FEATURE ARTICLE, MAY 2006

EXPANDING BEYOND HOME
With a new partner in CALSTRS, Houston developer Levcor is growing beyond Texas.
Randy Shearin

When Larry Levine launched Levcor Inc. in 1980, Houston had just come through tough times. As Levine soon learned, the Texas economy was cyclical along with the oil business. A few years ago, Levcor began to sell a number of its Houston assets with plans to recycle its capital into assets throughout the state and country. It began by building centers in expanding areas of the state, like San Antonio, Austin, Laredo, Waco and Sherman. The company has now announced additional projects in Texas, Tennessee, Arizona and Florida. A new investment by the California State Teachers Retirement System (CALSTRS) has enabled the company to grow beyond Texas.

Texas Real Estate Business recently met with executives from Levcor while in Houston. At the company’s headquarters — above a center built by Levcor  — TREB met with Larry Levine, president; Tom Grieco, general counsel/senior vice president-finance; Dan Smith, senior vice president and head of leasing; John Hoag, executive vice president and head of operations and management, and Craig Schuster, director of development.

Levine was the top retail broker at Coldwell Banker Commercial’s Houston office for several years in the 1970s before leaving to start Levcor in 1980. That position allowed him to establish long-term relationships with retailers actively looking to open in the Houston market and at other markets in Texas. Levcor found sites and built centers that accommodated these tenants. In the mid-1980s, after the oil business took a dive again, retailers wouldn’t even look at Houston or his projects, Levine says. He learned then that depending on one market could be troublesome. At one point the company operated offices in San Antonio, Austin and Laredo. By the late 1980s, those offices were closed and the company operated and developed solely in Houston.

“Houston used to be ‘boom or bust’ along with the oil market,” says Levine. “Now, we’re more stable and diversified. Other markets in Texas are also diversified. The Texas market over the last 20 years has been very vibrant. It is one of the first markets that retailers always look at, but when times get tough, they retreat.”

During the past 3 years, Levcor has expanded again to other parts of Texas: Waco, Sherman, Eagle Pass, Laredo and McAllen.

“The assets that we have in Houston today are prime real estate and of the quality that they will be at the top, even in a bad market,” says Levine. “We are positioning ourselves so that when things get soft again — which they will — we will be in a position to profit from market conditions.”

Over its history, the company has developed millions of square feet of community and power centers across the state. The company has continued to develop in Houston as well, creating centers like the Centre at Bunker Hill, The Heights and Hedwig Village. Today, the company has an old regional mall that it is redeveloping in McAllen. Redevelopment has been one shift that Levcor has made in its plans over the years. As where the company used to develop strictly from the ground up, today Levine estimates that two-thirds of the company’s work is redevelopment of existing centers as he sees more profit potential going forward in redevelopment.

“With redevelopment, there is an established market in the location,” says Levine. “Because the center needs some work, you generally know the downside of the market. There is nothing but upside ahead if the redevelopment is done right. Plus, the properties have a built in cash flow from day one.”

The company looks for existing centers in the good locations that are poorly operated and leased. It has redeveloped several million square feet in the last 5 years.

Levcor plans to revitalize its Post Oak Plaza in Houston.

In Laredo, the company is developing a regional open-air center that will have upscale tenants with several major anchors. The project, currently in the early planning stages, will be close to 1 million square feet, says Levine. In McAllen, the company has purchased an existing, poorly performing center that is located at one of the busiest intersections in town. Levcor will redevelop the center, creating a 500,000-square-foot power-lifestyle center.

In Eagle Pass, the company will build a 250,000-square-foot power center.

“All the cities along the Texas-Mexico border are growing,” says Levine.

Expanding its dealings beyond Texas, Levcor has recently announced developments in Crystal River, Florida; Yuma, Arizona; and Knoxville, Tennessee. Because of its history in developing properties throughout Texas, Levcor is comfortable with smaller markets in other states. The company’s current expansion plans involve the Sunbelt States from Florida to California. The company also likes the open-air center format, chiefly because the development lead time is shorter than malls. However, the company has purchased and has owned malls in the past.

