BLUEPRINT: Work boots and wing tips

When David Marks and Jason Blank were attending university at the Massachusetts Institute of Technology, they came across a certain phrase: “Work boots and wing tips don’t mix.” The phrase – the kind of thing a Boston contractor might shout while drumming his fist on a desk – is intended to mean that a get-your-hands-dirty construction worker does not work well together with a return-driven financial type.

Yet for Marks and Blank, who worked at The Blackstone Group and Merrill Lynch respectively before starting London-based Brockton Capital in 2005, that phrase rankles because they fundamentally disagree with it. “They do mix,” contends Marks. “It’s rare, but you need both.”  

Blank adds: “We have property DNA – buildings, bricks and mortar – and we understand finance. It is a key concept.”

PERE caught up with the Brockton team at their offices on London’s Wardour Street. The location is a little unusual for a private equity real estate firm given it is a stone’s throw away from the Soho and Chinatown entertainment district of London instead of the more traditional and costly Mayfair area. 

The inside décor and adornments also are a curious hybrid to match their style of investing. Overall, the open-plan office presents something of a cross between a real estate development company and an edgy design firm. There are high-tech screens, dark desks and various artifacts providing clues to the firm’s ‘DNA’, although some are not immediately obvious. 

On the floor leaning near a window are several large black and white framed photos, including one of the most recent US presidents walking along together. There also is an architect’s model of Canary Wharf dating back to 1989, when it still was owned by Olympia & York. 

At the far end of the office are 10 American football helmets, which it later becomes clear are the teams from the cities where many of Brockton’s US-based limited partners are based. “The assets might be in London, but the capital and pension beneficiaries come from Detroit and Texas,” Marks says. “We always remember that.”

Upstairs, where longer private meetings can be held, is a main space filled with a large boardroom table and photo-graphs of people who re-shaped cities, from John Nash to Robert Moses to Ove Arup. 

Not your typical firm 

Brockton has never been a typical firm, essentially incorporating a property company approach within a return-driven investment manager. Its culture appears “closer to the street” than typical firms and, indeed, the founding philosophy is to create value through a combination of investing in high-growth sectors and hands-on asset management. 

“They are extremely good at articulating what they want to do and why,” says one real estate professional who seems to be an admirer. “That’s quite unusual.”  The same professional says they are “thoughtful” but also questions whether they might be “over-zealous” in the due diligence stage. Do they miss opportunities as a result?
Brockton invests in a mix of traditional assets and real estate platforms such as Virtus Data Centres, which owns data center properties within the M25 ring road around London. “The idea to the outsider seems to be to create goodwill with the platform deals, but they have yet to prove it,” the professional says. “The firm is fascinating but not yet proven.”  

That observation is something with which Brockton would take issue, as the firm has successfully exited platform deals not intended to be ‘goodwill’ plays. For example, in 2011, after having built up London-based pub business Realpubs, it sold the business and management to listed pub-brewer Greene King for £55 million (€65 million; $87 million), generating a 2.1x equity multiple and a 37 percent IRR.   

Though Brockton might be hard to pigeonhole, it nevertheless has become established in UK real estate over the past eight years. Indeed, Marks became president of the British Property Federation his year for a 12-month term. He argues that, even though the role takes up approximately 10 percent of his time, it is additive to Brockton because the role gives him an insider’s perspective on UK real estate such as changes that the UK government is making to the industry and top-level debates around major infrastructure projects, not to mention even greater personal links to participants across the industry, including the CEOs at major UK property REITs. 

Inside tenants’ shoes

Talk to investors, rivals, consultants or brokers, and one invariably will hear Brockton and its partners described in complimentary terms. PERE even included Marks and Blank in a July 2007 feature called “20 Rising Stars” after peers suggested they were new managers worth watching. 

One frequently hears that the Brockton team is “smart” and has a very high command of details within their investments. Yet it is an unconventional type of smart, where asset management and adding value is laced with an investment thesis based upon a desire to fully understand first-hand how global industries and market forces are working hand-in-hand to change real estate. For example, in identifying assets to purchase within its high-yielding industrial portfolio, the firm will research the auto supply chains around Jaguar Land Rover’s new car plants in the West Midlands before buying assets that are leased to those suppliers.  

On his Blackberry phone, Marks plays a video of robotic welders on the inside of an industrial unit Brockton now owns. “This tenant already is part of the Honda supply chain and is trying to become part of the Jaguar Land Rover supply chain,” he adds. 

