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2004: A Record Year for Falcon Real Estate

By every quantitative measure, 2004 was the most active year that Falcon Real Estate has had since it was founded thirteen years ago. Each of the following categories established a record, exceeding any prior year in the company's history:

  1. 1. We advised on the purchase of more properties;
  2. 2. We sold more properties;
  3. 3. We obtained a greater dollar volume of mortgages;
  4. 4. We leased more space; and
  5. 5. We added more staff.

I. PURCHASES

As to purchases, we closed on the acquisition of ten properties during the year and those properties contained over 1.5 million square feet of space and had a total dollar value of over $320 million. Properties were purchased in seven different states in every section of the United States. The following is a list of the ten properties purchased by Falcon in 2004:

Property Square Feet Purchase Price
1. Time-Life Building, Alexandria, VA 156,123 $ 39,750,000
2. Delta Call Center, Miramar, FL 49,650 10,950,000
3. FCB Building, Irvine, CA 98,925 29,500,000
4. Aventi Apartments, Aventura, FL 218,835 40,100,000
5. Digeo Building, Kirkland, WA 50,954 14,500,000
6. AT&T Headquarters, Morristown, NJ 387,000 14,500,000
7. Hewlett-Packard Center, Cincinnati, OH 126,321 9,600,000
8. 1300 Parkwood, Atlanta, GA 210,823 39,300,000
9. McGraw Hill, Salinas, CA 98,127 18,250,000
10. Pershing Park Plaza, Atlanta, GA 159,103 41,300,000
Total 1,555,861 $ 320,250,000

These properties were purchased for a number of different clients whose investment objectives ranged from fairly conservative, in single-tenant net-leased properties such as McGraw Hill, to relatively more aggressive in properties such as Time-Life that have significant leasing risk.

II. SALES

Falcon has sold a number of buildings over the years, but in 2004 we set a record for our company in terms of the number of properties sold since we closed on the sale of six properties. The reasons for selling these properties varied from one situation to the other, but they were all properties that had been held for a considerable period of time and had either reached what we considered to be a maximum valuation level or were situations where alternative real estate investments appeared to be more promising. Interestingly, these properties represented each of the five real estate areas in which Falcon is active as an asset manager - shopping centers, offices, industrials, apartments and land.

Property Square Feet Sales Price
1. Woodinville Shop. Ctr., Woodinville, WA 120,556 $ 18,102,000
2. Corporate West Office, Lisle, IL 47,803 3,960,000
3. Sikorsky Industrial, Shelton, CT 125,794 8,375,000
4. Bristol Farms Apts., Kirkland, WA 182,048 24,000,000
5. Woodland Valley Land, Agoura, CA N.A. 3,100,000
6. Bentley Estates Land, Charlotte, NC N.A. 1,300,000
Total 476,210 $ 58,837,000

Bristol Farms was the only property that was originally purchased on Falcon's recommendation. Falcon took over the management of the other five properties from previous management.

III. FINANCINGS

With a record number of new purchases, it would logically follow that there would also be a record amount of new mortgage financings arranged by Falcon during the year. Most of the investors that Falcon represents do finance their purchases and in 2004 only two of our ten purchases were all-cash. However, with the aging of our existing portfolio there were also a considerable number of refinancings that had to be arranged. As a result, Falcon obtained over $350 million of new mortgages during 2004 and, with the low level of interest rates, the great majority of these were fixed rate mortgages at what we believe to be relatively attractive interest rates. The following is a breakdown of the new mortgage activity:

Mortgage Financings on New Purchases $ 185,000,000
Mortgage Refinancings 165,000,000
Total    $ 350,000,000

IV. LEASING

2004 was also a very active year in terms of leasing. Our asset management staff completed negotiations for 48 leases during the year covering just under 500,000 square feet of space. These leases will produce over $177 million of rental income during the term of the leases. It should be noted that it is frequently necessary to make a number of leasing proposals and to prepare leases for several tenants before a vacant space is finally leased. As a result, there is a great deal of time and effort that must be expended to finalize 48 leases.

Over 70% of the square footage that was leased in 2004 was in the office sector, with the remaining 30% being in retail. However, because of the fact that retail leases generally cover a longer period of time, and in high quality retail properties the rent per square foot is often higher, the office properties produced 55% of the projected rental income and the retail properties produced 45%. The following is a breakdown of the leasing activity between renewing tenants and new tenants:

  Square feet Percent Total Dollar Value (millions) Percent
Renewals 311,479 62.8% $121.8 68.8%
New Tenants 184,306 37.2 55.4 31.2
Total    490,490   $177.2  

When analyzing a property for possible purchase, we generally assume that there is a 60% to 70% chance that existing tenants will renew their leases and remain in a building. The above figures would tend to support that assumption. In fact, if one major office building were excluded from the above figures, renewing tenants would constitute close to 90% of the leases written during the year. Because of this tendency for tenants to renew their leases rather than to move, we believe that the leasing risk in multi-tenant office buildings is frequently overstated.

V. NEW EMPLOYEES

With the continued growth in Falcon's business, it has been necessary to expand our staff to be certain that we continue to provide the best possible service to our clients. In this connection, we have added two new asset managers and a new accountant to our staff during the past year. We have also added a new director of marketing to improve our coverage of the European markets.

In the asset management field, Carl Omark joined Falcon after 17 years as an asset manager for Devon Properties in New York. Carl is now located in our New York office and has responsibility for a portfolio of properties in the north-eastern and south-eastern sections of the country. The second asset manager to join Falcon was Paul Zurlo who assumed a position in our Chicago office. Paul came to Falcon from HDG Mansur Company in Indianapolis where he was an asset manager for a global real estate fund managed by that company. Paul will handle a portfolio of properties in the midwestern and southern states.

In addition, to keep up with the accounting and audit work resulting from the increased portfolio now managed by Falcon, a senior accountant was added to our staff in the Dallas office. Dan Moudy, who has had extensive experience in the accounting field with such firms as Peat, Marwick, Mitchell & Co. and Price Waterhouse, joined Falcon to have senior audit responsibility for the company. This addition increases Falcon's accounting staff in Dallas to five professionals

Finally, Falcon was pleased to have Georg Peters join Falcon in 2004 as Director of Marketing for Europe. Immediately prior to joining Falcon, Mr. Peters was a Vice President and Manager of the Financial Institutions Group at Norddeutsche Landesbank Girozentrale New York Branch, where he had extensive exposure to real estate opportunity funds. Mr. Peters will concentrate on expanding Falcon’s business in Germany and other countries of the European community.

OUTLOOK:

As we enter 2005 we remain optimistic about the U.S. real estate market. With an improving economy, rising but still moderate interest rates, and improving occupancy levels and rental rates in the real estate market, 2005 should be another good year for investors in this market.

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January 2005