Ralph Rosenberg was hired by KKR in 2011 to spearhead its move into global real estate. He talks to Stephanie Schwartz-Driver
KKR, the US-based private equity giant, set its sights on the global real estate markets in 2011. The company, formerly known as Kohlberg Kravis Roberts, identified that the correction in real estate would create opportunities for the firm, especially since it had cash on its balance sheet to deploy.
“There were a handful of high-level observations,” says Ralph Rosenberg, who joined the firm in 2011 to build its real estate operation. “One is that existing asset managers had made a lot of missteps during the crisis, and this presented a natural opportunity from the market-share perspective.
“Another is that many traditional providers of capital had to shrink their balance sheets or were put out of business. There was a role to be flexible with capital to fill that gap. Finally, the crisis in real estate was a financial crisis, not a development crisis. Because there is a better supply and demand balance, real estate markets should come back more quickly.”
As part of the KKR stable, real estate is seen as a business strategically similar to the oil and gas business. “It’s a chance to create inflation-adjusted assets,” Rosenberg says.
Today the firm is looking to take advantage of its 19 global offices, established connections and its brand to build a real estate business from scratch, with the added benefit of having no legacy problems. The firm has capital of its own to invest (KKR had $83.5bn under management at the end of June 2013) and its sister company, KKR Financial, also has appetite for real estate exposure. KKR has been investing capital from its balance sheet to create opportunities.
The firm has also created a real estate fund, which is said to have commitments of $500m already, according to second-quarter financial statements; fundraising is ongoing. The firm sees opportunities in the US and in Europe, where deleveraging has been more gradual thus far, at both the entity level and property level. In Europe, the focus is on the UK, Spain and France, but less so on Germany and Italy.
“I like to gravitate toward markets where something is out of favour that was once in favour,” says Rosenberg.
Although the fund will not allocate more than 25% to Europe, KKR will not necessarily be limited to this level. “We are not capital constrained in Europe because we can use our own balance sheet,” Rosenberg says.
Eventually, KKR will build a dedicated European strategy, he adds. The firm has already hired Martin Moore, former chairman of M&G Real Estate (formerly Prupim). The European business is being headed by Guillaume Cassou.
In its real estate business, KKR is not acting like the private equity giant it is. The average deal size is only $50-60m. In part, this is down to the nature of real estate where most assets in the private market are in fragmented ownership, but it also brings a strategic benefit. “From a cyclical perspective, you want to make sure your exposures are sized so you have a better chance of liquidity, a safer exit strategy,” Rosenberg says.
So far, the firm has completed 11 transactions, spending around $700m of its own capital in the retail, senior housing, hospitality, office and industrial sectors, as well as platform investments in companies that operate in real estate.
It’s a quirky assortment of assets that do have certain attributes in common. “Each asset has a nuanced story,” he says. “The firm can work across business units to create a real opinion of what the market will look like over time. We have to have a firm view and an advantage in either sourcing, information or execution.”
One example is the Del Monte Center in Pittsburgh, a 270,000sq ft office building whose main tenant is Del Monte, the processed food manufacturer and marketer that is also part of the KKR stable. “It’s a 98% occupied office building, and KKR owns the company that occupies 62% of that building,” Rosenberg says. “We had an information advantage about the credit health of the major tenant that nobody else looking at the building could have.
The portfolio company also controlled the right to buy. These factors together gave us a significant advantage in our ability to create value.”
Pittsburgh is largely off the radar of multinational investors, but that doesn’t put Rosenberg off. “The pricing levels in gateway cities are very expensive, and international capital there is playing a very defensive game. When you have an appetite to take more risk, the best risk-reward scenario is outside the gateway markets,” he says. “Value-add or opportunistic deals are fairly priced and more compelling.”
Another off-the-beaten track deal is the multifamily development project in Williston, North Dakota. There, the firm is betting on the continued success of the oil business in the state and creating housing for the thousands of workers streaming to the area.
The Bakken formation, which underlies the town, is predicted to become the leading oil source in the US. “It’s a binary bet that we are right about the oil business,” admits Rosenberg. Here the firm was connecting the dots between its energy team and the real estate team.
The Sunrise Assisted Living deal more directly leveraged the firm’s brand. Working with the healthcare team, the real estate team participated in a deal to take the company private, acquiring an ownership interest in leasehold assets in the assisted living space as well as a real estate management company and a development company.
Its European acquisitions are similar in style. A recent deal in the UK involved the purchase of three retail parks in Glasgow, Sunderland, and Oxford. Although not in prestige locations, they are 90% leased, with an average of 11 years left on the leases.
Again, internal synergies brought advantages. “We were able to move very quickly, and because we own both Pets at Home and Alliance Boots, we were able to tap into their real estate teams to get insight,” Rosenberg says.