Why BH Properties Is Adopting A Conservative Acquisitions Strategy
Los Angeles-based BH Properties is preparing for a potentially slow and painful real estate downturn and is adding “leased fee,” or land leases, to its acquisitions strategy to lower the risk of pursuits going forward. We caught up with BH Properties chief acquisitions officer Andrew Van Tuyle (here with his two sons at an Angels game) last week to find out what types of assets his company is seeking, particularly in SoCal.
Andrew tells us BH Properties has been primarily a value-add buyer, but with the current real estate cycle becoming overheated, his firm has allocated $300M for ground-lease opportunities. “We want to own the dirt, and are looking in Downtown San Diego," he tells us. BH Properties views those as nonvolatile, with less upside, but also little downside.
The low-risk, low-return approach is a change for BH Properties, Andrew says. The firm wants to be in the position to generate annuity-type returns while adding certainty to its portfolio, he says.
Andrew tells us those in this industry are accustomed to falling off the cliff and recovering fairly quickly, but predicts that the next downturn could happen slower and take a longer time to recover than the last one. Due to quick growth over the last five years, Andrew suspects the ultimate effect could be far worse than the relatively brief pain experienced from 2008-2009. By 2013, properties in some asset classes were priced above 2007's peak. “We’ve already had so much growth, it’s inconceivable much more can occur,” he says, “so I think we’re in the last 10% of the recovery.”
That doesn’t mean BH Properties has stopped buying brick-and-mortar buildings. “We’ll buy value-add opportunities in the four major food groups—office, retail, multifamily and industrial—providing the property is in an urban core or secondary market,” Andrew says.
The firm owns one San Diego asset, the Aero office building (above) in Mission Valley. The building was part of a 13-property portfolio acquired from LNR Special Servicing last year. Andrew says his firm is interested in owning more San Diego real estate and is looking for all types of Class-B assets in good condition, except multifamily.
He says the local multifamily market is a little too hot to be of interest to his firm, because with extremely low interest and high rent growth, a lot of capital is chasing the limited number of apartment assets that come to market. Andrew says San Diego’s market dynamics are complicated by a shortage of multifamily stock, because a lot of apartments were converted to condos in the last cycle. As a result, cap rates have dropped to 4.5% to 5%. “This is a really aggressive cap, and you need a lot of rent growth to offset that,” he tells us.
A privately capitalized firm with a portfolio valued at $1B, BH Properties enjoys an acquisitions advantage because it closes deals quickly. “Generally, after a site visit, the decision-making process is complete,” Andrew says. Due diligence is often done before his visit. BH Properties’ last four transactions included 20 properties and closed in 15 days or less, three of which were done in 10 days.
The firm recently divested a 145,400 SF retail center in Calexico, CA, a tertiary market too far afield geographically from the company’s market focus on urban core and suburban submarkets from Texas to the west, particularly SoCal cities, Salt Lake City, Phoenix and Dallas. BH Properties is divesting all assets east of Texas and will transfer capital to Western markets, including San Diego.
