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Keen Eyes
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[September/October 2006]
By Charles Keenan
Looking For Opportunity - Beacon
Capital Partners
Page 3 of 3 --Beacon
Capital Partners knows a bargain when it sees one. Since its debut
eight years ago, the Boston-based private real estate fund and asset
manager has been snapping up office properties at a fast clip,
outbidding rivals and paying top dollar. This year is no exception.
As of June 30, Beacon has contracted or purchased $5 billion in both
U.S. and European office properties.
...What is important
in terms of driving return is how you
increase value through the operation of the asset. |
Beacon’s recent purchases
include $425 million for an office tower in Boston, at approximately
$418 a square foot, and $130 million—$318 a square foot—for a
24-story building in Bellevue, Wash., in May 2006. Meanwhile, Beacon
also made its first splash into European waters this year, buying
two properties in London and Paris totaling more than $1 billion.
Beacon Capital owns four closed-end commingled funds with a REIT
embedded in each of the structures.
This is all part of
Beacon’s strategy: buying well-situated office properties and then
selling them years down the road for significant profit. The key:
focusing on cities with tight supply, where there are highly
educated workforces and a high concentration of colleges,
universities and teaching hospitals.
“What we look for are
buildings that are difficult to replace,” says
Alan
Leventhal, chairman and chief executive officer of Beacon.
“We don’t want to buy commodities. We want to buy unique assets.”
That strategy has paid off handsomely over the years. Since
opening its doors in 1998, Beacon Capital has generated a gross
cumulative return ranging from 17 percent to 51 percent for its
company portfolio and its closed-end funds. Beacon has amassed an
$8.8 billion portfolio in 10 cities overall, including its first
foray into New York last year.
Investors like what they see.
In April, the firm closed its fourth commingled fund, Beacon Capital
Strategic Capital IV, with $2 billion in equity capital, easily
surpassing its goal of raising $1.75 billion. The fund’s objective
is to acquire office properties in the U.S. and Western Europe with
a total cost of $7 billion to $8 billion. It has already closed or
agreed to buy 11 properties, representing $2.6 billion, including
the London and Paris acquisitions.
Longtime investors praise
the 54-year-old
Alan
Leventhal for his honesty and integrity—as well as his
ability to find gold in places where others do not. John Myers,
former president of GE Asset Management, who left the pension fund
in July after running it for 20 years, says Leventhal has a knack
for generating solid returns. “He has proven to be a brilliant
investor,” Myers says. “He understands all facets of the real estate
market. He recognizes that real estate is an opportunistic asset
class. He has a great nose for finding value in situations.”
Cornell University, with $4.5 billion of assets under management and
a 10 percent concentration in real estate, was an early investor
with Beacon Capital. Howard Milstein, chairman of the Cornell Real
Estate Committee and chairman of Milstein Brothers Capital Partners
in New York, says Leventhal brings the combination of local
knowledge and market capability, along with the contacts and scale
to compete nationally. “The risks that Alan takes are modest and the
returns are outstanding,” Milstein says. “I don’t know of anybody
who is in his league on a risk-adjusted basis.”
Treasure Hunters
Indeed, over the years, Leventhal and his team at Beacon have
uncovered some gems. Most notable is Beacon’s purchase of Boston’s
John Hancock Tower in 2003, paying $910 million for New England’s
tallest building, which this year celebrates its 30th anniversary.
But there are other deals not as sensational in name as they are
in profit. In one earlier transaction, Beacon purchased BP Plaza, a
55-story office tower in downtown Los Angeles for $270 million.
Beacon then resigned a major tenant for 350,000 square feet,
representing a quarter of the space. It also managed to squeeze
another $500,000 annually from parking revenue. Then it signed on
Bank of
America Corp. for 157,000 square feet, and renamed the
building Bank of America Plaza. In 2004, Beacon sold the building
for $435 million, capturing a $165 million gross profit in two
years. Deals like these have benefited from real estate’s updraft in
prices in recent years.
Beale Street
San Francisco, CA, and
Defene Plaza, Paris (below)
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Along with buying
hard-to-replace assets, Beacon pursues a strategy of aggressive
leasing and capital improvements. Aside from these typical methods,
Beacon also has worked to improve its buildings’ energy efficiency,
which also helps the bottom line. For example, The John Hancock
Tower recently won a merit award from the Environmental Protection
Agency, which calculates the building’s annual energy bill to be
$3.5 million less than similar buildings, as a result of
conservation improvements.
“When we identify these assets in
the market and buy them, the question then is, ‘How do we add
value?’” Leventhal says. “What is so important in terms of driving
return is how you increase value through the operation of the
asset.”
Getting a Solid Start
Leventhal’s acumen and instinct began at an early age. His father,
Norman Leventhal, formed Beacon Cos. in 1946, developing buildings
across Boston. Alan joined the company after graduating with an MBA
from Dartmouth College’s Tuck School of Business in 1976. In 1994,
he became chief executive of Beacon Properties after taking the
company public by spinning off the office division from the Beacon
Cos. That helped give Leventhal the scale to launch his approach
nationally.
After starting with an initial market
capitalization of $400 million, Leventhal sold Beacon Properties for
$4 billion in 1997 to Equity Office, the REIT founded by real estate
legend Sam Zell. All told, in Beacon Properties’ short life span,
Leventhal and his company engineered an annual return of 42 percent
for investors.
