Scott Rechler’s RXR Realty goes on buying binge, aided by luck and aggression

The names of those who got crushed when the real estate market crashed have been splashed in the headlines for several years: Harry Macklowe, Kent Swig and Lev Leviev, to name a few.

But it’s only in recent months that it’s become fully possible to evaluate who’s benefited the most from the fallout and recovery. Somewhere on the top of that list: Scott Rechler.

“Everything in our business is luck and timing,” said Richard Baxter, a top investment sales broker at Jones Lang LaSalle. “And he’s had great luck and incredible timing.”

In January 2007, Rechler closed on a deal to sell Reckson Associates, the $6 billion real estate investment trust he ran, to SL Green Realty. As part of the deal, Rechler partnered with two pension funds to buy back about 30 percent of the portfolio. And the very next day, he and his team were working at a newly formed private company called RXR Realty.

Still, the firm largely stayed out of the trophy office market in Manhattan. Instead, it watched from afar, cultivating relationships, raising money and biding time until the market imploded.

Then — when the time was right — the company pounced.

In recent months, RXR has been on an acquisition tear that ranks it as among the most aggressive buyers of trophy office towers in the city (see accompanying chart).

Last July, the company acquired 450 Lexington Avenue from Istithmar World Capital — months after buying into the building’s capital stack and trying to make itself indispensible by helping Istithmar through arbitration with a tenant and with other matters.

In January, it took control over 75 Rockefeller Plaza through a 99-year triple net lease. And in March, it announced plans to buy 237 Park Avenue for about $800 million.

Those deals follow investments of more than $3 billion in Manhattan inked between 2010 and 2011, according to Real Capital Analytics.

The Park Avenue purchase marked a watershed of sorts for RXR, bringing the value of its assets to over $6 billion for the first time — about the same level Reckson was at in 2007 when Rechler cashed out. And replicating that success as a private company has been no easy feat.

“When we were public, I could basically pick up the phone and call an investment bank and sell $200 million in bonds in literally 10 minutes,” said Michael Maturo, RXR’s president, chief financial officer and treasurer, who also served as Reckson’s CFO and president. “You can’t do that when you are private. It’s much more time-consuming. Scott and I are pretty much fundraising every day of our lives.”

That fundraising has thus far been successful, and Rechler and his team have no plans to stop buying anytime soon.

“I imagine we will get bigger,” Rechler told The Real Deal during an interview in his Uniondale, Long Island, headquarters. “We have a lot of investment opportunities that we are pursuing right now. We have capital that we have been raising to invest.… We think this is the time to be active. We believe we are still in the early stages of this market.”

But buying buildings in the current New York market has not been without difficulties. With multiple buyers going after properties, the competition is fierce.

Still, RXR has often found itself with an edge, according to industry insiders.

At 75 Rockefeller, RXR was up against other major investors — at least one of whom bid more, one source said. But RXR still won, in part because it committed to a concrete redevelopment plan, said Arthur Mirante, tri-state president of Avison Young, who helped represent the building owner, British department store tycoon Mohamed Al Fayed.

“It wasn’t just about who was going to pay the most money [for the 99-year deal], it was more about, who did we have the greatest confidence would elevate the building?” Mirante said. “Who did we have the greatest sense of confidence could do the work, and could then lease the building? I can tell you my client was very impressed.”

JLL’s Baxter, who worked on the 237 Park deal, attributed RXR’s recent coups to an ability to move quickly. Rechler and his team have a “keen understanding of capital stacks and the ability to fund a substantial non-refundable deposit within hours of being selected as the winning bidder,” he said.

“New York City is the most competitive market in the world, and as a buyer, you’re usually one of at least half a dozen who are at the same price level vying to acquire whatever building you are working on,” Baxter said. “You’ve got to act very quickly and decisively.”

But RXR’s purchases also involved months of behind-the-scenes planning. And they are part of a deliberate strategy, which traces back, ironically enough, to the frustration Rechler encountered in the heady days of 2006, when Reckson found itself repeatedly outbid for trophy office towers.

The set-up

Rechler, 45, grew up in Port Washington and Roslyn in a prominent Long Island real estate family. His grandfather formed Reckson Associates in 1968 with his sons Donald and Roger (Scott’s father) to build Long Island office buildings. Rechler inherited the family gene for wheeling and dealing.

At Clark University in Worcester, Mass., he was elected student body president. His treasurer, Jason Barnett, recalled that the student activities’ budget was facing a shortfall, threatening an array of programs. Rechler suggested that the student council “float a bond.”

