QUARTERLY REPORT
4th Quarter • 2010
The following is a brief update on the current status of select ERECT Funds projects
BAKERY SQUARE AT EASTSIDE – Google has announced that it will expand its leased office space at Bakery Square from 45,000 SF to 114,000 SF, absorbing much of the remaining office space and eventually bringing overall office occupancy to approximately 79%. Google currently has 150 employees at Bakery Square. The expansion will provide space for approximately 500 new hires. Other office tenants include the University of Pittsburgh, Veterans Administration, and UPMC. Retail tenants also continue to increase, with retail occupancy approaching 45%. Retail tenants include Urban Active Fitness Center (41,550 SF); Anthropologie (11,220 SF); Coffee Tree (1,750 SF); Verizon Wireless (2,700 SF); Learning Express (3,146 SF); Free People (2,531 SF); and two newly signed but not yet opened tenants: Jimmy Johns (1,721 SF) and Massage Heights (2,557 SF). Walnut Capital, the project developer, continues to negotiate lease terms with a variety of retail and restaurant users. The Spring Hill Suites by Marriott at Bakery Square finished the year with an average occupancy rate in excess of 80%. The Bakery Square project has a total cost of approximately $130,000,000. The ERECT Funds provided a $10,500,000 loan for the purchase of a Tax Increment Financing Note from the Urban Redevelopment Authority of Pittsburgh in April 2009.
NORTH SHORE GARAGE (WEST GENERAL ROBINSON STREET) – This ten-level parking garage with 1,321 spaces on the North Shore of Pittsburgh was completed in June 2006. The Borrower on the first mortgage loan is the Stadium Authority of the City of Pittsburgh. Construction of the Port Authority Light Rail Transit (LRT) System extension to the North Shore is still underway, and will feature a passenger station at the garage when completed in 2012. With the ongoing LRT construction, average weekday parking occupancy is in the range of 65% to 70%. Parking leases with Allegheny General Hospital, Fox Sports, Pittsburgh Pirates, Equitable Resources and others account for 63% of the total spaces. In addition, the Borrower recently signed a ten-year lease with New Cingular Wireless which will install three antennas and an equipment closet on the top level. The term of this lease is 10 years with an annual rental rate beginning at $30,000. Despite the leases, the parking garage generated an operating deficit for 2010, and the Borrower anticipates an operating deficit in 2011. As a result, the Borrower is contributing funds directly to a Debt Service Reserve Escrow account, and is allocating income from separate surface lots nearby to support its obligations to the lenders.
200 CRANBERRY BUSINESS PARK – ERECT is a limited partner in 200 Cranberry Associates with an investment of $1,000,000 in this 53,560 SF flex/office building located in Cranberry Business Park in Cranberry Township, PA. The property is 94% occupied and the earliest lease expiration is in early 2012. All leases have a one year notice provision, giving plenty of time to work with tenants on re-leasing the space. Tenants include Millennium Pharmacy Systems (8,046 SF), Conair Group (34,859 SF) and HRG Engineering (7,410 SF). There is 3,245 SF of available space in the building which is being actively marketed. The General Partner distributed preferred return payments to all partners including ERECT in June and November of 2010. The cash-on-cash return to ERECT over the last twelve months was 14.64%.
REGIONAL LEARNING ALLIANCE – The manager of this 76,000 SF educational center and conference facility reports that the Regional Learning Alliance (RLA) has exceeded projected credit class offerings for the Spring and Fall of 2010, and revenues for the facility were higher than projected. This facility is located in Cranberry Woods Business Park. There are twelve colleges and vocational schools offering classes at RLA, and several are introducing new programs, including Masters and PhD courses. The conference facility continues to be used daily by Westinghouse, and weekly by other companies such as MSA, Heinz, and Giant Eagle. The RLA is in need of additional parking, so they are currently reviewing plans for possible improvements.
930 PENN AVE. APARTMENTS – ERECT is a limited partner in this 20-unit loft-style apartment building located on Penn Avenue in downtown Pittsburgh's cultural district. The building also includes two first-floor retail spaces leased to Seviche (2,230 SF), a bar/tapas restaurant, and a Subway restaurant (1,520 SF) and includes a 20-car integral garage. The apartment units are currently 95% leased. The General Partner is reviewing the plan for the conversion of the apartments into condos for sale. While the units are in good condition, it is contemplated that certain features may need updating, such as lobby work and flooring prior to beginning the condo marketing process. Despite continued rent increases, the General Partner is not convinced that the current residential sales market is favorable for condo conversion. The General Partner is negotiating an extension of the first mortgage loan, which will include a mechanism to repay the loan as units are sold, if the condo conversion moves forward.