While
Alan
Leventhal was out of a job in December 1997, he was far from
riding off into the sunset and was immediately able to start Beacon
Capital Partners with colleague Lionel Fortin in 1998. “We closed
the transaction, and in early January, I was back in business,”
Leventhal says.
He and Fortin approached longtime investors,
such as GE, to start a private fund. Beacon raised $470 million of
equity capital with a 144(A) private placement, using an internally
managed REIT Beacon quickly went to work, eventually raising $875
million, which, by the end of 1999, was fully invested in a
portfolio of properties that ultimately generated a 17 percent
cumulative rate of return once all assets were sold. Its subsequent
funds have done even better. Beacon Capital Strategic Partners I, a
commingled fund closed to investors in 2000, has generated a
cumulative return of more than 35 percent. Strategic Partners II has
notched a 51 percent return, while Strategic Partners III has gained
a 19 percent return, and has yet to sell most of its assets.
With each fund, Beacon tends to hold properties for approximately a
five-year period. Once the assets are sold, profits are passed along
to investors, with Beacon taking a slice of the gains above the
fund’s stated return objective (Beacon also charges a management
fee). Most of its building management is done by third parties.
With all the funds, Beacon has no doubt been active in the
office market. In terms of total projected value, Beacon Capital has
invested in $13 billion worth of properties over the last five
years. Nearly a quarter of the value—23 percent—is invested in
Washington D.C. properties, with Boston representing its second
largest concentration at 16 percent. About 15 percent is in San
Francisco, and 14 percent is in Los Angeles. The rest of the
portfolio is spread among six other cities: New York, Chicago,
Seattle, Denver, London and Paris.
With all the growth,
Beacon Capital Partners’ size now surpasses that of its predecessor
REIT, Beacon Properties. Its current $12 billion portfolio is bigger
than the listed REIT’s $4 billion market capitalization when it was
sold in 1997. Now, Beacon Capital oversees 30 million square feet,
compared with 23.7 million square feet before the listed REIT,
Beacon Properties, was sold.
M Street
Washington, DC |
Building the
Right Team
Beacon Capital
has managed to do it all with a lean shop. It has a staff of about
45, versus 1,000 employees when Leventhal ran the REIT. Among the
current team are key managers from the Beacon Properties days:
Douglas Mitchell, a senior managing director oversees leasing
operations and capital improvement; Jeremy Fletcher, a senior
managing director, runs the West Coast operations; and William Bonn,
a senior managing director, is general counsel. After partner Fortin
retired in 2001,
Alan
Leventhal hired
Fred Seigel—a friend, investment banker, and businessman—as
president and chief operating officer. In the past two years, the
firm has added key hires in New York, London and Paris.
Over
the years, Leventhal has managed to engender loyalty among his
staff, along with respect from those on the other side of the table,
says Bob Lieber, a managing director at Lehman Brothers, who has
worked with Beacon on both sides of its transactions. “He takes a
very personal interest in the business and in the transactions they
make,” Lieber says. “For him, it is incredibly important.
Relationships mean a great deal to him. It’s not just about the
deal.”
Picking Properties
Alan
Leventhal is taking his strategy for choosing the right
office properties across the globe. Across the Atlantic, London and
Paris office markets show the same characteristics that appeal to
Beacon: rising rents in highly educated markets, with office supply
that is constrained and difficult to replace. “The types of things
we are experiencing here in the U.S. we are also seeing in London
and Paris,”
Leventhal
says. “You don’t see significant new supply, and given the amount of
demand over there, it points to an attractive time to invest.”
That same strategy also carries to suburban office parks. In
May, Beacon signed an agreement to buy Westchester One, a 21-story
office tower in White Plains, N.Y. Beacon agreed to pay $181
million, about $213 per square foot. Beacon also closed a deal in
January for Skyline Tower, a 24-story building in Bellevue, Wash.,
for $130 million, or $318 a square foot. Last year, Beacon paid $276
a square foot for Bay Colony, an office park in Waltham, Mass. and
scooped up 12 properties in suburban Washington, paying prices
ranging from $200 to $450 a square foot, according to figures
tabulated by Real Capital Analytics.
While the prices might
seem high, Beacon factors another variable into its evaluation of
its properties: what the value of replacing the asset would be at
the time of a future sale. “What we focus on more than anything else
is the cost to replace the asset,” Leventhal says. “We look to see
if we can sell a building in five years’ time at some significant
discount to the replacement cost then.”
That philosophy seeps
into all of Beacon’s decisions. “They are pretty consistent with
staying with what they know,” Lieber says. “That is in large part a
by-product of the focus Alan brings to major urban office
properties.”
Bank of America Plaza
Los Angeles
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To be sure, Beacon’s
properties have uniqueness. The Hancock Tower gives tenants
unobstructed 360-degree views. Because of zoning restrictions, the
chances of getting another 60-story building built in Boston’s Back
Bay section are slim to none. Its Bay Colony property is situated in
what is considered the best region along Boston’s technology
corridor, Route 128. “Waltham is the best location, and this is the
premier location within Waltham,” Leventhal says. “We just felt
rents would really start to move, which they have.”
The
fundamentals still point to future gains,
Alan
Leventhal says: “If you can buy office buildings at some
reasonable discount to today’s replacement costs, where that
replacement cost is rapidly rising and where you see virtually no
new supply coming—that provides an opportunity to make solid
investment returns.”
Related:
Alan
Leventhal Blog |
Beacon
Capital Partners
Related:
Fred Seigel Beacon Capital
Partners
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Charles
Keenan is a contributing writer to Portfolio. |
