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DealBook: To Satisfy Its Investors, Cash-Rich Apple Borrows Money

May 1, 2013 by Leave a Comment

Timothy Cook, the chief of Apple.Eric Risberg/Associated PressTimothy Cook, the chief of Apple.

9:00 p.m. | Updated

With a $145 billion cash hoard, Apple could acquire Facebook, Hewlett-Packard and Yahoo. Put another way, it could buy every office building and retail space in New York, according to city estimates.

But despite its extraordinarily flush balance sheet, the technology behemoth borrowed money on Tuesday for the first time in nearly two decades. In a record-size bond deal, the company raised $17 billion, paying interest rates that hovered near the low-cost debt of the United States Treasury.

Apple’s return to the debt markets raises a riddle: Why would a company with so much cash even bother to issue debt?

The answer has a lot to do with the frenzied state of the bond markets. Companies are issuing hundreds of billions of dollars in debt to exploit historically low interest rates. They are also feeding strong investor demand for high-quality corporate bonds as an alternative to money market funds and Treasury bills, which are paying virtually nothing.

Apple’s maneuver, however, also reflects the unusual challenges of a fabulously successful company with a sinking stock price. Apple is plagued by concerns that its growth may be slowing, and its shares have plummeted from a high last fall of more than $700 to under $400 last month.

In an effort to assuage a growing chorus of frustrated investors, the company is issuing bonds to help finance a $100 billion payout to shareholders. Apple said last week that it planned to distribute that amount by the end of 2015 in the form of paying increased dividends and buying back its stock. Since that announcement, Apple shares have risen 10 percent, closing at $442.78 on Tuesday

Taking on debt can actually magnify the returns for shareholders and improve stock performance, financial specialists say. It can reduce the overall cost of the capital that a company invests in its business. In addition, after a stock buyback, there are fewer shares, which can increase their value.

Yet even as shareholders and analysts welcome the financial tactics, they emphasize that the maker of iPhones, iPads and Macs must continue to innovate and fend off increasing competition. After all, today’s Apple could be tomorrow’s Palm.

“This is a substantial return of cash and it’s the right thing to do on many levels,” said Toni Sacconaghi, an analyst with Bernstein Research. “But, ultimately, the company has to execute. This is no substitute for that.”

By raising cheap debt for the shareholder payout, Apple also avoids a potentially big tax hit. About two-thirds of Apple’s cash — about $102 billion — sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors, it could have significant tax consequences for the company. In some ways, the bond issue is a response to that tax situation.

“They have been so successful with their tax planning that they’ve created a new problem,” said Martin A. Sullivan, chief economist at Tax Analysts, a publisher of tax information. “They’ve got so much money offshore.”

The $17 billion debt sale by Apple is the largest corporate issuance on record, surpassing a $16.5 billion deal from the drug maker Roche Holding in 2009, according to Dealogic.

Apple joins a parade of large companies issuing debt with astonishingly low yields. Last week, Nike sold bonds that mature in 10 years that yielded only 2.27 percent. In November, Microsoft set the record for the lowest yield on a five-year bond, issuing the debt at 0.99 percent. In comparison, the yield on the 10-year Treasury on Tuesday was 1.67 percent, while the five-year note yielded 0.68 percent.

“If you look at these big companies like Apple and Microsoft doing these big, low-cost bond offerings, it’s a way for them to raise money in an effort to create better returns for their shareholders,” said Steven Miller, a credit analyst with Standard Poor’s Capital IQ. “The bond markets are practically begging these corporations to issue debt because of how cheap it is to raise money.”

On Tuesday, Apple issued six different securities, with maturities ranging from a three-year note yielding 0.45 percent to a 30-year bond that yields 3.85 percent. The largest piece, a $5.5 billion issue, is a 10-year yielding 2.4 percent. While good for the company, longer-term bonds with yields this low can fall steeply in price if interest rates go up, hurting investors who hold them. Still, $3 billion of the Apple debt are notes whose interest rates are periodically reset.

Despite all the cash held by Apple, the credit-rating agencies have not awarded it their coveted AAA ratings, citing increased competition and a concern that its future product offerings could disappoint. Moody’s Investors Service gave Apple its second-highest rating, AA1, as did Standard Poor’s, rating the company AA+. (Microsoft, Exxon Mobil, Johnson Johnson, and Automatic Data Processing have the highest credit ratings from Moody’s and S.. P.)