In a foreshadowing of the hustle that would come to distinguish him in New York real estate, Rechler made a presentation to top university officials that culminated with the school agreeing to advance the funds to close the budget gap.

“Even back in school he was into macroeconomics,” Barnett said. “He was getting it done.”

After Clark, Rechler went to New York University’s Schack Institute of Real Estate, and then went into the family business.

It was the early 1990s and the real estate industry was just coming off a bruising downturn. Reckson, which emerged relatively intact, sensed opportunity: If it could raise enough capital to buy up some of the distressed properties from companies in a 50-mile radius of the city, it could spread its costs out and vastly reduce operating expenses per building.

The family, pushed along by Rechler and others, began to explore taking the company public — a plan that would raise a huge war chest and grant them a number of tax advantages. It was around this time that Rechler approached an international law firm called Brown & Wood, which specialized in REITs. Soon he realized he already knew one of the associates — Jason Barnett, his treasurer at Clark.

Within months, Barnett jumped ship and joined Rechler. (The two still work side-by-side at RXR.)

In 1995, the company went public as Reckson Associates Realty Corp. with a portfolio valued at roughly $300 million, Rechler said.

Soon Reckson was snapping up properties in Long Island, Westchester, Connecticut and New Jersey. And in 1997, Rechler, the key architect of the expansion, was named Reckson’s president.

The buys included an $83 million Westchester portfolio; a six-building, $77 million complex in Stamford, Conn.; and five New Jersey office buildings for $56 million.

The plan was simple: Acquire entire portfolios and their management teams, and then provide a high level of service to tenants.

And as a public company, Reckson now had easy access to credit and could always issue more equity or acquire new portfolios by granting equity stakes to the old owners.

From the beginning, however, Rechler and his team had their eyes on the prize: New York City.

That city opportunity arrived in 1998 in a big way, with a $734 million bid to purchase Tower Realty Trust Incorporated, a REIT. The deal was far larger than any single transaction Reckson had completed up to that point.

The portfolio — 65 percent of which was in New York City and about 35 percent of which was in Florida and Arizona — included 100 Wall Street, 819 Seventh Avenue and 120 West 45th Street, along with four older scattered buildings on Broad Street and Madison Avenue that Rechler flipped to SL Green.

The Tower Realty deal took months, and was complicated by a number of factors — including the loss of a major equity partner, the Russian debt crisis and a major renegotiation, replete with screaming, threats and New York City–style bravado.

Yet it marked a turning point for the suburban-based REIT. After it closed in 1999, Rechler assumed the title of co-CEO, which he shared with his uncle, Donald.

Within months of closing on its purchase of Tower, the company bought 919 Third Avenue and shelled out $126.5 million for 1350 Avenue of the Americas — which involved hammering out an agreement with 50 members of the Minskoff family.
As the expansion continued, however, the interests of the family began to diverge.

While Rechler and his increasingly tight team argued for a continued expansion into New York City and a focus on office properties, other family members — including Scott’s brother, Gregory, and cousin, Mitchell — were looking to return to the simpler days as a private developer.

In 2003, with the value of Reckson having risen to $3 billion, Rechler and his family decided to part ways and divvy up the spoils — with Gregory, Mitchell, Roger and Donald launching a new company called Rechler Equity Partners and Rechler and his team taking over at Reckson. Rechler handed over 95 industrial properties totaling 5.9 million square feet in exchange for $315 million from his family. He then reinvested the funds in the $321 million purchase of 1185 Avenue of the Americas.

The move worked out financially for Rechler. Between 2003 and 2006, under his leadership, Reckson was one of the most active firms in New York. By 2006, it had about $6 billion in assets, 70 percent of which were in the city.
In total, over the course of Reckson’s tenure as a public company, Maturo estimated the company acquired about $4 billion in assets and sold $2.5 billion.

“We’re not empire builders,” he said. “Our philosophy is buy, create value and then sell to realize the value.”
It was a strategy that set the firm up perfectly for what came next.

Losing out

As the real estate market became red-hot in 2006, Maturo, Rechler and the rest of their team saw it becoming harder to win deals.

That spring, they bid on 1211 Avenue of the Americas, the 1.9 million-square-foot office tower known as the News Corp. Building.

Reckson had signed up a German partner looking for a relatively modest rate of return. Reckson decided to submit an early bid and up it by $50 million to ensure nobody would match it.

But before it could get the bid in, the firm got a call notifying it that the property had sold for tens of millions more than it had planned to bid. Indeed, investment manager Beacon and Lehman Brothers agreed to pay $1.5 billion in the second-priciest office building purchase in U.S. history at the time.

