Pulling it Orf

Citigroup Property Investors raised €1.6 billion for its debut European real estate fund last year. Here Roger Orf, who runs the firm's European arm, explains Citigroup's strategy, his 30-year career in real estate and that model train on his desk. By Robin Marriott

Roger Orf, doyen of European private equity real estate, is enjoying life at the moment. In his office just off Pall Mall in London, he is surrounded by mementos of past glories. One of the more noticeable items in the room is a bronze statue with a card proclaiming: “He's pulled it Orf.”

Orf, who comes across as amiable, suave and even regal, has good reason to feel pleased. As the European head of Citigroup Property Investors (CPI), Orf has just wrapped up fundraising for the firm's debut European fund, closing on €1.2 billion ($1.6 billion), one of the largest amounts ever raised for a European-focused vehicle. (The effort has also recently been crowned European Fundraising of the Year in the 2006 Global PERE Awards, a satisfying result for a man with his fair share of trophies on the shelf.)

That honor has capped a remarkable 18 months. Already, the CPI fund has invested 20 percent of its equity and has even started to sell some properties in order to hand cash back to investors. Behind the scenes, Orf and his team are analyzing the possible flotation of Deutsche Annington, the German residential property company owned by Terra Firma and in which CPI owns a minority stake. Although Orf says bringing the company to the market is only one option, City experts expect Deutsche Annington to follow in the footsteps of Gagfah, the German residential company owned by Fortress, which went public last year.

Orf, a 30-year veteran of the real estate industry, is a great believer in the German property market at the moment. He says that around half of the new fund will probably be invested in the country. “I still think Germany is the best opportunity because you can buy property below replacement cost,” Orf says.

Given Orf's past roles as head of European real estate for Goldman Sachs and Fortress, there are plenty of people interested in his thoughts. And in his opinion, there remains a significant level of inefficiency and opportunity in the German market, particularly when compared to more established regions like the UK.

While the Gagfah flotation has presumably opened up exit opportunities for private equity real estate investors, there are many who argue that the business model employed by Fortress, Terra Firma and others is flawed: persuading Germans to buy their own properties or pay higher rents, the argument goes, is not only risky, it is near impossible, especially in high unemployment areas such as Berlin and Dresden.

Orf agrees that unemployment statistics in those former East German cities are “horrible.” However, he points out that 95 percent of the 200,000 homes Citigroup has invested in through Deutsche Annington are in the western part of the country.

According to Orf, Deutsche Annington has purchased properties at around €700 a square meter—which equates to approximately €70 a square foot—and is selling them back to tenants at approximately €110 to €120 a square foot. “It's a compelling economic proposition for them because the amount they pay back in a mortgage is the same as the rent,” Orf says. However, if tenants decide not to buy, the economics still look favorable; over the next five years, Deutsche Annington needs to sell only 2 to 3 percent of its properties in order to service its debt. Over the past two years, Orf notes that the company has generated €1 billion of cash via property sales, which can be used to pay dividends or fund further acquisitions.

“What is happening in Germany is symptomatic of the economy that has been cosseted and protected for a long period of time.”

The level of money being made by foreign investors in Germany and the sale of stateowned companies has led to a much publicized political backlash against private equity firms. Orf, however, seems relatively unmoved by the protestations of a few German politicians. In fact, he compares the situation in Germany today to the US in the 1980s, when Japanese investors were buying up properties throughout America.

“I remember my father not having very friendly thoughts about what was happening in the States,” Orf says. “I told him that it was actually a good thing because they can't take the Rockefeller Center back to Japan— and what's more, we have their money. I just think what is happening in Germany is symptomatic of the economy that has been cosseted and protected for a long period of time.”

But Germany is only one market on Citigroup's radar. The firm told its investors that it would invest roughly 10 percent of the fund in Central Europe, 10 percent in the UK, 10 percent in Spain and so on, providing a relatively balanced portfolio throughout Europe.

One area the firm has invested in recently is Lithuania, where the economy is growing at approximately 7 percent a year. As in other Central and Eastern European countries, Citigroup is looking to take advantage of demographic trends and a dilapidated housing supply in the country. The firm has bought swaths of land in Lithuania in order to develop residential apartments. It is a strategy Orf believes can be replicated throughout Central Europe.

“It is as exciting as some of the markets in Asia,” he says. “The growth prospects for the next five to ten years are outstanding.”

Yet the first deal out of Citigroup's new fund was a bit more traditional: the acquisition of a London office building. Orf confesses he has been worried about the UK market crashing for the past ten years, but he has still made selective acquisitions from time to time. In nominal terms, office rents in London have hardly risen over the past decade, but Citigroup believes this is about to change. The firm believes it can make money by refurbishing and renting out the acquired office in Gracechurch Street even at current rents; the higher rents that they anticipate will only provide additional upside.

Orf is attached to London. He put down his roots in the British capital some 17 years ago. But he was raised far from the UK in a small town in Missouri. He went to the same college as Bill Clinton, Georgetown University, and like Clinton hankered after a career in politics. However, events led him to a different career path. Happy to study law and business at the University of Chicago because it kept him close to Missouri, Orf found himself rooming with a graduate who eventually persuaded him to work at Goldman Sachs. Shunning offers from Morgan Stanley and Salomon Brothers (now part of Citigroup), he became an investment banker in the Wall Street firm's Chicago office in 1982.

It was there that Orf struck up a friendship with another young and ambitious investment banker, Hank Paulson, who later became chairman and chief executive of Goldman Sachs and, more recently, the US Treasury Secretary.