“There are inherent long-run risks for any company with high exposure to shifting consumer preferences in the rapidly evolving technology and wireless communications sectors,” wrote Gerald Granovsky, a Moody’s analyst.

Apple’s less-than-perfect rating did not drive away investors on Tuesday. The offering generated investor demand of about $52 billion, according to Goldman Sachs and Deutsche Bank, which led the sale of the issuance.

Desperate for returns in a yield-starved world, investors like insurance companies, pension funds and foreign governments have been snapping up corporate debt. Individual investors are also driving the demand: this year, through last Wednesday, a record $55 billion has flowed into mutual funds and exchange-traded funds that invest in corporate debt with high-quality ratings, according to the fund data provider Lipper.

Steve Jobs, Apple’s co-founder and former chief executive, had long resisted calls to dispense big sums to investors. In 2010, when Apple’s cash stood at $50 billion, he rejected pressure to make large distributions to shareholders. The company’s cash balance continued to grow after Mr. Jobs’s death in 2011, as it generated billions of dollars in earnings each quarter. Over the last 12 months, Apple operations have been generating about $150 million of cash a day.

A year ago, the new chief executive, Tim Cook, announced a decision to start returning $45 billion to shareholders. But that did not satisfy everyone. David Einhorn, chief executive of the hedge fund Greenlight Capital and an Apple shareholder, pressed the company to do even more.

The excitement surrounding Apple’s bond deal on Tuesday stood in stark contrast to the gloom that hung over the company when it last issued debt. In 1996, Apple faced a crisis, with shrinking sales of its niche computers and a weakening balance sheet that earned a junk credit rating. In the middle of the year, its shares reached a 10-year low.

“Will Apple Computer run out of cash soon?” asked an article in The New York Times on April 7, 1996. That summer, it tapped the bond markets, raising about $600 million and averting a crisis.

Later in the year, Mr. Jobs, who had left Apple more than a decade before, returned to the company.

Article source: http://dealbook.nytimes.com/2013/04/30/apple-raises-17-billion-in-record-debt-sale/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Square Feet: Blocks From the President, Developers Plan Big

June 22, 2011 by Leave a Comment

And after years of planning, the most ambitious of the downtown projects is finally under way. Construction began in March on CityCenterDC, a $700 million complex envisioned as a modern-day Rockefeller Center, with 2.5 million square feet of office, residential and retail space as well as a public plaza and park. Completion of the bulk of the project is expected in late 2013, according to the two real estate companies, Hines Interests of Houston and Archstone of Englewood, Colo., that won development rights in 2003.

One of the largest downtown projects in the nation, CityCenterDC will fill 10 acres, all city-owned except for the land beneath two condo buildings. Bounded by New York Avenue and 9th, H and 11th Streets NW, the site was once occupied by a convention center that was demolished in 2004 (a year after the larger Walter E. Washington Convention Center was built nearby), leaving a giant parking lot in one of the city’s most desirable locations, only two blocks from two of the busiest Metrorail stations.

“This really is the hole in the doughnut,” said William M. Collins, a senior managing director of Cassidy Turley, a national brokerage, which is not involved in CityCenterDC.

CityCenterDC is one of several major projects around the country that were stalled by the recession. But while construction has yet to begin developments like Grand Avenue in Los Angeles and Atlantic Yards in Brooklyn (except for the Nets basketball arena, where work is under way), CityCenterDC was able to move forward because of a recent $620 million equity investment by the real estate arm of the Persian Gulf state of Qatar. The Qatari Diar Real Estate Investment Company is now the project’s principal owner.

The complex will be made up of six buildings, 10 and 11 stories in height in keeping with the District of Columbia’s 130-foot height restriction. At their base will be 185,000 square feet of retail stores facing the street. An additional 110,000 square feet of retail space is planned for the project’s second phase, which will also include a luxury hotel.

To integrate the site with its surroundings, the sections of I and 10th Streets that were cut off to make way for the old convention center will be restored. Alleyways, largely restricted to pedestrians, will run between buildings and provide space for smaller stores.

The two office buildings, with a total of 520,000 square feet, and two condominium buildings, with 216 units, were designed by the prominent London architect Norman Foster’s firm, Foster Partners, whose other projects have included the reconstruction of the Reichstag in Berlin. The two rental apartment buildings, with 458 units, were designed by Shalom Baranes, a local firm that worked on the redevelopment of the Homer building in downtown Washington at 13th and F Streets NW.

