As published in the June 1, 2013 Toledo Business Journal
Chris Campbell
Devonshire REIT
Area REIT issuing
$100M private placement
Toledo Business Journal recently interviewed Chris Campbell, president and CEO of northwest Ohio’s Devonshire REIT. He shared the following thoughts.
Toledo Business Journal (TBJ): While some real estate investment firms have left the area, Devonshire REIT has continued to acquire properties in the region and the Midwest. How many properties in your portfolio are located in northwest Ohio or southeast Michigan?
Chris Campbell: I believe Devonshire owns and operates 32 total properties throughout northwest Ohio and the Great Lakes region. As for the firms leaving the region, I wouldn’t say they have so much left the area as they are just not as active in the business today.
The United Stated went through a horrific economy in 2008-2009 and liquidity virtually disappeared – meaning that there just was not any readily available credit at the local level, which made it very difficult for local developers to find available capital to refinance properties that were non-performing or in need of capital improvements.
Therefore, a large majority of property owners were left with a limited number of options for accessing capital and that is probably the main reason why most of the developers are either not in business today or have left the area. The credit crunch of 2008, that still continues today, is really what has created a purchasing opportunity for Devonshire.
In addition, there was a lot of talent walking around three to four years ago that wasn’t available prior to the recession. Devonshire was able to capitalize on the local skill sets that were available here in northwest Ohio. Devonshire’s strong credit and access to capital has single-handedly allowed us to compete where other developers have been less fortunate.
TBJ: You have recently had some changes to your business, including a change to your name. Can you explain these changes?
Campbell: Devonshire started out as a private equity commercial real estate firm in 2009. After four years of acquiring more than $100 million of performing assets with sufficient cash flow, management made the decision that converting to a REIT, which is a Real Estate Investment Trust, would benefit our existing shareholder base and ultimately create more credibility with our future investors and lending relationships.
Our name has recently changed from Devonshire Fund, LLC to Devonshire REIT, Inc. The REIT election status makes the company more marketable based primarily on an extra layer of compliance and testing in order to maintain REIT status. The change has opened a lot of institutional investor doors and it is certainly a more understandable investment. The vast majority of investors have a risk tolerance that is more in alignment with a REIT vehicle compared to a private equity fund.
In order to stay in compliance as a REIT, you have to distribute to shareholders 90% of your cash flow from funds from operations – so it is very beneficial to the investor. The distribution is treated as a partial return of capital. When in compliance, the REIT corporation is tax exempt.
Reynolds Plaza Shopping Center
TBJ: Can you discuss the background and history of Devonshire REIT, the location of your headquarters, and the purpose for which the business was started?
Campbell: I was president and CEO of OBS Financial Services, Inc. from 2001 through 2008 here in Whitehouse, Ohio. The company was sold in 2007 to Texas Financial, which is the credit union for Texas Instruments. I followed through with the transition of new management and was part of the team for about a year.
At that time, I personally owned and operated a commercial real estate portfolio and my strengths for the last 25 years have been in capital markets; I have extensive experience as a licensed principal and securities representative with a proven track record with our capital sources.
I owned the building that OBS currently resides in and there was a vacancy that was the right fit for Devonshire’s business model. Since I already owned several commercial properties, Devonshire had a portfolio of income producing centers from day one. In addition, several key employees from OBS joined me at Devonshire and were able to utilize some of their well-established relationships to source initial investment capital.
TBJ: Can you describe the investment focus of the REIT and key requirements that you look for in a property acquisition?
Campbell: Our focus is primarily on retail income producing properties. Our property committee prefers grocery-anchored centers that drive a lot of foot traffic. Devonshire also prefers centers that are occupied by name brand credit tenants, which do not necessarily have to be grocery anchored. Shopping centers that feature credible tenants, national tenants that anchor the center, and long-term leases are the types of centers we are interested in.
TBJ: Can you explain the Devonshire Fund LLC and the Devonshire Multi-Family LLC, and the different type of properties on which they focus?
Campbell: The Devonshire Multi-Family LLC focuses on apartment complexes. There are currently four fairly large complexes in our portfolio. Both the Devonshire Multi-Family LLC and the Devonshire Fund LLC will be “rolled-up” into the REIT structure.
TBJ: Can you discuss the management team involved with the REIT and share some of the background and experience of the members?
Campbell: The strongest attribute of Devonshire is probably that we’ve been able to employ some of the most talented commercial real estate individuals in northwest Ohio. Some of these employees include:
- Robert Gersten, who has 40-plus years of experience, was a principal with RL West Properties. He’s been instrumental in chairing our property assessment committee; not to mention he’s opened a lot of opportunities for the REIT.
- Both Jim Saffran, our vice president of asset management, and Gary Yunker, our vice president of real estate operations, were previously with Bostleman Corporation. They have over 80 years of combined real estate operations and property management experience. Their expertise in operations, financing, renovations, and new construction are several of the skill sets they bring to Devonshire.
- Eric Hutchins, our vice president of leasing, and Michael Denman, our executive vice president of real estate operations, both came to us from Timberstone Group Inc. Hutchins and Denman add extensive leasing and acquisition expertise to Devonshire.
We’ve been very fortunate in assembling a team with this much expertise right here in northwest Ohio.
Deveaux Village Shopping Center
TBJ: Can you identify properties in our region owned by the REIT?
Campbell: Devonshire owns and operates multiple high profile centers in our region such as Perrysburg Market Place, Deveaux Village Center, and Reynolds Plaza Shopping Center. However, many of our properties are also scattered throughout northwest Ohio and the Great Lakes region.
