Firm Salvages Value of Overlooked Properties
Buy a troubled property. Fix it up. Sell it at a profit.
This fundamental real estate strategy is practiced by legions of investors, but very few ever play at the level of a pair of Newport Beach turnover specialists who have wrung millions of dollars in profits out of commercial properties that others were reluctant to touch.
Among their boldest acquisitions was the Orange County portfolio of Shuwa Investments Corp. Steve Layton and Phil Belling outspent several large competitors last year with a $160-million bid for buildings owned by the troubled Japanese real estate company.
Layton and Belling have purchased more than $1 billion worth of property since 1995 and are assembling $150 million for what will be their third shopping spree. Layton-Belling Associates is especially on the lookout for commercial properties that can be electronically souped up to meet the demands of technology firms.
Accommodating the fast-changing desires of tenants is part of the profit formula the pair learned as proteges of prominent Orange County developer Don Koll in the 1980s. What their target renters want now is speedy connections.
“It’s critical to today’s tenants that they have immediate access to the latest in telecommunications technology,” Layton said.
Both fiber-optic and wireless systems were plugged into 19000 MacArthur Blvd., a former Shuwa trophy in Irvine that was half empty when Layton-Belling bought it in 1999. The electronics were part of $3 million worth of improvements intended to please such new tenants as software developer and service provider Winfire Inc.; networking specialist Colo.com and telecommunications giant Qwest Communications Corp. The building is now fully leased and rents are up 25%.
Partnering mostly with Boston pension fund advisor AEW Capital Management, LBA has purchased several properties for which strategic improvements have substantially boosted property revenue and values.
Over the last year, Layton-Belling’s team of 35 real estate professionals has leased about 800,000 square feet of business space, principal Phil Belling said. That amounts to 20% of the 4 million square feet of commercial space under LBA’s control in Orange, Los Angeles and San Diego counties.
Layton and Belling won’t discuss their firm’s profitability, but observers familiar with their performance estimate that the two initial AEW-LBA investment funds have generated annual returns in excess of 20%, which would place them among the better-performing “value-added” investment funds. Such companies attempt to buy, improve and fill up commercial buildings before selling them at a profit and paying a return to investors.
One secret of adding value is attention to detail, said Steve Silk of West Los Angeles real estate investment banking company Secured Capital Corp. He said LBA’s principals are “passionate” about their property improvement programs and said they spend a lot of time selecting such minutiae as floral arrangements and paint colors.
That kind of thoroughness was required to make over an abandoned El Segundo office building that once housed aerospace engineers working for Rockwell International Corp. After installing a new metal exterior, renovating the lobby areas, improving the landscaping and upgrading the air-conditioning and mechanical systems, AEW-LBA’s second investment fund sold the property for more than $30 million to a group affiliated with ownership of tech company Candle Corp., which made the building its headquarters.
The second AEW-LBA fund, formed in 1997, bought and renovated both the Rockwell building and the big Shuwa portfolio, among other properties, for a total of $300 million. But as the increasingly “new media”-heavy Southland economy has continued to grow and absorb once-vacant commercial space, it has become tougher to find such opportunities.
Nevertheless, the AEW and LBA teams are raising capital again, targeting another potential $150 million in Southland commercial real estate investments. Layton and Belling said they will focus on adding value through the kinds of technological improvements that helped the MacArthur building attract high-tech tenants.
Belling acknowledged that the pool of target properties continues to shrink, but said his strategy will remain the same. “The assets we acquire still have to be available for less than their replacement costs and be under-utilized, under-managed or have other issues that our value-added efforts can resolve.”
Along with AEW’s institutional clients and the LBA principals, the new fund’s investors include executives from highflying Silicon Valley venture capital firms. Their insights into what tech companies want from landlords are proving invaluable, Belling said.
Consequently the new AEW-LBA fund will focus on adding technological features to “what appears to be perfectly good real estate,” AEW President Joe Azrack said. A key feature of those properties will be accessibility to the fiber-optic networks that communications companies are laying in metropolitan areas.
The history of one of the former Shuwa buildings owned by the second AEW-LBA fund--the Taco Bell headquarters in Irvine--is an example of the long collaboration by Layton and Belling. When they were in their 20s and working for the company headed by Southland developer Koll, the pair helped develop what would become the Taco Bell building and several surrounding facilities that make up Koll Center Irvine.
Shuwa bought the building during a 1980s office buying spree in Southern California and other major markets. Layton and Belling head the team that bought it back last year--after spending much of the 1990s taking advantage of opportunities created by the depressed real estate market.
During the recession years, when many owners were unable to service their mortgage debts, the pair’s fledgling company was often tapped to operate commercial buildings for lenders who had taken properties back. LBA quietly worked with lenders as receiver for such debt-plagued properties as the giant California Mart in downtown Los Angles, the ABC Entertainment Center in Century City and the Plaza at La Jolla Village in La Jolla.
As the economy recovered and Layton and Belling established their relationship with AEW, they also expanded their team to include the three senior partners--Dave Thomas, Steve Briggs and Bill Kearns--and about 30 other associates.
Layton and Belling said they have yet to lose money on a project. But don’t expect to see them tackle any more troubled retail properties.
“Our experience has been that it’s especially difficult to make a positive impact on shopping centers with fundamental locational or physical [problems], like being a second mall in what should be a one-mall town,” Belling said.
Since 1998, when the AEW-LBA venture sold the bulk of its 5.2-million-square-foot real estate portfolio to Brentwood real estate investment trust Arden Realty for more than $600 million, Layton-Belling (mostly in partnership with AEW) has built its portfolio back up to about 4 million square feet, valued at perhaps $400 million.
And with institutional investors still allocating plenty of capital to real estate, LBA and its partners are predictably looking to sell certain properties they’ve been working on. Some of their other properties are worth keeping for a while.
