By Charles Keenan

Looking For Opportunity

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 valuethrough 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 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)

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 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, 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

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

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, 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.”