Coretrust Capital Partners is a fledgling company with an enormous, significantly vacant asset on its hands: the Citigroup Center downtown that it purchased in November for $336 million.
But the daunting task of filling the 250,000 square feet – a full quarter of the building – that is now vacant is being hailed by its principals as precisely the kind of challenge that will get them back into the game after the breakup of their former company.
“This is what we’ve always done,” said Managing Principal John Sischo. “You have to put money back into a property. Buildings are living, breathing instruments. You have to feed them every day.”
Sischo worked with fellow Managing Principals Thomas Ricci and Randall Scott for 20 years at L.A. landlord Thomas Properties Group.
After Parkway Properties Inc. purchased Thomas in 2013, the trio decided to launch their own venture. Coretrust was born the following year.
“We literally started from scratch,” said Sischo, 60. “We’re one of those 20-year overnight wonders.”
Coretrust, with offices downtown and in Philadelphia, is moving quickly. The company poured just under $1 billion into acquisitions last year, sweeping up large properties in Philadelphia; the suburbs of Washington D.C.; and Los Angeles. It closed its first $250 million fund in 2015 through Austin, Texas-based private equity firm Hawkeye Partners and plans to kick off one targeting $500 million this year.
The goal is eventually to own major assets in central business districts nationwide.
Claudia Faust, Hawkeye’s managing partner, said she appreciates the depth of experience behind Coretrust.
“They’re so creative and so bright,” she said. “A lot of people who invest in real estate don’t have a methodical way of looking at opportunity and risk. These guys already have it.”
Major test
Turning around Citigroup Center might be a major test. The blue and silver 48-story tower that appeared on the “L.A. Law” TV show in the 1980s and ’90s has not had comprehensive renovations in years. It will compete with every other Bunker Hill skyscraper for tenants to fill its quarter-million square feet of empty space.
That 25 percent vacancy rate is well above downtown’s average of 16.4 percent last quarter, according to data from Jones Lang LaSalle.
But the building isn’t alone in struggling to find office tenants.
The 72-story U.S. Bank Tower next door, which sold in 2013 for $367.5 million, is 72 percent occupied, according to CoStar. The nearby One Cal Plaza is doing better, at 90 percent full, and its neighbor Two Cal Plaza is 80 percent leased.
“To move the needle on that building’s value, you’re going to have to do a lot of leasing,” Todd Doney, a CBRE vice chairman, said of Citigroup Center.
The Coretrust co-founders say they are well aware of that challenge.
“The entire net worth of this building leaves at the end of each day,” Ricci said, standing by the lobby doors. “And there’s no guarantee they’re going to come back.”
Still, Coretrust has staged turnarounds before. The three co-founders were top executives at Thomas Properties in 2003 when it purchased downtown’s long-neglected City National Plaza, which was less than a quarter occupied. Thomas launched a makeover and pumped occupancy to 90 percent by the time it sold its stake a decade later.
Over the years, Ricci, Sischo, and Scott had been preparing to take over for Jim Thomas, the company’s chief executive, who previously built downtown’s Gas Co. Tower and U.S. Bank Tower with longtime partner Robert Maguire. But Thomas Properties took a beating in the 2008 financial crisis.
Thomas decided in 2013 that it would benefit shareholders to sell – even though the stock had lost half its value since the company went public in 2004. The $1.2 billion sale to Parkway left the Coretrust co-founders out of a job.
“That’s when the three of us decided, you know what, we do truly trust each other,” said Ricci, 59.
Equipped with proceeds from the sale but prevented from buying property under a one-year noncompete agreement with Parkway, Ricci, Scott, and Sischo set about putting Coretrust in place.
Capital plan
One of their first moves was to connect with Hawkeye, which aims to connect institutional investors such as state pension funds with up-and-coming real estate companies. In 2015, Hawkeye decided to allocate $200 million to Coretrust for deployment in real estate assets, drawing on investments from five large U.S. pension funds, one sovereign wealth fund, and one overseas investor. The Coretrust fund size is now $250 million, with the ability to raise up to $350 million of equity.
Coretrust went on to purchase a pair of office buildings in Reston, Va.; an office complex in Fairfax, Va.; the office portion of the prestigious Two Liberty Square tower in Philadelphia; and Citigroup Center downtown. It also purchased a Philadelphia office building on behalf of Korea Investment Management.
With $100 million of the fund still available, Sischo said Coretrust can buy an additional $300 million worth of assets – probably one or two buildings.
The $50 million facelift plan for Citigroup Center is to renovate the common areas; outfit terraces at different levels of the building; and tear away the cubicles, corner offices, and carpets of the ’80s-era suites.
“There’s much more interest now in collaborative workspace,” said Scott, 61.
The aim is eventually to raise monthly rents from about $2.08 a square foot to $2.50 a square foot, exclusive of taxes, insurance, and maintenance.
Coretrust also will move its office there next month, and will soon begin outfitting the sixth floor as a showroom for various types of office design. Ricci, in a bid to enhance the tenant experience, might infuse the lobbies with fragrances such as “white tea thyme” and “fig essence.”
CBRE broker Doney recalled that the team also implemented a showroom floor at City National Plaza, contributing to that building’s success.
“It’s money well spent,” he said. “You still have to compete with everybody else in that Class A market for every tenant.”