Another example of “getting inside the shoes of the tenant” might seem over the top, but it is what Brockton does. Before acquiring the one-acre, canal-side investment that forms part of Camden Market in London, the firm took out a stall to see how the street market – Europe’s largest – actually operated from a tenant’s perspective. In fact, Marks let slip that, as a kid, he once had a stall there during his school holidays.

This due diligence approach was evident early in the firm’s life as well. One of the first things Brockton did as it launched and raised its maiden UK-focused fund in 2006 was to go on a road trip in Asia. The resulting booklet that the firm produced was a collection of observations and conclusions following interviews with dozens of people ranging from real estate developers in Shanghai to the boss of a clothing company in Guangdong. 

Up until recently, PERE kept that booklet as a handy guide how to connect once seemingly unconnected Asian trends with a far-sighted strategy for real estate in the UK market. By the way, a fundamental prediction of that Brockton booklet from 2006 was that Chinese capital would flow into UK real estate. Obviously, they were right.

“The Chinese are one of the top five direct investors in residential property in central London,” says Blank. “That wasn’t true eight years ago.” Moreover, Ping An’s acquisition of the Lloyd’s Building is just the start of Chinese insurance companies buying UK real estate, he notes.

“If China sneezes, you better understand the implications,” adds Marks. For example, he points to the symbiotic relationship between China and the US as it relates to interest rates. “Why have Asian central banks accumulated more than $2 trillion of US treasuries?” he asks rhetorically. “It is not because they don’t know what to do with their money, it is because they effectively are part-subsidizing the US consumer. Everyone knows that trend now.”

Marks continues: “You need to go to China to see for yourself the need for full, or near full, employment with the migration of 15 million people per annum to the cities and how that translates into US interest rates. Unless you understand that, you are not going to understand UK and European interest rates and how those tectonic plates shift. As a result, you also don’t have a proper view on UK property yields or whether they are going up, down or sideways, so it is vital.”

Another example of the way Brockton operates came much more recently. Just before the summer, the deal team that acquired a 300,000-square-foot former post office on New Oxford Street in central London went on an “interesting building” tour of office space in London and New York. Overall, they saw 20 million square feet across 50 buildings and even took with them the architect working on the project.  

“What we were trying to do was challenge ourselves to see what were the most relevant and most interesting things happening in those two markets today when it comes to new office space,” explains Tony Edgley, one of the Brockton partners. “Things change, and sometimes they can change quite rapidly. When you are thinking about a 300,000-square-foot office building in London’s West End, you had better think about what we believe is a revolution in terms of how occupiers are using their buildings.” 

Indeed, there is a proper revolution underway, led most noticeably by occupiers from America’s West Coast. “It may be cliché to mention Google, but it is a cliché because is it true,” Edgley continues. “The tech company occupies office space completely differently to virtually all other occupiers in the London market. It is a different way of working and that translates into a different type of office space.” 

Bricks in their DNA 

This nature of being real estate people seems to permeate most things for Brockton, which currently employs a staff of 22. “When we interview a professional to join our team, if they can’t take us to one of the buildings they are working on, we will take them to one of ours and do the interview there, talking about that building,” says Blank. “‘Where can you enhance value?’ is what we ask. That is just in our DNA.”

Simon Samuels, the fourth partner at Brockton, says “professionals at Brockton one day might need to be able to talk to the CEO of an investment manager that might be occupying a Brockton property in the West End and, later that same day, talk to a stall owner selling cupcakes at Camden Market.”

The earlier reference about Marks once having a market stall maybe wasn’t so insignificant, as Brockton likes to think of itself as being entrepreneurial. That said, the founders don’t claim to be alone in their methods when it comes to buying and managing assets. 

Marks points to Simon Property Group and the Westfield Group as two examples of firms that have gone well beyond things such as simple tenant mix to “curating” shopping malls. “How much you pay for an asset is ‘vital’, the capital structure is ‘vital’ and how you exit is ‘vital’, but fundamentally you have to buy the right asset for the right reasons and understand who is occupying it and why,” he stresses.

Brockton claims that the firm’s growth over the years hasn’t changed its DNA. The deals were smaller in its first fund, given the firm raised just £150 million in equity. Its second fund, which raised £500 million in 2010, obviously has allowed for bigger deals.

“You go and attack the due diligence the same way, whether it is assessing a 65,000-square-foot building on London’s Curzon Street for Fund I or The Mailbox in Birmingham for Fund II, which is ten times that size,” Samuels insists. Fund I ended up making a total of six investments, and Fund II has made eight so far, although three of those eight are portfolio deals – a high-yielding industrial portfolio, a Thames Valley office portfolio and a retail park portfolio. 

