By: Douglas Robson - SF Business Times

- February 17, 2000 - After hibernating through much of the real estate boom, Shorenstein Co. is emerging from a three-year acquisitions slumber with plans to spend a bankroll of up to $750 million.

The San Francisco-based real estate giant has raised an undisclosed amount of new equity from foundations, university endowments and high-net-worth individuals. Leveraged up, that gives it a war chest of as much as $750 million, company executives said.

Shorenstein Investment Partners LLC, which closed in late fall, is its fifth, and largest, investment fund. Earlier this month, Shorenstein kicked off its anticipated shopping trip by snapping up a 761,000-square-foot office building in New Orleans for $68.5 million.

With mega-bucks at its disposal -- and the view that rising interest rates and diminished capital flows have whittled down the price of prime office properties in many markets across the country -- the company is not likely to stop there.

"We see this as a good acquisitions period," said Doug Shorenstein, chairman and CEO of the privately held company, from his perch on the 49th floor of the Bank of America building, decorated with Asian art. "Capital is spotty, which presents more acquisition opportunities."

That's a far cry from the company's attitude going back almost four years.

After snapping up about $3 billion in properties between 1991 and 1996, the company applied the brakes when capital became easy to obtain and voracious real estate investment trusts began to bid up prices.

"By 1997 to the middle of 1998, we were still in the markets on the acquisition side, but we were being outbid by the REITs," Shorenstein said. "Our strategy became not to be a net buyer but to actually be a net seller. So we sold quite a bit to the REIT community."

Indeed, with the disposition of assets such as Golden Gateway Commons in San Francisco, the company shed about $900 million worth of assets in an 18-month period. By mid-1998, its portfolio had been reduced by about 5 million square feet to 20 million square feet.

But by the middle of 1998, the real estate capital markets melted down and acquisition-hungry REITs were on the retreat. Shorenstein purchased the John Hancock building in Chicago at the end of 1998.

"We became a buyer again," said Shorenstein, who believes capital is still hard to come by in the real estate markets, which gives his company a decided advantage over REITs and other investors which rely on public markets for their investing dollars.

The acquisition of its latest building in New Orleans, the John Hancock Center in Chicago and the development of an office building in Boston has increased its portfolio back to about 25 million square feet.

Whether or not this is an opportune time to get back into the acquisitions game remains to be seen, experts said.

Diane Olmstead, who heads Arthur Andersen's real estate capital markets group for the western region, said it is a more challenging environment to find assets that can generate returns of 20 percent or more -- what Shorenstein has been able to achieve historically for its investors.

"But, with their operating expertise, they are better suited to deliver that type of return than fiduciary types like pension funds and advisers than in years past," she said.

As with previous funds, the first of which was formed in 1991, Shorenstein's strategy is unchanged: The company seeks to acquire high-quality assets and add value to those assets through its in-house management and leasing capabilities.

With its funds, Shorenstein aims to position itself between opportunity funds -- that might be seeking returns of 20 percent or more -- and more staid investors such as pension funds. It will continue to be conservatively leveraged at no more than 50 or 60 percent.

"We have never defaulted on a loan or given a property back to a lender, and we don't intend on doing that in the future," the 45-year-old Shorenstein said.

Typical of its "value-added" strategy is its new building in New Orleans, the Energy Centre. The building is top-tier but only 85 percent occupied.

As it has done with dozens of other properties, such as downtown Oakland's 1.1 million-square-foot City Center complex, it plans to spruce up, lease up and manage the building until the time is right to sell.

"If we see an asset that we think has a strong leasing position in a given market, then we'll go after it on the theory that we can keep that building leased through all real estate cycles," Shorenstein said.

However, the company won't be targeting specific geographic areas, but will hunt for buys on a case-by-case basis.

Despite its deep San Francisco roots -- with approximately 8 million square feet of space in San Francisco and Oakland, the company remains the region's biggest downtown landlord -- the company no longer sees its home turf as anything special.

"San Francisco is just another market," Shorenstein remarked, citing the company's increasingly national scope of operations. "From an industry viewpoint, we don't see it any differently."

What's more, with prices reaching the stratosphere and no end in sight, Shorenstein doesn't expect to do much buying in the Bay Area anytime soon, though the company "looks at everything" and has unsuccessfully chased a number of downtown properties.

Mike Evans, national director of strategic asset consulting with E&Y Kenneth Leventhal, noted that not only does Shorenstein have the ability to leverage its leasing and management expertise, but it also has buying power at its fingertips beyond the reach of the majority of opportunity funds.

To some degree, Shorenstein's latest fund signals the ongoing evolution of the 50-year-old company to a more investment-focused outfit -- a company now firmly controlled by the younger Shorenstein, scion of company founder and near-legend Walter Shorenstein.

The younger Shorenstein agrees that he's brought to the company a greater emphasis on new investments. But he also stresses that the company has been, and remains, both an investor and an operator of real estate. In fact, that dual strategy has been what separates Shorenstein from most other real estate advisers and opportunity funds, which don't lease or manage the assets they acquire.

But if he's taking the company in a new direction, Shorenstein doesn't shy away from seeking his father's counsel.

Said the CEO: "It's my show, but it's a family show."

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