Zarasai is a town in northeast Lithuania. Shortly before World War II, the Weiner family emigrated to the United States. Like many other Jewish immigrants from Europe, the family settled in New York. The Weiners have now been in the real estate business for three generations; in 1996 they founded Pinnacle Group, one of the city's biggest property firms.
This week, in their journey from a small town in Eastern Europe to a business empire in New York, the Weiners stopped for a visit in Tel Aviv. Pinnacle, today controlled by Joel Weiner, decided that Zarasai, one of the operating units in New York, would issue as much as NIS 400 million in bonds in Tel Aviv.
Zarasai, whose chiefs are in Israel on a road show, has a property portfolio worth about $800 million. This includes more than 8,000 apartments and about160 residential buildings in four of New York's five boroughs, Brooklyn with a third, Queens with 30%, Manhattan with 20% and the Bronx with the rest.
Zarasai has a unique business model: 96% of the apartments it owns are rent stabilized; their monthly rental charge is controlled by the city. That's the American version of affordable housing. Rent-stabilized apartments are relatively cheap, up to $2,500 a month. But for Pinnacle this means it enjoys steady demand and relatively stable cash flow.
Zarasai's property portfolio generated some $61 million in revenues last year, representing a 3% rise every year since 2009. The company's balance sheet at the end of the third quarter was $808 million, up from $570 million in 2009.
Why is a company the size of Zarasai selling debt in distant Tel Aviv? The bond market here hasn't been thriving in the last few years. Companies say credit has become difficult to obtain, institutions complain about the lack of liquidity, and until recently the public shunned debt dubbed "corporate."
Zarasai isn't the only American company selling bonds here. Only a month and a half ago, the U.S. property company the Leser Group placed bonds in Israel for the third time, raising NIS 225 million.
The Tel Aviv market's main attraction for foreign real estate companies is the cheap money available. Companies admit that raising capital in the United States for income-producing real estate is more expensive than in Israel.
Israeli institutions are willing to buy debt at lower interest rates.
Moreover, American property companies, which usually enjoy medium-to-high credit ratings, aren't required to provide collateral or liens. The low-cost capital, the lack of a collateral requirement and the Jewish connection that makes Tel Aviv feel less like a foreign market is a winning combination.
Ahead of the bond issue, Zarasai received an A-plus (medium-high) rating with a Stable outlook from S&P Maalot. The credit rating agency noted that most of Zarasai's apartments are rent-controlled and enjoy long-term demand. It added that the company has relatively low leverage at 44% of capital.
Still, Maalot also found that Zarasai is a closely held company and information on its operating history is limited. It also expressed concerns that Zarasai has relied on the management talents of a small number of people who are also the company's owners.
The prospectus that Zarasai published this week documents the transactions Weiner and other controlling shareholders have made, three of which are material.
The first relates to the fees Zarasai pays to an asset management company controlled by Weiner. The fees amount to 4% of Zarasai's monthly rent revenue from its property portfolio, or between $2.2 million and $2.4 million annually between 2009 and 2011.
The second relates to an agreement between Zarasai and a company controlled by
Joel Weiner's son, Neil, and several former police officials that provides24-hour-a-day security to buildings. That business reaped between $580,000 and $666,000 between 2009 and 2011.
Finally, the prospectus says Zarasai reached a new agreement with the owners' management company that will go into effect after the bond issue. The deal guarantees an annual payment in exchange for headquarters-management services.