Success in the suburbs.

Westrust's Capretta and Ponte made big profits in once-troubled office market; now, they're setting sights on regional shopping centers 

CALABASAS HILLS - When real estate entrepreneurs Ricardo Capretta and Claudio Ponte joined forces about four years ago amid the region's unprecedented commercial real estate depression, few investors were interested in buying suburban Southern California office buildings.

So what type of property did the pair of partners pursue?

Suburban office buildings, of course. But not just any old buildings.

The "value-added" real estate investment firm they had just formed - Westrust Financial Co. - bought interests in "fundamentally sound" but financially troubled buildings.

Four years ago, "office was a four-letter word" in the investment community, Ponte recalls.

Adds Capretta, "Everyone thought we were nuts" to pursue suburban office investments in particular.

After more than $200 million worth of acquisitions, Westrust and its financial partners - as planned - are selling off their office property portfolios for impressive profits, now that the local commercial real estate investment climate has caught fire.

"Everyone wants to buy suburban office properties today," Capretta says.

In recent years, it is the region's retail real estate sector that buyers have generally been avoiding. So guess which property type dominates the $64 million in real estate investments that Westrust ventures now have in escrow?

Shopping centers - what else?

"Ric and Claudio are truly contrarian thinkers, and theft success in the office sector has proven that they're outstanding strategists and expert asset managers," says local commercial broker Bob Safai, who helped a Westrust investment fund lease and sell a once-troubled Studio City office building at a substantial profit.

Capretta notes that Westrust affiliates are purchasing a regional mall and even planning a speculative retail/entertainment development near Disneyland. Revealing the contrarian nature of Westrust's ongoing game plan, "the regional mall property type is a battered real estate segment today," he says.

Not surprisingly, the 39-year-old Ponte, an engineer by training, and 37-year-old Capretta, an architect by training, are finding it much easier to secure major financial commitments from key venture partners than they did four years ago.

At that time, they were preaching their contrarian doctrine to mostly reluctant would-be capital-suppliers.

By 1995, Ponte and Capretta reasoned four years ago, the market would be on the mend. And if an enlightened asset management team could mend well-located commercial properties' ills in the interim, buyers smelling rebound-related future rent hikes would aggressively snatch up the buildings.

History has proven Ponte and Capretta to be prudent prognosticators.

Westrust-led investment teams have typically paid only 30 to 40 percent of "replacement cost" for the 30 real estate assets - carrying combined bank "book value" of about $212 million - that Capretta, Ponte and partners have purchased so far.

And now that institutions, Wall Street funds, offshore buyers and other investors are pouring capital into the L.A. area's office arena, the Westrust partnerships are selling the same properties for 70 to 75 percent of replacement cost.

Execution of the strategy has brought substantial profits to the Westrust principals, as well as to their well-heeled financial partners - including the likes of Minnesota industrial/financial giant Cargill Inc. and Beverly Hills-based investment firm Dabney/Resnick Inc.

But just as significantly, the principals point out, the investors buying buildings from the Westrust partnerships can likewise expect solid returns.

"The plan from the start was to leave something on the table" for buyers, explains Capretta. "We wanted to add value to the properties and sell them (at a profit), while still letting investors buy" at favorable prices.

Westrust accomplishes this by acquiring troubled properties and improving their income streams through hands-on asset management directed by the co-founders personally.

Leasing activity in particular - along with physical improvements when appropriate - has enhanced property values in relatively short time frames.

The Studio City property a Westrust fund just sold, with Safai's help, provides a case study of the firm's value-added strategies.

In late 1994, the WFC Ventures L.P. fund Westrust assembled with Dabney/Resnick - with financing from a unit of giant Nomura Securities Co. Ltd. - purchased a $47 million (book value) pool of five foreclosed L.A.-area commercial properties from Dai-Ichi Kangyo Bank Ltd. WFC Ventures reportedly paid about $22.5 million for the package.

One of those five properties was the 61,000-square-foot Ventura Place project, which was just 51 percent leased at that time. But by the time WFC sold the project less than two years later, for more than $7.8 million, the property was nearly 95 percent leased.

Considering that Dai-Ichi Kangyo's original Ventura Place mortgage carded a principal amount of $10.8 million, the Westrust team was able to create substantial value for its investment fund - clearly more than $2 million, local real estate sources estimate - while also leaving plenty of upside "on the table" for the buyer.

The Westrust team "took the property from probably 'B-minus' to 'A' status and achieved 95 percent occupancy in a market averaging 85," Safai notes. "That's how you get top dollar."

That kind of track record could help Westrust expand substantially - but that's not in the cards and never has been.

"We vowed from the start we'd never grow to more than 15 people, and we think we can still meet our goal of acquiring an average of $100 million worth of property each year," Capretta notes. And even though Westrust Financial plans to relocate from its current cramped quarters to a slightly larger office next spring, that vow to stay small holds.

Spotlight 

Westrust Financial Co.

Year Founded: 1992

Headquarters: Calabasas Hills

Core Business: Value-added real estate investment and asset management

Employees in 1992: 0

Employees in 1996: 12

Acquisitions in 1992: $55 million (book value)

Acquisitions in 1996: $105 million (estimated book value)

Co-Managing Partners: Ricardo Capretta, Claudio Ponte

Goal: Investing $100 million in real estate acquisitions each year, and selling off previously purchased properties at profitable prices.

Driving force: Buying distressed properties in an out-of-favor sector, increasing the properties' occupancy levels, and selling them when the sector's popularity returns.