Being bullish on Hub pays off for Beacon Capital
Being bullish on Boston has made
Alan Leventhal a very successful man.
Page 2 of 3 -- While others lament the current population decline, sluggish job growth, drain of signature companies, and high cost of living, Leventhal, founder of Beacon Capital Partners LLC, sees a city well positioned for the future.
His eight-year-old private real estate firm has invested successfully in Boston and in what he calls ``knowledge-based" cities like it around the country.
Beacon Capital paid $910 million for the John Hancock complex in 2003; one local broker estimates the Back Bay landmark is now worth as much as $1.5 billion. The company has just ventured abroad, buying $1 billion worth of property in London and Paris. ``That's two buildings," Leventhal said, laughing during a recent interview.
But that's the point: Beacon Capital's strategy is to go after valuable properties in key cities where land and top-quality buildings are few in number. With capital improvements, aggressive leasing, and the general escalation in the value of real estate, those properties should be more valuable in just a few years when they're sold.
This week, Leventhal again showed his faith in Boston, when he signed an agreement to purchase another prominent tower, One Beacon Street, from its New York owners for about $425 million, Rob Griffin, president of Cushman & Wakefield of Massachusetts Inc., confirmed yesterday.
Leventhal was already a success before Beacon Capital. His father, Norman Leventhal, started Beacon Cos. in 1946 and eventually changed the Boston skyline with its buildings, including the Rowes Wharf complex and One Post Office Square.
They took the family company public, and then sold it in 1997, for $4 billion. (The Leventhals are also prominent supporters of civic causes, including Combined Jewish Philanthropies of Boston, and the planned Center for Arts and Culture on the Rose Fitzgerald Kennedy Greenway.)
``Alan could have gone to the beach," said John P. Fowler, executive managing director of the investment consulting firm Holliday Fenoglio Fowler LP. ``But he has higher plans, and I continue to be amazed at how much money he can raise and how he deploys it."
Beacon Capital Partners' fifth investment fund, with an initial target of raising $1.75 billion, recently closed at $2 billion. Each of the company's previous funds also exceeded initial fund-raising goals. The objective on the new fund is to make an 18 to 20 percent return.
Past returns have been terrific. Its third fund had gross annual returns exceeding 50 percent; another, 35.3 percent. The overall average return is 30 percent.
``Thirty percent is phenomenal," said Hans Nordby, director of US market research and forecasting at Property & Portfolio Research Inc., a consulting firm in Boston. Indeed, real estate mutual funds, for example, had annualized total returns of about 15 percent over the last 10 years, according to the financial data firms Lipper and Morningstar Inc.
Beacon Capital's investors, numbering around 70, include endowments, pension funds, insurance and investment companies, and a few wealthy individuals. (Minimum investment is $10 million.) Beacon intends to leverage the $2 billion in the newest fund, by borrowing money, into purchases of about $8 billion worth of buildings.
Here's how a Beacon Capital fund works: Alan Leventhal and his team set a dollar goal and get commitments from investors, from $470 million in the first fund to $2 billion for the current one. They draw down pledged cash as they find the real estate buys in favored cities, including Boston, Washington, Los Angeles, San Francisco, and Seattle.
Beacon Capital's goal is to hold buildings about five years and sell them profitably, usually after making capital improvements or securing advantageous leasing deals. A lean staff of about 50 handles assessment of potential investors, property evaluation, investment strategy, and leasing. Most building management is contracted out.
Beacon Capital currently has a portfolio of about 26 million square feet, with an estimated market value of $8.7 billion. By contrast, said company president Fred Seigel, when Beacon Properties sold its 23 million square feet of property to Equity Office Properties in 1997, it had 550 employees.
Early last year Beacon Capital began looking to expand into Europe, where it foresees the same kind of appreciation it has received from US markets.
``They were introduced to us by some of our longstanding German investors," said James Goldsmith, director of international investment at the real estate firm Savills of London, which worked with Beacon Capital. ``They were very professional, very quick. They did everything they said they would do."
Beacon Capital has had some stumbles. A Dallas portfolio of office property from the first fund was sold for about a 14 percent loss after new, competitive space was built in the area. Even so, Beacon Capital posted a respectable 17 percent overall return on that fund.
``It was not a good investment decision," Leventhal said of the Dallas buildings, ``and it was not consistent with our strategy," which is investing where no one can easily come along and build something new.
Beacon Capital's target cities typically have good transportation, a liberal dose of cultural institutions, skilled jobs with high wages, and, in Leventhal's view, favorable demographics. ``Young, highly educated workers want to live in New York, Boston, the cities we invest in," he said.
``What made us successful in Boston and drove the Boston economy is what has made us successful today -- on the East Coast, the West Coast, in London and Paris," Leventhal said. These are ``high barrier to entry" cities, where if it's expensive and difficult to build new buildings, existing buildings become more valuable.
Leventhal's plan with his first fund, following the sale of the family company, was to invest, grow, and go public. But as the 1990s closed the ``market was weak," Leventhal recalled. Now, some competitors are speculating Leventhal will revisit the earlier plan to go public.
To this, Leventhal responded with an emphatic shake of the head, and a firm ``no."
Thomas C. Palmer Jr. can be reached at firstname.lastname@example.org.