Africa Israel Buys High, Sells Low
Africa Israel Investments Ltd. was one of the most aggressive foreign buyers of U.S. commercial real estate during the boom, snapping up or building trophy properties in New York and Miami and hatching grand development plans in Phoenix and Las Vegas.
Now, after big losses, the Israel-based company, which is run by a Uzbek-born diamond tycoon, is selling some of those properties for significantly less than it paid.
In recent weeks, Africa Israel has struck agreements to sell a major piece of the former New York Times headquarters and the landmark Clock Tower building overlooking Madison Square Park in Manhattan, both at steep losses. It also has unloaded numerous parcels of land in Florida.
The company cited improving commercial markets in New York and other regions as the main reason for its moves. As recently as a few months ago, Africa Israel had said it planned to develop the Clock Tower and New York Times properties.
We are trying to cash out a little bit, said Izzy Cohen, chief executive of Africa Israel, in an interview Tuesday.
Africa Israel in 2008 reported a loss of 4.9 billion shekels ($1.43 billion) and wrote down the value of its U.S. portfolio. It posted a loss of 800 million shekels in 2009. In 2010, the company recorded a profit of 1.8 billion shekels, but most of this was a capital gain recorded from debt restructuring, according to Dan Harverd, an analyst at Deutsche Bank.
Africa Israel, headed by diamond-industry billionaire Lev Leviev, is the latest overseas company to run aground in the U.S. commercial market. In the late 1980s, Japanese investors purchased such iconic properties as Rockefeller Center and the Pebble Beach golf resort, only to suffer losses during the early 1990s recession.
During the recent boom, Irish lender Anglo Irish Bank Corp. made several loans to fund New York hotels and condos and other U.S. projects near the peak. The bank, which has been nationalized, is marketing a $10 billion portfolio of U.S. real-estate loans that is expected to sell at a discount to face value. Anglo Irish couldnt be reached to comment.
Foreign investors often make the mistake of looking at U.S. real estate as a safe haven. The U.S. market is one of the most transparent, the government is stable and foreigners often invest with a long-term horizon, said Mark Edelstein, head of the real-estate group at law firm Morrison Foerster LLP. The problem is they often buy near the top of the market and overpay.
We paid market prices, said Africa Israel USA Chief Executive Tamir Kazaz. We paid them at the peak.
Many of Africa Israels recent deals have resulted in big losses. It paid $200 million for the Clock Tower building in 2007 and spent tens of millions of dollars to convert it to condominiums, only to announce in May that it has a buyer in contract for $170 million. The buyer, fashion designer Tommy Hilfiger, hasnt yet closed on the deal.
Likewise, the company in April said that it was selling 11 of 16 floors at the former New York Times headquarters on West 43rd Street in New York to Blackstone Group LP for $160 million, far less than the $525 million it had paid for the property in 2007.
Mr. Kazaz said the company could buy U.S. properties in the future. We are not buying now. We still have significant inventory to sell.
Africa Israels losses have proved to be a black eye for Mr. Leviev, the companys chairman, who immigrated to Israel with his family from Uzbekistan in the early 1970s and started his career as an entry-level diamond cutter. Mr. Leviev, 54 years old, built one of the worlds largest diamond businesses in the world, developing relationships with top mines in countries like South Africa, Angola and Russia. Mr. Leviev couldnt be reached to comment.
In 1997, Mr. Leviev purchased a controlling interest in Africa Israel, a public property-investment company founded in 1934 by Jewish investors from South Africa. Under his leadership the company expanded into new markets like the Philippines and Russia, where Mr. Leviev developed a friendship with Vladimir Putin, now the countrys prime minister. Projects developed by the companys Russian arm include AFIMall City, a giant retail complex in Moscow that opened in May after delays.
During the late stages of the U.S. real-estate boom, Africa Israel began making highly leveraged bets in big cities. Unlike many foreign investors, which tend to buy stabilized properties with solid cash flows, Africa Israel made highly speculative bets, buying up empty tracks of land and trying to convert office buildings to condos. It issued bonds in the Israeli market to finance much of the buying, racking up debt of 7.8 billion shekels by the end of 2009.
In 2007, Africa Israel bought the Apthorp in New York for $426 million, one of the highest prices ever paid for a residential building. It built what it boasted was the tallest luxury condo in Miami and purchased land in Phoenix with plans to build the tallest building in the city. In Las Vegas, it planned to build the worlds largest hotel with more than 6,700 rooms.
When the recession began, Africa Israel shelved the Phoenix project and wrote down its $100 million investment in Las Vegas to zero. In New York, condo sales slowed, forcing the company to restructure the Apthorps debt. Since then, the company has been beset by management turmoil. Africa Israel USAs then-chief executive, Rotem Rosen, the son-in-law of New York billionaire developer Tamir Sapir, stepped down in 2009. Mr. Rosen couldnt be reached to comment.
Africa Israel brought in Richard Marin, a former Bear Stearns executive and chairman of Deutsche Asset Management, to succeed Mr. Rosen. Mr. Marin made progress restructuring many of the companys debts. As part of a 2009 deal, Mr. Leviev made a personal capital infusion of 400 million shekels last year and this year, and he has pledged 350 million shekels more over the next three years.
But Mr. Marin and senior management in Israel got into a dispute over pay. Mr. Marin left the company in December 2010.
Write to Craig Karmin at firstname.lastname@example.org