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RLJ: PPIP will help achieve ‘price discovery’

The founder of RLJ Companies, Robert Johnson, says the US bailout programme will help establish a market price for real estate-related securities – and potentially for banks’ other real estate assets. "It’s not a total panacea but it will help banks that are trying to find market pricing."

RLJ Companies founder Robert Johnson said the US government’s PPIP programme could be the first step in achieving market-clearing prices for troubled real estate assets.

A partnership between Bethesda, Maryland-based RLJ and Western Asset Management, the fixed income arm of Legg Mason, was yesterday selected as one of nine managers to take part in the initial round of the Public-Private Investment Program.

The managers now have 12 weeks to raise at least $500 million, and up to $1 billion, in private capital which will be matched by the government and used to purchase legacy securities.

It’s not a total panacea but it will help banks that are trying to find market pricing.

Robert Johnson, RLJ Companies

Johnson, who made his money establishing the US channel Black Entertainment Television, rejected industry concerns that PPIP – along with the US government’s two other programmes, the Term Asset-Backed Securities Loan Facility (TALF) and the Troubled Asset Relief Program (TARP) – will not kick-start the real estate market as originally hoped.

Some industry professionals have warned previous government attempts to prop up banks with capital have reduced the need for banks to dispose of toxic real estate-related assets. As a result bid-ask spreads are still too wide for transactions to take place.

“This is one step,” Johnson said. “It’s not a total panacea but it will help banks that are trying to find market pricing. We will get price discovery in this because a market place function will take place. When you get a buyer and a seller you have a marketplace. Banks will be able to use this as a way of determining what their assets are worth.”

However, he noted “price discovery” would be the biggest challenge facing the programme. Even given the fact the selected fund managers will have to raise $500 million of private capital, Johnson said the largest obstacle would be “where and when we reach a price where everyone is comfortable”. But he said: “This will happen.”

The RLJ Western Asset Management partnership expects to target private equity real estate-style returns through PPIP. RLJ Companies also operates the private equity real estate firm RLJ Development and the bank Urban Trust.

The eight other managers selected included a joint venture between Angelo Gordon and GE Real Estate, Invesco, BlackRock, Marathon Asset Management, the TCW Group , AllianceBernstein with Greenfield Partners and Rialto Capital, Wellington Management Company and Oaktree Capital Management.

Oaktree founder Howard Marks said in a statement the selected firms had a “heavy responsibility” managing taxpayers money, but stressed: “Given the events of the recent past, we now believe attractive investment opportunities in commercial real estate lie ahead.”