63.5mm at a rate of 6.14%, with additional floating rate monies totaling $15.1mm available to support future leasing and identified capital expenditure. This new financing resulted in a meaningfully lowered cost of capital and substantially improved flexibility to execute on the business plan going forward, including the prospect for additional one-off sales transactions if conditions warrant. Additionally the monies available in support of new leasing provide the partnership with ample funds to support ongoing leasing efforts. Recently the partnership was able to convert variable rate borrowings drawn since closing from a floor rate of 6.88% into fixed rate borrowings at a 3.15% interest rate. Further, the partnership has also procured the requisite flexibility to address, and mitigate detrimental leverage impacts resulting from, the sale of either of two adjacent (and at the time vacant) flex/industrial properties totaling 304,436 sf which were excluded from collateral in support of this loan.
Successful execution of a 152,218 sf, 126 month lease to General Electric Co. to accommodate a new headquarters location for the Control Solutions division of GE Energy. This lease fully occupies one of the aforementioned vacant flex/industrial properties which were excluded from collateral in support of the GE financing.
Due to this recent lease and due to the fact that this particular asset is unencumbered, the partnership is contemplating a variety of value enhancing options including the potential for a near term investment sale of this property or contribution of this asset into the collateral pool supporting our loan in exchange for additional term and/or re-pricing of the loan.