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REVIEW SUMMARY
Company. Kitson & Partners
Industry. Real estate
Key. Developers with capital and patience will be rewarded.
Nothing gets in the way of Syd Kitson, not even the worst recession in decades.
The West Palm Beach-based developer has been cruising up and down Interstate 75 scouting for opportunities on the Gulf Coast since the blockbuster deal in 2005 to buy Babcock Ranch, the 91,000-acre tract that straddles Lee and Collier counties.
Kitson's latest move is the acquisition of a 60-acre tract in Pinellas County that's entitled for 1,119 condos, apartments and townhomes. Kitson paid $7.65 million for the former mobile-home park near Madeira Beach that sold for $38.5 million at the peak of the boom in early 2006.
The money behind this and other deals is Evergreen Real Estate Partners, a Chicago-based fund that committed $750 million for Kitson to pursue residential and commercial real estate development projects in Florida. “There are not a lot of healthy developers left in Florida,” says Kitson, chairman and CEO of Kitson & Partners.
In fact, Evergreen's investments in Kitson's company allowed it to buy out Morgan Stanley's 50% share of Babcock Ranch. “We own 100% of Babcock Ranch,” says Kitson, who said the deal took place earlier this summer. (Because Kitson and Morgan Stanley purchased the stock of Babcock Florida Co., terms of the 2005 deal for the ranch were never disclosed.)
“High octane” funds such as the one that invested in Babcock Ranch — Morgan Stanley Real Estate Fund V — expected 20%-plus annual returns within five to seven years. That's the kind of boom-time performance that would never have materialized under the current recessionary environment.
Indeed, The Wall Street Journal reported in July that Morgan Stanley was weighing plans to scale back its real estate investments after building the hugely successful family of funds known by their initials “Msref.” The funds' $46 billion in global real estate assets likely will come under greater scrutiny as a result of federal financial legislation, forcing the investment bank to pare the funds.
Kitson says only that “circumstances and timing” led to the Evergreen-backed buyout of Morgan Stanley's share of Babcock Ranch a few months ago. “They've been great partners,” says Kitson, who notes that he now has more control over the future of Babcock Ranch through a new entity called Kitson Evergreen. “Controlling your own destiny is something that's great,” he says.
By contrast, Evergreen has a longer time horizon. “Evergreen is more long-term, patient capital,” Kitson says. “We're more 20-year money.”
Besides Bay Pines in Pinellas and Babcock Ranch in Charlotte, Kitson has acquired a dozen retail shopping centers across the state. “Retail leasing has stabilized and is improving,” Kitson says.
Evergreen officials could not be reached for comment for this story.
Farmer Kitson
For now, the farming operations at Babcock Ranch are covering the costs of holding the land. Kitson says his firm has all the permits in hand to begin construction and is now working on the final engineering drawings. He estimates that the engineering will take another year and construction could begin in about two years. “Babcock is moving along pretty well,” he says.
The regulatory environment remains as challenging as ever, Kitson says. Regulators haven't let up even as the recession decimated construction and related industries. “China would have a city built by now,” says Kitson, who recently traveled to China and Singapore to explore development opportunities there.
But Kitson isn't lamenting the recession because he hasn't spent money on construction at Babcock. “If we had put a couple hundred million into the ground, we wouldn't be happy,” he says.
And the State of Florida acquired the bulk of Babcock Ranch from 2006 to 2009 for $350 million when its coffers were full. The state now owns about 73,000 acres of Babcock Ranch and has hired Kitson to manage its agriculture and ranching operations in the preserve. Kitson retains control of the remaining 17,000 acres that straddle Charlotte and Lee counties, which will ultimately be home to 19,500 homes and 6 million square feet of commercial space.
Unlike many unsuccessful residential developments in Florida's rural areas, Kitson says he plans to attract companies to fill the commercial space first. Then, he'll build housing for employees and others who want to be there. “We're going to lead with jobs,” he says. “I'm not building homes and hope they will come.”
Kitson says he's talking with companies that are interested in relocating to the area, though he declined to disclose who they might be. Powered by a solar-power plant, Kitson says the City of Babcock Ranch will attract companies seeking to tout their environmental stewardship. “Lots of companies want to walk the talk,” he says.
But lining up the power plant has proved more difficult than expected. Florida Power & Light was scheduled to break ground on a solar facility at Babcock Ranch in late 2009, but Kitson says politics interfered with those plans.
State Rep. Trudi Williams, the Fort Myers representative who shepherded the state's Babcock land acquisition, says Gov. Charlie Crist's switch from a Republican to independent candidate for the U.S. Senate halted many plans for the recent special session, including the solar plant at Babcock.
Earlier this spring, in the regular state legislative session, the solar-power subsidy bill that would have benefited FPL and Babcock Ranch “got rolled up into another a committee bill that died under its own weight,” Williams says. Ratepayers would have had to subsidize the solar-power effort, Williams acknowledges, but “it was less than $1 per year per household,” she says.
Still bullish on Florida
While Kitson is still betting big on Florida, he's also a realist. “We don't see a very quick recovery. It's going to be long, slow and steady,” he says.
“What's occurred is that Florida's gotten back to value,” Kitson says, though he warns developers still have to be careful about what they buy even if prices are low.
But haven't great fortunes been made in Florida by buying cheap real estate in depressed times? “There's more skeletons in Florida than there are fortunes,” Kitson cautions.
Kitson says he's hoping to wrap up two more residential and commercial real estate deals by the end of the year, but he says deals are more complex than ever because they often include lenders such as banks and bondholders who may be scattered across the globe. “Some of them are fairly large,” he says.
Part of the problem is that there's no government-appointed body like the Resolution Trust Corp., which cleared out the inventory of real estate and buildings during the last downturn in the wake of the savings-and-loan crisis of the early 1990s. Now, that process will take longer, Kitson acknowledges. “You've got to look hard” to find the deals today, he says.
Still, there are signs that the recovery is at hand. A surge in sales of existing homes on the Gulf Coast this year is one indication, Kitson says. There's no state income tax in Florida, which will continue to appeal to Baby Boomers who want to move to the state for the fair weather. “They do have money and want to come down,” Kitson says. Florida's population growth, even at a moderate pace, will continue to lead the nation
And Kitson is quick to seize on his long-running theme of promoting solar power, both as a conservation effort at Babcock ranch and as a new job-creating industry for the state. He warns other states, such as North Carolina and even New Jersey, have taken the lead in this area. “This isn't just about Babcock,” he says.
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