“We’re not looking for 1 million-square-foot malls,” says Levine. “However, since we were involved with the development of some malls, we wouldn’t be opposed to pursuing an opportunity if the location was right.”

Because of its past experience, Levcor likes markets with middle market incomes. These markets accommodate retailers like Target, but also some upper end retailers like those found in lifestyle centers.

“The lifestyle centers today cater to the upper 1 percent of households,” says Levine. “A lot of time there is not enough of that 1 percent in our markets. That market is also very dependent on their household income. While lifestyle centers are in, when things take a turn that market will cut back on disposable income. If you cater to the middle working class — the people who pay cash for their automobiles and who are not overextended — you will be better off in a recession.”

By the ICSC Spring Convention, the company plans to have eight new projects for discussion with prospective tenants. Among them are the projects in Knoxville, Yuma and Crystal River, as well as those already underway in Texas.

In Knoxville, the company is building a Target-anchored center. Target will develop its own store on 12 acres, and Levcor owns the adjacent 18 acres upon which it will develop a power center.

“We don’t just rely on the tenants to tell us where to go,“ says Levine. “We heavily study the demographics and the area, and especially the location. We want to be the best intersection in town.”

In Yuma, the company purchased a surplus Target location that it plans to redevelop into a community center. The company is very comfortable operating outside the typical retail format. In McAllen, the company was looking for vacant land to develop a new shopping center when it passed by an older center that it had previously tried to buy 5 years ago. Remembering the opportunity, Levcor contacted the owner again and found out that this time, it was willing to sell.

“The brokers know that when a former Target or Wal-Mart comes on the market, we are at the top of the hit list as a buyer,” says Levine.

The company has a goal to still have 30 to 40 percent of its development plans in Texas. The remainder will be in selective markets across the Sunbelt.

Since Levcor is a smaller company, it is able to make decisions rather quickly. The company’s five officers bounce ideas off each other and help the company make the final decision as to whether an acquisition or development deal that’s on the table fits the company’s program.

“Our first step in any acquisition is to look at the inherent real estate value,” says Levine. “We look at any project as if it is 100 percent vacant. If the real estate is great, we consider it. Give me the downside; the upside will take care of itself. We want to know the worst case scenario before making it better.”

Most of the existing projects that Levcor has acquired have been purchased based upon land value. In Waco, Texas, for example, the company acquired a center where the land alone was appraised higher than the center’s purchase price.

Levcor leases all of its properties from its Houston office. It manages a number of its Texas properties from its Houston office, while others have on-site management. In other states, the company plans to hire local managers to handle the center. Anchor leasing for remote projects will be handled by Levcor, while renewal leases will be contracted with a local brokerage firm.

In 2005, Levcor struck a deal with CALSTRS to create a joint venture partnership called LevCal to develop and acquire centers. The two entities have raised $111 million in equity and will leverage the equity up to 65 percent, equating to approximately $350 million in centers that it plans to buy, build or develop over the next 3 years.

“When we look at our big retailers, like Lowe’s and Target, we see that they want to open over 100 stores per year,” says Levine. “We want to be able to develop for them in other markets the same kind of developments that we’ve been able to build for them in Texas. With the REITs selling and slowing down on development, we think the opportunity is right to expand. The retailers want experienced developers to grow with them.”

Being able to make quick decisions allows the company to move swiftly in acquiring new sites or existing redevelopment opportunities. The amount of capital that Levcor now has will enable it to buy portfolios of shopping centers, or even another owner of centers.

“The CALSTRS investment will make it possible for us to move even quicker than we already do,” says Hoag. “It will also allow us to do a lot of things going forward that others can’t do.”

Levcor is approaching its growth plans with “cautious optimism,” says Levine. It is being careful not to expand its operations too quickly by hiring the wrong people. The company isn’t jumping into unknown waters without its due diligence, either.

“We are going to grow the business as it makes sense,” says Levine. “If that’s 1 million square feet per year or 3 million square feet per year, each deal has to stand on its own and make sense.”

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