The folks of J.E. Robert Cos. are ending 2004 on a high note. As reported in October, the McLean, VA-based investment and asset-management firm closed its JER Fund III with some $823 million in capital. But the firm also closed on its JER Investors Trust—JERIT for short—to the tune of $172.5 million. And then there’s the JER Europe Fund II, which tips the scales at roughly euro 123 million, bringing the grand total buying power to near $3 billion. Not a bad year, all things considered. The capital is earmarked for a specific niche—those assets deemed by the firm to be mispriced by the market and considered prime for value-enhancement. In a recent, exclusive interview, president and chief investment officer Deborah L. Harmon talked about the year that was—and what lies ahead. What is your basic investment mission?

Harmon: We look for the opportunity to add value. We look for where the risk might be mis-priced and the asset needs more capital. How does that differ from other approaches?

Harmon: We’re swimming in a slightly different pool from the likes of, let’s say, Wells. Broadly, current debt and equity underwriting standards have become much more aggressive at the origination level. I see it also with lenders competing to finance projects. But that plays into our strategy, which is to focus where there is less capital competing for opportunities. The risk is being mispriced in the more complex transactions that need the value enhancement or where there is a seller who is distressed. Capital is a commodity–at all levels, core, core-plus, value-added and opportunistic. You need to be focused on fundamentals and you need to stay dedicated to risk management. You always go for the added value?

Harmon: Yes. Otherwise we’re just competing with core buyers. We take an asset that’s 50% to 70% leased, reposition and stabilize it and sell it, maybe to the REITs that are looking to buy more core or core-plus assets. So office and hotels figure heavily in your strategy, no?

Harmon: We’ve focused on hotels recently because on a relative basis to other types of properties they’ve been less expensive. They’re also showing significant occupancy and rate increases. As hotels were on the decline and risk was increasing, we followed them. We do believe the sector has bottomed and that there will be more positive surprises, especially in certain markets that were harder hit. We do think it’s an emerging market, and it will deliver a strong risk-adjusted return, but you do need to be selective. And office?

Harmon: In Fund II, almost 50% of our transactions were in office and it was very successful. To contrast, in Fund III, we have one office investment. And that’s in Washington, DC. In fact, we’ve looked on the order of billions of dollars of office in the past 12 or 24 months and just didn’t feel that we’d see the appropriate returns for the level of risk involved. When do you see that turning?

Harmon: Given the election outcome, I don’t see a spike in interest rates. The office market houses the general economy, so when increases in job growth begin, you want to buy right before that. This is becoming a favorite question for investors I interview, but are there deals that make you shake your head?

Harmon: Absolutely, but I’ve seen that for the past three years. In the macro picture, no one would disagree that there are questionable deals being done, but in selective niches there is sufficient opportunity for us. Remember, our goal is to assemble a diversified pool of value-oriented investments in the four major food groups and complement that with hospitality, CMBS and healthcare real estate, which generate higher niche-like returns. It’s harder than it was, though, isn’t it?

Harmon: We’ve just closed or have under contract close to $750 million in investments. That’s significantly higher than either of the past two years. Likewise, the projected returns are higher than we’ve seen over the past two years. The only difference is you really have to look hard to find those investments. So, where from here?

Harmon: I have every intention of continuing to generate the kinds of returns we currently have. Every day you have to earn the confidence of your investors for subsequent funds. We’ll continue to pursue highly attractive risk-adjusted returns, and we’ll expand our investor base, focusing on both public and private capital. And we’re committed to expanding our relationship with operating partners in North America and Europe. By this time next year, I would like to have invested in the fund as much if not more and have generated a number of operating partnerships across the country–especially in California and the Southeast. In Europe, I see us being fully invested and in the process of raising capital for another European vehicle.

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