07/15/2009

Sterling Lays Off 24, Shelves Planned Fund

Sterling Equities has dismissed two dozen employees after dramatically lowering projections for its acquisition activity over the next couple of years.

Among the 24 employees let go by the New York firm last week were four senior vice presidents who oversaw acquisitions and dispositions: Robert Watman, Mel Mayers, Jeffrey Smith and David Ash. Watman, Mayers and Smith were longtime Sterling employees, each joining the company between 1997 and 2000. Watman and Mayers handled East Coast deals, while Smith worked on investments in the Midwest and South. Ash, who was responsible for West Coast transactions, came to Sterling last October after spending eight years with Eastdil Secured. All four were granted severance packages.

Sterling employed about 200 people before the staff cuts.

Meanwhile, investors in Sterling's latest value-added real estate fund are expected to grant swift approval to the firm's request for a two-year extension of the vehicle's investment period. By giving Sterling American Property Fund 5 extra time to put its remaining capital to work, its limited partners are effectively delaying the firm's sixth fund until 2011.

Sterling and its investors agreed to the game plan at the fund shop's annual meeting two weeks ago. The firm, which wouldn't comment on the plan, is expected to formally request the extension shortly.

Fund 5 has so far invested only about $370 million of its $610 million of committed capital. The New York firm - led by Richard Wilpon, Michael Katz and Thomas Osterman - had hoped to have the vehicle nearly fully invested by the time it held a first equity close for Fund 6, a planned $800 million vehicle. That close was likely to have come around next April, when the four-year investment period for Fund 5 was slated to have expired.

But Sterling has been wary about investing in a U.S. commercial real estate market where prices are still declining, few foreclosed properties are on the block and deal flow has slowed to a trickle. Consequently, investors said it has invested only about $65 million of equity over the past 18 months - a pace that would leave it well short of fully invested next April. Hence, Sterling's corresponding staff cuts.

One idea bandied about was to halt Fund 5 acquisitions and transfer that vehicle's unused capital to Fund 6, which was to be more heavily focused on distressed debt. But that approach was never formally considered at the investor meeting, and Sterling is instead likely to use much of the $240 million of remaining capital in Fund 5 to target distressed plays. That's a departure from the vehicle's original strategy, which was to act as a developer to add value to its acquired properties.

Investors said Sterling was having no trouble garnering interest in Fund 6. It had lined up about $100 million of soft commitments from existing investors, and the fund sponsor was prepared to commit $150 million to the vehicle. That amount would have put Sterling well on its way to a first equity close.

Sterling is by no means new to the market for distressed real estate debt. In the early 1990s, the firm teamed up with the former Bankers Trust to buy more than $1.6 billion of mortgages and other assets from Resolution Trust Corp., which liquidated almost $400 billion of assets from failed S&Ls. The team acquired four RTC portfolios, working out the assets before selling them.

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