Devonshire REIT owns its office building, A.W. Professional Building, located in Whitehouse, along with many single and multi-tenant properties in northwest Ohio including:
- Paulding Place – Paulding
- CVS Pharmacy – Sandusky
- Family Dollar – Tiffin
- Heatherdowns Village – Toledo
- Reynolds-Hill Strip Center – Toledo
- Rocket Center – Toledo
- Brightside Academy – Toledo
- B.G. Plaza – Bowling Green
- 741 Commerce Drive – Perrysburg
- Falcon Plaza – Bowling Green
TBJ: Can you discuss the key factors involved in the original decision to acquire the Deveaux Village Shopping Center and Reynolds Plaza Shopping Center?
Campbell: Both of these locations were very strong performing properties – generating substantial cash flow and having a solid tenant mix. Both properties were also encumbered by numerous liens and were either in foreclosure or about to be foreclosed on by the first mortgage holder.
The key elements behind the transactions were the negotiations with the banks and the borrowers that had first mortgages on the properties. You have to focus on providing solutions for both the note holder and the owner of the property in order to secure clear title – typically writing a check to the first mortgage holder and guaranteeing leniency on the borrower are critical in order to finalize the transaction.
The end result is the first mortgage holder is able to liquidate a non-performing asset on their books and the borrowers are typically released from any personal liabilities or personal guarantees.
Devonshire has been successful by staying away from the vulture fund mentality; we’re not going to local banks and trying to buy a property at $0.20 on the dollar. Our success is wrapped around a strategy that provides a solution for all parties involved in the transaction. Typically, the best approach is to sit down with the bank and the borrower and work out an amicable solution to avoid foreclosure.
Deveaux Village is 72,000 square feet and sits on approximately 7.5 acres surrounded by some of Toledo’s busiest thoroughfares in Sylvania Avenue, Douglas Road, Secor Road, and Monroe Street. It is located less than half a mile from I-475. In 2006, over $2 million was invested in a complete renovation of the property.
Reynolds Plaza Shopping Center is a neighborhood center with over 126,000 leasable square feet. The center is anchored by Jo-Ann Fabrics and Savers Thrift Store. Its sub-anchors include Family Dollar, O’Reilly Auto Parts, and Harbor Freight. There are also many national brands that are located near the center such as Toys-R-Us, Rite Aid pharmacy, and Bob Evans restaurant. This center is located about 1.5 miles east of I-475 and just north of the Ohio Turnpike.
TBJ: Can you share a list of some of the major tenants who occupy properties in the portfolio?
Campbell: Our portfolio is anchored with a number of name brand tenants, some of our well-known tenants include: Kroger, Dollar Tree, Family Dollar, Auto Zone, NAPA Auto Parts, O’Reilly’s Auto Parts, Rent-A-Center, CVS Pharmacy, and Panera Bread.
TBJ: Can you discuss the financing structure of properties in the portfolio as it relates to equity funds from investors and borrowed funds from lenders?
Campbell: We finished 2012 with a 54% loan-to-value (LTV), ratio meaning we borrowed 54% of the fair market value of the property and used investor’s capital for the down payments on the balance of the asset. Right now Devonshire is probably running at about 60% LTV and we will eventually be in the 50% LTV ratio by the year-end.
Our typical finance structure will lock in non-recouse 10-year fixed rates based on a 30-year amortization loan. Currently, 10-year treasuries are trading at about 180 basis points, so we’re securing financing in the high 3% to low 4% range, which has been a tremendous opportunity.
Initially, early into our inception, when we were still Devonshire Fund, our focus was on distressed properties and we eventually moved into distressed borrowers. Now our focus has really been on taking advantage of the cap rates we’re buying these properties at, which is significantly above the cost of our capital. The typical spread has been between 400-600 basis points, which is really unprecedented and generates a tremendous amount of cash flow for the portfolio. It is not uncommon for us to see 15-25% cash-on-cash returns on these properties by locking in the rates under the current interest rate environment.
TBJ: The timing of Devonshire’s first investment offering in 2009 was instrumental in its initial success. Will there be another opportunity for investors?
Campbell: Devonshire REIT has a $100 million offering that became effective June 1. There’s probably a bigger opportunity for the national market; there is about $800 billion of loans that expire over the next three years. These properties are trading substantially below their loan balances and will eventually move into a loan workout scenario.
We believe this is a tremendous opportunity to purchase additional product – especially in the secondary and tertiary markets, which is really our niche. The major national REITs dominate the top 70 markets and really don’t compete that often in our space. In addition, the secondary and tertiary market is tough for the local property owners because there is very limited credit for the smaller developers.
Devonshire typically sees competition up to about the $5 million mark, once above that threshold the local developers are just not as competitive and the larger REITs are not present in our footprint. Therefore, with our business model, we will see a big opportunity with this company to continue to capitalize and focus on the secondary and tertiary markets throughout the Great Lakes region.
TBJ: What has been the most rewarding aspect of Devonshire’s local presence in northwest Ohio?
Campbell: I was born and raised here. I have lived in northwest Ohio for 48 years. At my previous company (OBS Financial Services), all of the professional services were contracted outside of the local area; even our attorneys were out of Columbus. One of the best things about Devonshire is that we have employed 18 full-time equivalents and these are quality jobs that we have brought to the region.
Devonshire utilizes several law firms in the Toledo area. We use regional title companies, banks, brokers, etc. and most of the capital we raise goes back into northwest Ohio – either purchasing properties or for the professional services that go along with purchasing these assets. It is all done here locally.
I believe with the new offering and the growth expectations, there are not a lot of companies like Devonshire in the Great Lakes region. Our focus is to really build a world-class organization right here in northwest Ohio.