Aecom has long constructed buildings for other people. Now it’s building for itself, and planning to do much more of it.
The Century City-based construction and engineering firm launched its Aecom Capital development subsidiary in 2012 and has taken equity positions in 14 projects accounting for 7.5 billion square feet nationwide.
Its stake in those investments came from an internally funded $200 million pool, and the company is now embarking on a program to raise several hundred million more dollars, this time from outside investors amid increasingly heated fundraising competition for real estate opportunities.
Aecom’s ability to be a one-stop-shop for property development makes it unique among its competitors, said Aecom Capital Chief Executive John Livingston.
“We can invest in it, we can build it, we can design it, and, ultimately, we can operate it,” he said.
“Aecom has a competitive advantage, but it’s a competitive marketplace,” cautioned Michael Dudas, an analyst at Sterne Agee in New York. “The problem is getting the funds. There’s risk and reward, and not all projects get to the finish line.”
Michael S. Burke, Aecom’s chairman, countered that the company’s range of experience makes it attractive to investment partners.
“Clients want the support of a partner that can design, build, finance, and operate a range of public infrastructure and private real estate projects,” he said in an email. “Aecom Capital helps unlock these opportunities for us.”
Livingston said he aimed to raise between $300 million and $400 million for the next fund, keeping Aecom Capital much smaller than big private equity investment firms such as Blackstone Group and Starwood Capital Group. That limited scale is part of a plan for careful growth.
“Other funds can raise a billion or more at a time,” Livingston said. “I believe we have to walk before we run.”
The company is taking an improve-and-sell approach rather than buy-and-hold, seeking to cash out of the projects shortly after their completion.
Livingston landed at Aecom in 2010 after it bought Tishman Construction Corp., where he was chief operating officer. Aecom is the world’s largest construction and engineering firm, employing nearly 100,000 people.
Livingston sought to take advantage of that scale by creating a global platform that would offer full service from design through construction. Then he realized it would make more sense to take ownership stakes in the same assets he planned to build.
“You have much better control of destiny that way,” he said. “If you’re always bidding for work and being hired, it’s difficult.”
The goal is not to generate work for Aecom’s construction arm, Livingston emphasized. He’s looking at profits, which tend to be higher from investments than from service revenue.
That fits with Aecom’s broader strategy, said Andrew Wittmann, an analyst at Milwaukee-based Robert W. Baird & Co. Inc.
“The management team at Aecom has always had an eye for financial returns,” he said. “They think like private equity investors, so it’s not surprising to see them take more of a leadership role in the investment funds.”
Aecom had previously partnered with private equity firms, including Paris-based Meridiam. But by focusing on its own portfolio, management felt Aecom could better connect with projects that will require its expertise.
Running its own fund also provides a level of control that creates opportunity for Aecom’s subsidiaries. Aecom Capital’s deals are inked on the condition that one of Aecom’s companies, Tishman Construction or Hunt Construction Group, is the builder.
Construction typically comprises about 60 percent of a project’s total cost. With $3.5 billion worth of development on its way, that amounts to revenue of $2.1 billion. The company, which had $18 billion in revenue in its last fiscal year, posted a loss of $20.4 million on revenue of $4.3 billion for the quarter ended Dec. 31. The construction segment generated $15.6 million in income in that period on revenue of $1.7 billion.
The company has concentrated a significant portion of its investment portfolio close to home, having a hand in roughly $2.5 billion worth of development in Los Angeles.
It has partnered with downtown L.A. developer Mack Urban to buy six acres of land in South Park. The team is leading that development effort with a seven-story apartment building at Pico Boulevard and Olive Street, with towers up to 40 stories tall to follow. Altogether, the project will offer 1,400 residential units and 300 hotel rooms, at a cost that could range from $750 million to $1 billion.
Aecom plans to begin work on the Sunset Strip by the end of the year, replacing the shuttered House of Blues with 150 hotel rooms and 40 condos in a $415 million project called Sunset Time with Beverly Hills developer Combined Properties Inc. The design will nod to the boulevard’s iconic billboards, with 6,000 square feet of digital signs displayed across the building.
In Culver City, it has planned a 500,000-square-foot project called Ivy Station that will build apartments, offices, retail space, and restaurants next to the new Expo light-rail line. The project is expected to cost $330 million.
Aecom has told investors to be ready for a revenue boost as it sells off completed properties, beginning with a project in Jersey City, N.J., that is set to be finished by the end of the year.
“They anticipate realizing significant gains on those sales,” said Baird analyst Wittmann.
Still, Wittmann noted that real estate development will likely remain a small slice of business within Aecom, dwarfed by its infrastructure and construction megacontracts for clients such as the federal departments of Defense and Energy.
“As long as this remains a niche strategy at Aecom, we think the risk and the returns are acceptable,” he said.
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