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Kranzco/NAI pact sets stage for future

By Phyllis Feinberg

One firm wanted to expand its shopping center holdings outside its regional stronghold, the other to return to its development roots. One was an active real estate investment trust, the other a happily private brokerage and management services company. Now, the two are forming an alliance to fill each other's needs.

Kranzco Realty Trust, Conshohocken, Pa., and New America International (NAI), Hightstown, N.J., expect their recently announced deal to position their companies perfectly for the next century.

"We think in the millennium real estate will be divided into two segments -- ownership and management, and real estate services," said Norman Kranzdorf, chairman and CEO of Kranzco. "We've found a way for our shareholders to own a company in both businesses."

The two firms have formed a strategic alliance that will recapitalize NAI, a privately held commercial real estate brokerage and services company, as a public company in which Kranzco will own a 9.8% stake.

NAI's recapitalization will occur in two stages. First, Kranzco will conduct an exchange offer for 80% of the outstanding stock of NAI. In exchange for the common stock, Kranzco will issue convertible subordinated notes, convertible into Kranzco common shares.

In the second part of the deal, Kranzco will spin off approximately 88% of its shares in NAI, estimated to be about 12 million shares (70.2% of all shares outstanding), to its existing shareholders on a one-for-one basis. Along with the spin-off, NAI will issue rights to all of its current shareholders on a one-for-one basis, exercisable for 30 days, to acquire additional shares of NAI common stock.

When the deal closes, as expected in midsummer, Kranzco will own 9.8% of NAI, Kranzco shareholders will own 70.2% and the current 130 stockholders of NAI will own about 20%.

NAI operates a network of real estate services firms in 220 different markets. These include 48 states across the United States, as well as markets in Canada, Europe and South America. They provide real estate leasing, brokerage and management services to a wide array of customers.

"We hadn't been thinking about going public, but then Norman came up with this structure," said Gerald Finn, NAI's chairman and CEO, who has been nominated to join Kranzco's board of directors.

Mr. Kranzdorf and Mr. Finn stress that synergies between the two firms will benefit all of their shareholders.

"We can bring them properties in places they hadn't looked at before," said Mr. Finn, referring to NAI's huge network.

"I think we can also save them considerable money. There will be economies of scale because wherever they have properties we have local offices to provide local management, leasing and due diligence services," he said. "We're everywhere they want to be."

The alliance could help Kranzco expand nationally. It hasn't had the staff to search outside of its local base in the East, Mr. Finn said. But with NAI's network of brokers, "it will give them the opportunity to expand nationally."

NAI has offices in 92 of the top 100 markets in the United States and handles more than $16 billion in real estate transactions each year.

Kranzco will have first opportunity rights to neighborhood and community shopping centers that become available for sale through the NAI network.

"We're a tremendous opportunity for Kranzco and if we felt they weren't capable of doing the deal, we wouldn't do it," Mr. Finn added, contradicting press reports that Kranzco was doing the deal with NAI because of its weaknesses as a REIT.

NAI will be looking for opportunities to develop new shopping centers or redevelop distressed centers, which will then be sold to Kranzco.

"I did some development in the past," said Mr. Finn. "We kind of phased out of it during the last few years. I'm looking forward to getting back into it."

NAI manages about 80 million square feet of retail properties (none from Kranzco).

"We're looking for ways we can work with Kranzco on leasing," Mr. Finn said. "How much we do is up to Kranzco. We can certainly help them with any problem."

However, he acknowledges, "we won't willy-nilly be firing leasing agents for Kranzco's centers. But we can help them in certain areas. If they have vacancies, we can help fill them."

As a public company, NAI will reap strong benefits from the deal as well, including greater access to capital for expansion, Mr. Finn said.

"We expect to be able to accelerate our international expansion, expand into institutional investment services ... and provide enhanced services to our national clients," he said.

He pointed out that "selling shopping centers is a very profitable business," which NAI should do more of after the alliance is completed.

Since NAI is a traditional "C" corporation, not a REIT, it is not bound by the legal restrictions on REITs, he added.

"We can do things that they can't do," he said. "We may go in as partners in a deal with them and buy the pieces of it that Kranzco doesn't want or simply can't have."

This could include mixed-use properties, in which NAI could either acquire the non-shopping center pieces for its own account or assist in the disposal of those parcels.

NAI provides a variety of other services that could prove useful to Kranzco. The company's Accelerated Marketing Program assists clients in the disposition of major portfolios or unique assets. The company sponsors several multiproperty, multiseller events each year, in addition to individual asset sales handled on demand.

NAI also offers its clients a more unusual way to get value for their assets -- trade credits. This involves the exchange of real estate for prepaid expenses such as media, travel and telecommunication services. It has been a very helpful technique for the disposal of surplus real estate, including leasehold interests, according to Mr. Finn.

Companies that have large amounts of undervalued surplus property are finding trade credits "the most effective means now available" to recapture the book value, at least, for properties, and to avoid writedowns on these properties' earnings.

"Virtually any product can be used in the deals," he said. "It's very difficult to explain, and each time you do it you have to know exactly what each company's needs are."

However, he said the trade credits business is currently a very small part of its overall operations, although he believes it has a lot of growth potential.

NAI also arranges financing for companies through its subsidiary New America Financial Services, which provides both debt and equity financing.

Most of NAFS's deals are in the $4 million to $20 million size, and include conventional mortgages and construction financing.

"I am very positive there are lots of good synergies here," said Mr. Finn.

He does not expect similar ventures for other REITs and brokers. "We have a unique company and we have had a close relationship with Kranzco even before we structured this deal," he said. "I don't think other firms could duplicate it."