Selective Buyer

Selective Buyer

Seth Werner, a veteran Florida real estate executive, searches the state

for good office properties that he can make into great office properties.

commercial real estate by Dave Szymanski | Tampa Bay Editor

Seth Werner, chairman and chief executive officer of Cypress Creek Capital, prides himself on his youthful energy. He is 62.

Tanned, active and sporting a goatee, he has unretired three times, at the urging of business associates, to take advantage of the market. This is one of those times.

"I had a tough time doing charity things, skiing and playing golf and tennis," Werner says. "I was getting bored. "I tell my kids, 'You know, today's 62, it's yesterday's 61.'"

But don't let the age fool you. Werner is in tune with today's real estate values. That is what boosts revenues and profits at Cypress Creek: The ability to find good buys on quality Florida office properties, improve them and reap higher rents.

It's a strategy, focused only on Florida, that is working in a weakened commercial market with stagnant population growth in some areas. Revenues should reach about $7.5 million this year.

"We are being very opportunistic," Werner says. "But selective. We'll look at 75 properties to find, maybe, three each year."

Cypress Creek, based in Hollywood, Fla., is one of the few companies in the state trying to expand its investment property ownership in this down market. It has more than $400 million in assets. It has a pool of up to $450 million to spend on buying properties that each cost $30 million to $200 million or higher.

In the past two years, Cypress Creek has gotten out of the bridge-loan business to focus on buying Florida properties that fall within its business model. Werner said he hasn't seen a better time to buy commercial income-producing assets in the state in almost 15 years.

Many property owners have loans coming due on both first and mezzanine debt and are having a tough time refinancing. Cypress Creek markets itself as an alternative to refinancing because it has the capital available to buy these assets.

Werner, who has been doing business in Florida for 35 years, began Cypress Creek in 2003 with a constant focus on selective buying. The company farms out property management and leasing to keep costs down. It has a staff of nine, including two in Tampa.

"We're not buyers of properties not without issues," Werner says. "When we make a bet, our bet is significant, based on our knowledge of the market."

In the past 18 months, Cypress Creek has bought three offices in Tampa Bay: two office buildings on 15 acres in east Hillsborough County, along Interstate 75; the 15-building Koger Office Park in St. Petersburg, which it renamed Baypoint Commerce Center; and 501 E. Kennedy Blvd., a 300,000-square-foot, 21-floor office building in downtown Tampa that it renamed M&I Bank Plaza.

It paid $30 million for the east Tampa buildings, $94 million for Koger and $45.8 million for M&I. Total space for all three properties is 1.2 million square feet.

Fewer buyers

Unlike other buyers, Cypress Creek did not get over-leveraged, leaving it in a position to keep buying.

"We were never a player in that leverage," says Werner, who noted that the company has a 65% to 70% loan-to-value on its properties.

"There are fewer players and times are tougher," he says. "Not everyone understands the Florida market and has the confidence we do."

That means that as there were 15 to 20 bidders for each commercial property two years ago, now there may be three or four.

Cap rates are up. Institutional-grade properties are coming to market as well as high-rise, high-quality commercial property.

Cypress Creek looks at Class A office buildings and studies the quality of the property, its location and the amount and quality of its tenants. Companies going through mergers or firms connected to residential real estate may be weaker tenants.

Besides its strategy, one thing that sets Cypress Creek apart is its Florida roots, focus and knowledge of the state's history, politics, growth patterns and property.

"We have a lot more confidence than someone from New York or Chicago," Werner says. "Florida right now is fairly flat in population growth. That's not been our history. I have every confidence that flat growth will turn back up again."

The Gulf Coast is attractive because of its population density and growth history. Cypress Creek doesn't own property in the Panhandle for that reason.

"We want to own real estate where people are," Werner says. "The Gulf Coast is dense and will continue to grow."

Cypress Creek doesn't plan to diversify. It isn't looking at buying hotels, hospitals, bowling alleys or restaurants. Those businesses operate differently than office buildings and require different management. Don't look for it to go outside of Florida, either, because it believes there is plenty of property to buy in state. Plus, there are management issues.

"The further we get away, the harder it is to oversee the properties," Werner says. "I'd much rather wait and buy in Fort Lauderdale, then concern myself with how to oversee a building in Charlotte, N.C."

Werner looks to continue to be selective and not rush.

"We're very, very regimented in how we look at buying real estate," Werner says. "We don't have to buy anything. Others, with funds, have to invest money. They're under the gun."

Opportunities remain

Werner, a former business school faculty member, is confident about Cypress Creek, but he's skeptical about a quick national economic recovery.

"I see it getting worse before it gets better," he says. "Lehman is a good example. A couple of large banks will have a tough time making it. We will see a merger. I will be surprised if things pick up until the next to the last quarter of next year."

A couple of his economic barometers are the housing and auto markets and some real estate markets.

"If there's no new commercial construction in Chicago, things are hurting, and there's nothing new going on," Werner says. "Look at Southern California residential. It's a disaster. It is traditionally in the forefront."

Throw in the war and the election, and there are also a lot of unknowns for investors.

"With Lehman, Fannie Mae, Freddie Mac, it's easy to see why they are hunkering down," Werner says. "There is a tremendous oversupply of single-family attached and detached housing. Retailers will tell you sales are way, way off."

But in every down market, there are opportunities. You have to have capital, patience and market knowledge to take advantage of it, Werner says.

That's the case with Cypress Creek. But it needs to remain selective.

"We're doing very, very well, better than expected," Werner says. "But we project that we need to be very careful."

REVIEW SUMMARY

Company: Cypress Creek Capital

Industry: Real estate investments

Key: Find the right office buildings to buy, improve them and raise rents.