Even though nearly 7,000 new rental units are scheduled to be completed in Washington in the next few years, prospects are good for the apartments because of their central location, said Gregory H. Leisch, the chief executive of Delta Associates, a real estate consulting firm that advises Hines and Archstone. Condo prices in the city center have risen 1.8 percent in the past year, to an average of $710 a square foot.

The demand for office space from law firms and other private tenants — the space will be too costly for government tenants, said Bill Alsup, a senior vice president of Hines — is improving, according to Cassidy Turley. But Hines suffered a setback last July, when the national law firm Skadden, Arps, Slate, Meagher Flom renewed its lease at 1440 New York Avenue NW, rather than fulfilling an earlier plan to lease 350,000 square feet at CityCenterDC. “It would have been very nice to have had a major tenant commitment prior to the start of construction, but it wasn’t critical,” said Mr. Alsup.

Tom Fulcher, an executive vice president at Studley, a brokerage that represents tenants, said most large Washington law firms with leases expiring in 2015 and 2016 had made their real estate decisions because large blocks of space can be scarce in a city without skyscrapers. One exception pursued by the developers is Arnold Porter, which is searching for about 335,000 square feet. But the project’s biggest challenge, said Jason Jacobson, a group vice president at Archstone, will be getting the retail mix right. Downtown has a lot of “fast fashion, geared toward younger people,” he said. “Our goal is to bring it up a notch.”

Gerry Widdicombe, the director of economic development for the Downtown D.C. Business Improvement District, a group that helps to market the neighborhood, estimated that Washington residents spent as much as $1 billion a year in suburban shopping centers because of a dearth of stores within the District of Columbia.

The developers are seeking a mix of stores, including apparel, home furnishings and electronic goods, said Mr. Alsup, whose company developed and manages Galleria malls in Houston and Dallas. About one-third of the space will be limited to stores new to downtown, he said. Mr. Jacobson said some space along the alleys would be made available to local fledgling retailers.

Not surprisingly, the developers are trying to persuade the retailer highest on everyone’s list — Apple, which has one store within the District of Columbia, on Wisconsin Avenue in Georgetown — to open a much bigger store of 15,000 square feet or more.

John Asadoorian, a regional retail broker, said CityCenterDC’s leasing goals demonstrated how downtown had matured. “Ten years ago, you probably could not have talked about the type of retail they are trying to attract,” he said.

Even before the Qatari investors became involved, Hines and Archstone determined that leasing to banks would not help them create lively shopping streets, Mr. Alsup said. But as it happened, their hesitancy on bank branches meshed with the policies of their financial partners, who adhere to the restrictions of Shariah, or Islamic law, including the ban on collecting interest. Restaurants will be able to serve liquor, but retailers whose primary business involves selling alcohol will not be allowed, Mr. Alsup said.

In their marketing materials, Hines and Archstone say they intend to provide “an authentic place for urban residents to socialize outside their homes.”

But some planning specialists have wondered if people in downtown Washington will view the plaza, which will be situated between the condo and rental buildings, as public space for them to enjoy. “Putting the plaza in the middle of a large development just feels more private,” said David Dixon, who is in charge of planning and urban design at Goody Clancy Associates, a design firm in Boston.

Mr. Jacobson said the developers planned to offer programs in the plaza and would make it welcoming with public art and landscaping. “People will find it to be inviting,” he said. “I realize we have to convince some people. Hopefully, we’ll do a better job over the next year or so.”

Article source: http://feeds.nytimes.com/click.phdo?i=ed4bcf552c62ccefa4aa9e0019e3d1a8

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As Condos Fill, Retail Space Remains Vacant

June 5, 2011 by Leave a Comment

But through all its travails, one thing hasn’t changed about the building: Its vast ground-floor retail space, advertised as having 125 feet of Hudson River frontage, has never been occupied. The commercial broker, Sinvin Real Estate, has been offering potential tenants 18 months’ free rent, but hasn’t leased the space.

A blank storefront on a prominent site may not be easy on the eyes or good for the building’s image. But is it a bad thing for the residents and the condo’s finances in general? The answer is, probably not.

After all, a 99-cent store or a noisy bar could have a negative effect on condominium prices, which is why real estate experts say that the wrong business can be worse for a building than no business at all. Developers are loath to bring in delis, dry cleaners and discount stores; everyone would like a Marc Jacobs boutique or, at the very least, a bank. Many developers have therefore been biding their time, rather than do anything to hurt the value of the residential units over the stores.

Some landlords or developers have the resources to wait out a recession or a downturn. And others have sold the retail spaces as condos to investors, who through carefully structured deals pay relatively low carrying charges.