STONEGATE CORPORATE CENTER – ERECT is a limited partner in this four-story, class A, multi-tenant office building consisting of 117,693 rentable SF, and approximately 496 parking spaces. This property has recently generated significant lease renewals from credit-worthy tenants, primarily Cisco (83,370 SF), and has completed construction work to accommodate a new tenant, Westfield Insurance. Westfield took occupancy of 19,157 SF on October 1, 2010. Mitsui Steel (2,243 SF) relocated to the second floor to accommodate Westfield. The building is 98% occupied and other tenants include Logos (2,000 SF) and Medical Mutual of Ohio (6,592 SF). The managing member, CAM, Inc, has done an excellent job of leasing this building in a challenging market. The tenant improvements and leasing commissions have diminished the cash flow of the property in 2010, but a small 4th quarter distribution will be made to the partners.
K&L GATES CENTER – Renovations were completed a few months ago at this 37-story office building located at 210 Sixth Avenue, Pittsburgh, PA. Known as K&L Gates Center, the building has approximately 637,000 SF within 34 floors and has three levels of underground parking with 350 spaces. The renovations consisted of modernizing the lobby, common areas, and upgrading elevators, HVAC, electrical and communications systems, security and life safety systems. Renovations also included tenant finish work for a new 251,196 SF lease with Kirkpatrick & Lockhart Preston Gates Ellis, LLP (K&L Gates). Tenant improvement work will continue as new leases are signed. Current occupancy is 85.9% with three new leases and various lease extensions executed in 2010. ERECT provided a $10,000,000 commitment to an $82,000,000 syndicated first mortgage loan to One Oliver Associates, L.P. on February 12, 2009..
ERECT FUND PERFORMANCE
ERECT Fund I / Debt – At December 31, 2010, the Fund posted a fourth quarter return of 0.14% and a 2010 annual return of 5.59%. Several assets experienced an increase in value during the quarter with the most significant improvements evident in Mansions on Fifth and BeaveRun Motorsports Complex. Mansions on Fifth had an unrealized gain of $122,653 due primarily to ongoing construction advances under the loan facility. BeaveRun Motorsports Complex experienced an unrealized gain of $285,331 which directly corresponds to the receipt and acceptance of a purchase offer for the project. A sale of ERECT's loan facilities related to BeaveRun Motorsports Complex is anticipated to occur during first quarter 2011. Despite the positive activity above, several assets within the portfolio experienced substantial reductions in value which served to almost entirely offset the Fund's growth for the quarter. During the three months ended December 31st, the Fund experienced an unrealized loss of $710,419 largely resulting from rising Treasury Yields, which are a critical element in calculating the net present value of the loans held within ERECT Fund I. The 10 and 20 year Treasury Yields incurred the most dramatic spike and therefore, the assets within the portfolio with the longest term sustained the most impact. Notable unrealized losses were experienced in Bakery Square ($400,600), North Shore Parking Garage ($132,836), and Tower at Highlands ($247,178). Overall, at December 31st, ERECT Fund I reported a market value of $94,566,579.
ERECT Fund II / Equity – At December 31, 2010, the Fund posted a fourth quarter return of 5.97% and a 2010 annual return of 11.9%. Total market value rose by $2,344,932 over the prior quarter to $41,629,009. Following the trend of the prior two quarters, one asset in particular has been a primary performance driver; Bridgeside Point II. An appraisal of the project was received in the first quarter of 2010 which indicated an "As-is" value of $50,200,000, and an "As-Stabilized" value of $61,150,000, realizable at the completion of construction, which was originally slated for December 2010. As construction progressed throughout the year, and the subject moved closer toward stabilization, the market value of this asset gradually increased. With the subject being fully occupied and the final portion of rental revenue commencing in December, the property is now very near stabilization. In the fourth quarter alone, this asset realized a fair value improvement or gain of $1,362,757 for ERECT's ownership interest. It is noted, that only one asset experienced a decline in fair value for the quarter; Stonegate Corporate Center which decreased by $10,840. Throughout the year, approximately 57% of the assets held in the portfolio recognized an improvement in their appraised value over the prior year, while only 36% recognized a decline. Overall, at December 31st, ERECT Fund II reported a sizeable value improvement, with a twelve month return of 11.9%.
ERECT Co-Participation Fund – The ERECT Co-Participation Fund posted a fourth quarter return of 4.26%, and a 2010 annual return of 9.44%, at December 31, 2010. During the 4th quarter, the Fund experienced an unrealized gain of $785,127, primarily due to the progression of Bridgeside Point II from an asset under construction and partial earning capacity, to a stabilized, fully occupied facility. Bridgeside Point II provided an unrealized gain of $587,034 to the ERECT Co-Participation Fund during the 4th quarter. During the three months ended December 31st, the Fund's market value rose by $1,031,590 to a final year end value of $25,233,492.