“Everything we bid on, we were just losing,” Rechler said. “I guess subconsciously we were thinking, ‘this market is really getting heated.’ And in our own mind, we were trying to find a capital source to see if we could be players in this market, and be active in this market, and we realized we couldn’t be.”

Rechler and his team agreed that the market might be nearing a top, making it a potentially ripe time to sell Reckson. Just weeks before, the REIT Trizec Properties Inc. had sold for $8.9 billion. It seemed like a market where a company of Reckson’s size could be reasonably assured it would get multiple cash bids.

So in August 2006, it agreed to sell to SL Green for about $6 billion, which included outstanding debt of about $2 billion. It was a deal that promised to pay Reckson’s 68 million shareholders roughly 700 percent more than the REIT’s initial IPO price.

Even so, many shareholders were outraged, complaining that price wasn’t high enough. They cried cronyism, pointing to a side agreement that called for a newly formed private consortium, led by Rechler, to buy back Reckson’s suburban buildings. They also argued that the frothy real estate market had far higher to climb.

The deal closed in January, just a few weeks before news broke that Macklowe acquired a $7.6 billion portfolio of New York City office towers owned by Sam Zell’s Equity Office Trust — a top-of-the-market deal that became the poster child for the out-of-control times.

In a telling move, Macklowe had publicly announced his intention to partner with Carl Icahn to top SL Green’s bid for Reckson — before backing out and going after the Equity deal.

Back in business

The day after the sale to SL Green closed, Rechler and his team were back in business — in the same offices, but with a new name: RXR Associates. They spent the day completing a billion-dollar deal (backed by two pension funds) to buy back the New Jersey and Long Island properties Reckson had just sold to SL Green.

Then a few months later, the market crashed.

RXR’s problems were relatively minor compared to many other real estate companies. Its biggest issue was a 300,000-square-foot building it had built in Princeton: Development had finished just in time for it to sit empty in 2008 and a construction loan was coming due. But ultimately, the company bought the debt back at a discount, and leased the Princeton building up.

Meanwhile, after the crash, Rechler and his top executives worked their Rolodexes, compiling a list of properties that were underwater or in need of restructuring. For the next two years they reached out to bankers, debt servicers, private equity shops and hedge funds to try to get an in on buying some of those buildings.

For many months, the market was frozen. But RXR wanted to be on the other end of the phone when those who needed to sell finally did so. So it offered to help evaluate properties for owners still trying to find out where the market was headed, or assist in any other way.

“We did work so that when things started to happen, we had either bought the debt on it, or [were otherwise in] a position so we could have a seat at the table, or we had been working with one of the private equity shops that were looking to exit,” Rechler said.

The effort yielded its first payoff in August 2009, when RXR bought the debt on 1166 Avenue of the Americas — where JPMorgan Chase had a long-term lease — at a steep discount. The deal offered an immediate return of about 15 percent, which more than doubled over the next several years.

At the time, however, it was a harrowing decision. For weeks, Rechler and his team considered every possible issue. For example, what would happen if JPMorgan went out of business?

But the bet paid off. Back then office space was going for about $30 to $40 a square foot; today it’s going for between $50 and $60.

In November 2010, RXR also acquired a building it had long coveted — 1330 Avenue of the Americas, a Macklowe-owned building a few doors from its own headquarters. RXR had been in contact with the Canadian pension fund that owned the debt for some time, offering to pay roughly $400 million. Then late on a Friday, as Rechler was getting ready to go to his niece’s Bat Mitzvah, he got a call from a fund official saying if RXR put down a $50 million deposit by Monday and could close by the end of the year, it could buy the building.

Rechler and his team worked the phones from the hotel where the Bat Mitzvah was being held and won the necessary commitments from investment partners. The deal was signed that Monday.

In the months that followed, RXR decided to bet big on Midtown South, hoping to capitalize on the coming high-tech boom.

In the spring of 2011, it announced a $920 million megadeal to buy the Starrett Lehigh Building, a 2.2. million-square-foot behemoth on West 26th Street. Soon after, it acquired 620 Sixth Avenue, the Bed Bath & Beyond building, at 19th Street, for about $500 million.

In total, Rechler said RXR has raised about $2.9 billion from private investors, and is about 50 percent leveraged. He noted that the firm is disciplined about sticking to its strategy of paying prices that make sense. And he sees little reason for the firm to return to the public markets.. The private approach, he said, allows it to target pitches to investors rather than millions of shareholders.

“We don’t want to buy commodity buildings. We want to buy buildings that are tarnished gems, that have some sort of real estate problem or balance-sheet problem,” he said. “[The goal is] to polish them up and have a precious gem at the end.”