At River Lofts, as retail space in the building has sat empty, condos upstairs have continued to sell for millions of dollars. The same is true at many other new or recent condo buildings, including high-profile ones like Richard Meier’s 165 Charles Street and Jean Nouvel’s “vision machine” at 100 11th Avenue.

“If the developer has done well upstairs, he can afford to wait as long as he wants downstairs,” said Faith Hope Consolo, who heads the retail leasing and sales division of Prudential Douglas Elliman. “Sometimes we bring them offers,” she said of condo developers, “and we don’t even hear back.”

Ms. Consolo says the retail market, which has been weak for several years, appears to be recovering. There was “as much activity in the first quarter of 2011 as in the second half of 2010,” she said, referring to retail and restaurant leases in Manhattan. But, she said, the effects might not reach the out-of-the-way locations of most of the long-vacant retail spaces — which she described as “orphans.”

Richard Pandiscio, whose company has created the marketing campaigns for a number of expensive condo buildings, said that “from a marketing perspective, a retail tenant that adds an element of convenience or prestige is a positive.” But, he added, “right now, with so many retail spaces empty, I doubt too many residents are bothered by an empty space on their ground floor.”

Mr. Pandiscio himself lives at 100 11th Avenue, the Jean Nouvel building, where early marketing materials showed a glamorous restaurant, on the ground floor. In fact, the space has never been rented.

Another building that has never had a retail tenant — but where condo prices don’t appear to have suffered — is 165 Charles Street, where an apartment sold in February for $7.35 million. In that building, most of the retail frontage is around the corner from the residential entrance, meaning residents don’t have to look at a dusty storefront as they come and go.

But some buildings, like the glass tower at the corner of 110th Street and Malcolm X Boulevard in Harlem, seem seriously diminished by the absence of retail tenants. There, the entire retail frontage facing Central Park is vacant and, with unpainted wallboards behind double-height glass, has a forlorn appearance. (A small deli and a Subway restaurant occupy two much smaller spaces on the east side of the building.) But repeated e-mails and calls to unit owners at the building, known as 111 Central Park North, failed to turn up a single complaint about the vacancies. True, owners are unlikely to speak candidly about buildings in which they have spent as much as $6 million for apartments.

But it is also true that, once they have bought, residents generally have little or no financial stake in whether the retail spaces are ever occupied.

That’s because condo developers tend to retain the retail spaces for themselves, or sell them to investors. Last year, the retail spaces at 40 Mercer Street, a Jean Nouvel-designed building in SoHo, sold for an astounding $41.9 million. At 111 Central Park North, Tom Shapiro, an investor in Manhattan, recently paid $7 million for the retail spaces.

Mr. Shapiro said by e-mail that the businesses he had rented to — the Subway and the deli, as well as a dry cleaner and a medical office that also have street-level access — were doing well, and that other businesses were on their way. He said it was important to find tenants who would enhance the building. “We are big believers in the future of Harlem and acquired the space to hold for the long term,” he wrote.

The situation at River Lofts is similar. According to Christopher Owles, a principal of Sinvin, the retail space in that building is controlled by an investor, not the residents, “so the loss in income isn’t felt by anyone other than the owning party.”

The same is true at One Jackson Square, off 8th Avenue just south of 14th Street. Since the sponsor owns the units, said David Penick, a vice president for development at Hines, one of the developers, the vacancies “have no effect on the finances of the condo.”

As for developers who retain the retail spaces in their buildings, most of them can afford to wait out a slow economy, said Louis V. Greco Jr., a prominent Brooklyn developer. That, Mr. Greco said, is because when the condo deals are structured, “most of the operating costs of the building are attributable to the residential component.” The retail spaces, by contrast, are assigned relatively low carrying charges.

One of Mr. Greco’s projects, the 25-story tower called be@schermerhorn, on Schermerhorn Street in Downtown Brooklyn, has three large retail spaces, just one of which is rented. Mr. Greco said that, because his carrying costs are low and he believes the market “is on an upswing,” he had been sticking close to the asking price of $50 a square foot per year, rather than give the spaces away.

“The vacant retail space has not hurt the residential sales in that we only have one unit of the 246 left to sell,” he said. And while condo owners may not have stores in their building, the first-rate gourmet shop Brooklyn Fare (with its Michelin-starred restaurant) is diagonally across the street.

Article source: http://feeds.nytimes.com/click.phdo?i=6c91502523bca938cba5201ba9260fe3

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