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The Dealmakers - Terence O'Hara

J.E. Robert REIT Flirting With A Public Offering

By Terence O'Hara
Monday, June 21, 2004; Page E01

Joseph E. Robert Jr., a well-known Washington philanthropist, has made institutional investors wealthy through his privately held real estate investment funds.

Now he is taking a step toward making one of those funds into a publicly traded real estate investment trust.


Joseph E. Robert Jr.'s real estate portfolio extends worldwide.

Robert's company, McLean-based J.E. Robert Cos., plans to make JER Investors Trust Inc. its first publicly traded real-estate-related investment fund.

Since 1981, Robert has built one of the most successful private real estate investment organizations in the country. After the savings-and-loans crisis, he liquidated multibillion-dollar pools of real estate assets for the government throughout the 1980s. He combines a knack for bargain-hunting with an ability to raise huge amounts of money from some of the biggest names on Wall Street. The result is a massive portfolio of real estate investments in the United States, Mexico and Europe.

Since he founded his company, Robert has invested in or managed more than 30,000 real estate assets with a total book value of more than of $40 billion, according to the company's Web site.

All of that business has been privately held. With JER Investors, that is changing.

On May 27, JER Investors netted about $160 million by selling 11.5 million shares of common stock to a group of institutional and individual investors assembled by Arlington investment bank Friedman, Billings, Ramsey Group Inc. FBR was paid more than $10 million, including its placement fee and the discount it received on some of the shares. The offering price was $15 per share.

According to a prospectus outlining the deal, JER agreed to use its best efforts to register the company's shares for resale with the Securities and Exchange Commission within nine months and list them on a public stock exchange.

While J.E. Robert Cos. manages a number of other funds for institutional investors, this will be the first geared toward an actual initial stock offering. Company officials are guarded on their plans to take JER Investors public, but it's hard to imagine a better time to raise money for a real estate investment trust, which JER Investors will be. Investment bankers point out that investors are hungry for the kind of yields and dividends that REITs, particularly those that invest in commercial or residential mortgages, are bringing. While only selling 11.5 million shares, JER has 100 million shares authorized by its treasury, according to its prospectus. If the public equity markets react well to the deal, raising money for more investments in the stock market would be cheap and relatively easy.

As a real estate investment trust, JER Investors will not pay federal income tax but must pass most of its profits on to shareholders.

Joe Robert did not return a phone call. But JER's chief financial officer, Kari Doescher, said the company's first priority is to invest its initial proceeds and build its portfolio of investments.

"We're not in a position to speculate as to whether or when we'll go public at this point," Doescher said. "Raising money through a private platform was what we wanted to do in the beginning."

According to the prospectus, if JER Investors does not go public in the next nine months, J.E. Robert Cos.'s incentive fee for managing the company will be suspended.

It's not the first time Joe Robert has considered taking one of his managed investment funds public. JER Asia Corp., a real estate investment trust targeting Asia, dallied with an IPO in 1998 but never went through with it.

JER Investors Trust seeks to use J.E. Robert Cos.'s longstanding expertise in identifying hidden value in troubled or overlooked real estate properties. The company, however, won't invest directly in land and buildings, but in the loans used to finance those properties. It can invest in about any type of real estate venture it wants, but JER's prospectus indicates it will focus largely on commercial mortgage-backed securities (CMBS).

These securities are pieces of one or more mortgage loans on a commercial property, such as an office building.

JER will focus on the non-investment-grade CMBS -- the junk bonds of the commercial mortgage market. While they are a relatively small part of the market, these mortgage-backed securities typically carry a far-higher yield. For an investor in this market, the trick is to buy a large and diverse portfolio, at the right price, so the yield more than compensates for the higher risk.

JER Investors Trust will be managed by an affiliate of J.E. Robert Cos., but its president, according to the prospectus, will be longtime J.E. Robert executive Gene McQuown, who will serve as chief investment officer. Playing a large role will be newcomer Kenneth Krejca, who until last month was a senior executive at Banc One's high-yield CMBS group in Chicago. Krejca will be vice president. Doescher, a certified public accountant, first worked at J.E. Robert from 1992 to 1994, helping manage a Robert joint venture with Goldman Sachs. Before rejoining J.E. Robert in 2002, she was a vice president at Criimi Mae Inc., a Rockville commercial mortgage investment company.

Rounding out the investment committee are the usual J.E. Robert people: Joe Robert and his senior executive team, President Deborah L. Harmon and managing directors Keith W. Belcher and Tae-Sik Yoon.

Senior FBR real estate banker F. Fuller O'Connor Jr. put the deal together with FBR's Eric Gaaserud. JER's lawyers in the deal are Skadden, Arps, Slate, Meagher & Flom LLP in New York and Piper Rudnick LLP in Baltimore.

As the JER Investors Trust deal demonstrates, Washington has become a growing center for real estate finance, merchant banking, venture capital, business development companies and investment banking. The Dealmakers column, which commences today and will run in Washington Business every other week, will deal with these issues. It will examine venture capital deals, private debt and equity investments, stock-and-bond offerings, and recapitalizations, going beyond the prospectuses to explore the people, ideas and trends behind the deal.

Terence O'Hara's e-mail address is oharat@washpost.com.


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