Brockton has been busy of late making further investments, with a large amount of capital is ring-fenced to be spent on existing assets. One of the last assets the firm acquired was a 100,000-square-foot Class A office building, just 20 miles west of London and six miles from Heathrow Airport. It purchased the property from an administrator for roughly one-third of the all-in cost to the original purchaser.

Furthermore, just last month, Brockton exchanged contracts on an asset that came out of a giant nonperforming loan (NPL) portfolio. The firm had been following the investment through the original distressed owner prior to the NPL sale, made contact with the groups that were bidding and made an offer to buy the asset before the NPL buyer had completed its deal to buy the larger portfolio. “There still are tons of distress within the banks,” adds Samuels.
The investment thesis

The investment cycle of Fund II is sufficiently advanced now for Brockton to be contemplating a return to the fundraising trail next year, and the firm certainly intends to stick to its 100 percent focus on UK real estate despite opportunities in other parts of Europe. 

Marks talks about the big, deep UK market, where inefficiencies still exist that can be exploited in terms of the economic cycle as well as at the asset level. Brockton, however, doesn’t really call itself an ‘opportunistic’ firm as such. Echoing its ‘work boots and wing tips’ philosophy, the firm sees itself more as a “company with property DNA that understands finance.”

“The way we generate returns is all about value attribution,” says Blank. “We start with the premise of what sector or location do we like – the investment thesis – and from there it is about finding an asset, adding square footage, increasing net operating income and, in some instances, changing use from something less efficient to something more valuable.”

In the past six months, Brockton has hired four new analysts and two other professionals. Still, a danger for firms such as Brockton, which are lean and mean but are managing larger amounts of capital as well as platform investments, is that it raises concerns over whether the senior people can continue to put in the same hours at the asset level. The firm insists it can manage, as the team is focused on just the remaining assets in Fund I – both prime residential assets in London – and the eight investments in Fund II.

Blank says Brockton talks to its investors all the time, and one of the things they most often talk about with investors is tenants – tenants that the firm would like to put into a building or which already occupy an asset in due diligence. The firm also likes to find out if the investor might have any relationship with the occupier, an approach also is part of the firm’s culture. 

“For example, we recently spoke to a pension plan that is part of a major food logistics group, which happens to occupy one of our assets,” says Blank. “That is how we think of using communication with investors to help us create value within the assets.”

Between them, Marks and Blank estimate they have made roughly 26 investments as principals. Apparently, only one of them has gone bad – a 2006 investment in General Healthcare Group on behalf of Fund I. 

In that deal, Brockton took a £20 million minority stake in a £2.35 billion consortium consisting of South African operator Netcare, private equity firm Apax Partners and private property company London & Regional. Last year, the firm sold its investment to Netcare for a reported £11 million, recovering just over half of the invested equity. 

“I won’t bore you with a long list of lessons learned, but the main one is control,” Marks says. “Hands up, we said to investors that we made a mistake becoming part of a very high-powered consortium where we didn’t have control. The number one lesson is ‘Don’t think that other people’s alignment, intellectual capital and so on is the same.’ While we had a seat on the board of directors, we did not have control. We will never make another investment again where we don’t have control.” 

The interest factor  

Brockton is fairly typical of a private equity real estate firm in that it targets gross IRRs of 20 percent. For its third fund, which PERE expects Brockton to launch next year, the firm will target “similar” though not identical returns. 

Why not identical? The answer lies partly UK interest rates, which currently are at a 300-year low, and plenty of financial investors are betting on a rate increase sooner than new Bank of England Governor Mark Carney has guided. Still, Marks counters that this is quite a good “tension” because the debate has to do with how fast the UK economy is strengthening. “I have heard of worse macro debates,” he quips. 

Meanwhile, Brockton hopes its investment approach resonates with limited partners. Of the 19 investors in Fund I, 14 re-upped with Fund II, so the firm has a reason to be optimistic.  

“We are not complacent,” says Marks. “If an investor doesn’t come back for whatever reason that has to do with them, such as being overweight in alternatives, you have to be philosophical about that. If the investor is not coming back because of your performance, then that is something else.” 

Blank adds: “Every single one of our professionals invests in every single investment, and every single professional is involved in asset management. When you combine those things together, we believe we have created a culture where all the professionals have an ownership mentality.”

Indeed, it would seem that the key to Brockton’s future success lies in staying true to its original approach. “We have to remain just as entrepreneurial as we were when we started,” Blank says. For Brockton, that means keeping one foot in work boots and the other in wing tips.