In fact, one of the mementos in Orf's office is a model of a Santa Fe train, which was given to Orf after he worked with Paulson on a railroad deal. In the 1980s, American railroad companies were under corporate attack for morphing into oil, gas and real estate firms. Chicago-based Santa Fe was no exception. Goldman Sachs was brought in to help the company when it came under attack from the Reichmann family and others. Orf and Paulson proceeded to split the components, floating the real estate division in the process, and pleased Santa Fe's directors by keeping the core company independent. But one event from that deal stands out.

“I will never forget sitting in the office of the chairman in Chicago when who should walk in but Sam Zell,” Orf says. “He came in wearing his black motorcycle jacket and said to the chief executive, ‘Hi, I'm Sam Zell and I now own you.’”

Zell has of course just gone on to smash all the real estate records by selling Equity Office Properties to Blackstone for almost $40 billion—a deal that Orf thinks will have a big impact on the real estate markets. “Because of what Blackstone has done you will probably see a number of other companies in the US, and perhaps companies here, decide to go private,” he says.

Orf met his wife, who hails from New York, in Chicago and the couple moved to the Big Apple in 1985. At the time, Goldman Sachs only possessed a fledgling real estate advisory team and no proprietary investment arm. In the following few years, Orf worked on the sale of numerous buildings to the Japanese, but the real estate downturn of the late 1980s pulled a rug out from under the business. Orf recalls how he was having dinner with the chief executive officer of a real estate company who said simply: “Roger, it's all over.”

For reasons that he claims he is not sure of today, Orf volunteered to lead Goldman's real estate operation in Europe. The adventure started inauspiciously: The UK market collapsed as dramatically as the US and a multitude of companies fell by the wayside. At one point, Orf advised the administrators to Canary Wharf.

By November of 1990, however, Goldman had managed to raise $160 million for its new Whitehall Fund, something Orf was instrumental in setting up. As the bank started doing deals in the US and Europe, one of the highlights for Orf was purchasing the debt of an empty office building in London's Camomile Court from a Japanese insurance company. Just six months later, a tenant stormed in unexpectedly and bought the entire property for a price five times what Goldman had paid. It was the start of a long, successful road for Orf in the European property market, one that has not really ended.

Orf spent a total of 13 years working for the Wall Street bank before setting up Pelham Partners with a Goldman Sachs colleague. Pelham teamed up with New York's Apollo Real Estate and several other private equity firms in a succession of deals, investing $600 million of equity in 40 transactions that ranged from Moscow to London. It was around this time that UK serviced-office company Regus went public, giving Orf, who owned a stake in the company, a considerable windfall.

After a successful run at Pelham, Orf changed direction once again. In 2001, the UK market had slowed and his Pelham partner returned to Boston. Orf, however, says he was not yet ready to sit on a beach. So he called Lone Star founder John Grayken to talk about Germany, where Orf saw opportunities in non-performing loans.

Orf soon became the European head of Lone Star, where he embarked on a €5.5 billion NPL acquisition spree. Some industry observers have suggested that Orf was unhappy during his Lone Star days, but he quickly refutes that speculation. He had committed to Grayken to stay on for the firm's fourth fund and would have been happy to have been involved in the fifth, but along the way an unexpected opportunity came along.

Orf often met for breakfast with Joe Azrack, the legendary founder of AEW and a long-time acquaintance, to swap information about real estate markets. However, during one particular meeting in 2004, over breakfast at Claridges, Azrack was after something else. Unbeknownst to Orf, Azrack had been asked to lead Citigroup's huge push into global real estate investing. And he wanted Orf to be his man in Europe.

No offer was made at that breakfast but over the weeks and months to come, the offer was there. “Eventually I decided it was an opportunity I could not refuse,” Orf says. “The big blockbuster NPL deals had been done, and I felt I had achieved all I could at my former employer.”

Orf describes the subsequent discussions with “persuasive” Citigroup figures—including Robert Rubin, an ex-Goldman colleague who not only ran Goldman, but also spent time as US Treasury Secretary before joining Citigroup—as equivalent to “dating.”

In the end, and with Grayken's blessing, Orf decided to join Citigroup. The result, a year later, is that the largest financial institution in the world has made a significant push into the private equity real estate asset class: the firm now has three worldwide funds, one in the US, one in Asia and one in Europe, all of which have now closed. Together they have raised a monumental €3.5 billion of equity. Citigroup contributed €200 million of equity to the European fund, as well as $200 million to the other two funds. Orf and his colleagues, including chief investment officer Neil Hasson, added approximately £14 million of their own money to the European vehicle.

Observers speculate that because of Citigroup's global reach, its real estate investment strategy must take a “top down” approach driven more by large, macroeconomic issues than local, on-the-ground realities. While Orf agrees up to a point, he adds that Citigroup's franchise does not extend everywhere around the world—plucking Kazakhstan out of the air as such an example. And though the firm's worldwide presence provides an edge, it is nevertheless up to Orf and his team to decide where the best opportunities lie.

“Citigroup has entrusted us ultimately with the decision about where we should be going,” Orf says. “Our business is to see around corners. Our edge is with our people. Myself, Joe Azrack, Neil Hasson and many others give us a very deep bench.

Given that Citigroup is the world's largest financial services firm, it is strange to think of CPI as a start-up, but that is exactly what it is. And far from being a disadvantage, Orf believes that CPI can combine the entrepreneurial qualities of a young organization with the resources of a global institution.

“I think that's a significant edge,” he says, adding that the firm has been able to recruit the “best talent” precisely because of those unique characteristics.

“Our expectation in Europe was that if we had raised €500 million we would have been thrilled,” Orf says. “Combined with Asia and the US, we are the largest first-time fund ever globally. We have done 12 or 15 transactions and we are already selling some of the assets we acquired at a significant profit. To date we think our investors are very happy.”

Judging from the smile on his face, it seems like Orf is too.