Tough times for Behringer Harvard

Behringer Harvard Holdings Inc., a fundraising powerhouse among nontraded real estate investment trusts over the past decade, has hit a rough patch.

The company has seen the valuation of its REITs and funds slide, and recently lost two key executives who successfully marketed Beh-ringer Harvard's REITs to independent broker-dealers.

In fact, a handful of broker-dealers, including American Portfolios Financial Services Inc. and Securities America Inc., have pulled the plug on their relationships with Behringer Harvard.

Last April, American Portfolios Financial Services stopped selling a recent offering, Behringer Harvard Multifamily REIT I, because of concerns related to how the REIT was paying for its dividend.

“We felt that the dividend, which was among the largest in the space, was returning too much [of clients'] principal,” said Lon Dolber, chief executive of American Portfolios Financial Services.

PAYING FOR DIVIDENDS

Securities American spokeswoman Janine Wertheim said that the company stopped selling Behringer Harvard products in 2010 “as a result of our ongoing due diligence.”

How nontraded REITs pay for their dividend is one of the chief concerns of regulators.

American Portfolios Financial Services has taken a more cautious stance regarding the sale of alternative investments, including private REITs, Mr. Dolber said.

Behringer Harvard has sold $5.5 billion in nontraded REITs since 2003.

Despite a challenging environment for real estate investing in general, Behringer Harvard last year saw strong inflows of cash, raising $700 million over the first nine months of 2011. Most of that came from Multifamily REIT I, which it stopped selling in the summer.

Behringer Harvard is raising money for one product, Behringer Harvard Opportunity REIT II Inc., at the same time that it has lost access to some of the representatives and financial advisers who have sold the firm's REITs in the past.

Meanwhile, other broker-dealers — including FSC Securities Corp., Royal Alliance Associates Inc. and SagePoint Financial Inc., which constitute the American International Group Inc.'s Advisor Group — stopped selling the Multifamily REIT last summer when its offering period ended, according to spokeswoman Linda Malamut.

She declined to comment further.

LACK OF CONFIDENCE?

“Broker-dealers don't have confidence in Behringer Harvard,” said Tony Chereso, president of FactRight LLC, a due-diligence firm.

“We've had a similar perspective and cautioned some of the broker-dealers we work [with] to look at the selling agreements” with Behringer Harvard, he said.

But M. Jason Mattox, executive vice president and chief operating officer of Behringer Harvard, said: “I don't have any particular evidence that suggests to me” that broker-dealers are losing confidence in the firm.

Behringer Harvard stopped selling certain offerings last year, and there was a lag before it kicked off sales on new ones, he said.

“The Multifamily REIT capital raise concluded in July,” Mr. Mattox said.

“We believe we have a good relationship with AIG [broker-dealers],” he said. “There's not a suggestion that the relationship with Behringer Harvard and AIG doesn't continue.”

A sore point for some reps and broker-dealers is the stark decline in the estimated valuations of the REITs.

Behringer Harvard Opportunity REIT I at the end of 2011 saw its estimated value decline 46% to $4.12 a share, from $7.66 a year earlier (InvestmentNews, Jan. 16). And its flagship Behringer Harvard REIT I — with $4.2 billion in real estate assets — also has fallen from its original offering price of $10 a share, with its valuation in December at $4.64.

One of Behringer Harvard's smaller funds has fallen completely off a cliff. At the end of last year, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010.

“OPPORTUNISTIC ASSETS’

In a letter to investors, the company said that “opportunistic assets,” which require the spending of capital to enhance and redevelop the properties, had been “especially impacted by the recent economic and market turmoil.”

Industry observers were quick to note that investing in such “opportunity” funds carries risk but also the potential to see returns of 15% to 20%, if all goes as intended. And they also stressed that estimated valuations on Behringer Harvard's REITs and funds don't show the fair market value of the properties in the various portfolios and come after the historic collapse of the commercial real estate market.

Such explanations, however, aren't calming the nerves of reps who sold Behringer Harvard REITs and funds, and their compliance officers at broker-dealers, observers said.

Michael Stubben, president of MTS Research Advisors, noted that the two REITs carrying a valuation in the $4 range, Behringer Harvard Opportunity REIT I and Behringer Harvard REIT I, had the lowest valuations and dividends of the major REIT sponsors.

He questions whether Beh-ringer Harvard will stay in the nontraded-REIT industry as a sponsor or become part of the industry consolidation that recently pushed Grubb & Ellis out when the executives leading its health care REIT left to strike out on their own.

EXECUTIVE DEPARTURES

But Mr. Mattox said that the firm has a strong commitment to the nontraded-REIT industry.

Regarding the recent difficulties of the opportunistic Short-Term Opportunity REIT I, he said: “There's no doubt this fund has challenges. But we believe there's greater nominal value in the assets than the [most recent] valuation represents.”

Adding to Behringer Harvard's challenges is the recent loss of two executives essential to maintaining the relationships with broker-dealers whose reps had raised billions for the REIT sponsor in the past decade. Phil Graham, former director of national accounts, left to join Cole Capital Advisors Inc. as national accounts manager, while Jeffrey Schwaber, who oversaw the sales force, left to join Griffin Capital Securities Inc.

Mr. Mattox said that the firm has added industry veterans to the team.

“Behringer Harvard is not shrinking from the market,” he said. “We've had individual departures, but at the same time, we're adding significant experience.”

For example, Mark Peterson joined Behringer Harvard this month as head of retail distribution, from rival CNL Financial Group.

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