Challenger America is selling 50 Milk St. in Boston’s Financial District just two years after acquiring the asset.
In what could be one of the shortest long-term real estate holds ever seen in Boston, the owner of 50 Milk St. has agreed to sell the 21-story office building after barely two years under its control, with Challenger America said to be fetching more than $115 million from the transaction. According to industry sources, the new buyer is the same group that earlier this year paid a record price to acquire the Hub’s One Lincoln St. office tower.
Calls to Challenger America officials at their 50 Milk St. headquarters were not returned by press deadline, but sources claimed American Financial Realty Trust has overcome a handful of bidders to win out on the asset. At a supposed price of $116 million, the Financial District tower would trade at $450 per square foot. Backed by an Australian financial institution fueled by pension money, Challenger America paid $109 million for 50 Milk St. in 2002, or about $423 per square foot.
“That’s them,” one source said of AFRT as the 50 Milk St. buyer, a notion supported by several other sources who have been tracking the sale in recent weeks. Company officials did not return press inquiries, but the asset would seem to fit AFRT’s stated preference for properties sporting established financial companies as the primary tenants. The building at 50 Milk St. features a long-term lease to investment banker Brown Brothers Harriman, with its agreement said to extend more than 15 years.
Interestingly, Challenger America was emboldened by the Brown Bros. lease enough to make it the company’s first United States acquisition. The firm hired veteran real estate investment expert Jeff Miller to undertake a program of buying U.S. properties with strong credit leases in place, advancing a strategy of accepting lower returns in favor of long-range stability. The concept has become increasingly popular during the past year, so much so that most buildings offering a strong credit roster have enjoyed dramatic spikes in pricing. In both suburban Boston and in the downtown market as well, assets with solid tenant rosters have garnered eye-popping prices and record-low capitalization rates, as in the case of the $81 million paid by Morgan Stanley recently to purchase two Woburn buildings backed by a long-term lease to Raytheon. According to sources, the capitalization rate on that deal was in the 6 percent range, considered extremely low for a suburban office property.
‘A Moment in Time’
While it is unclear whether Challenger decided to take advantage of the overheated capital market or is altering its investment approach for other reasons, the firm has placed all of its U.S. assets up for sale, including buildings in Denver and Austin, Texas. If the $116 million mark is attained on 50 Milk St., it would certainly seem to mean a significant windfall for the sellers, who were questioned when they initially paid more than $400 per square foot for the building.
“It’s a moment in time,” one source maintained of the opportunity to sell at such a lofty figure. Others claimed internal financial issues related to Challenger’s Australian parent prompted the sales effort. In either case, it does appear to have been a bountiful outcome for the seller.
Based in Jenkintown, Penn., AFRT is a private real estate investment trust that shocked Boston’s investment market when it paid $705 million for One Lincoln St. this winter. The $667 per-square-foot price for the 36-story tower was easily a record price in the city for such a substantial asset, but the full-building lease to State Street Bank Corp. apparently gave AFRT the temerity to outdistance other suitors by a wide margin. The same aggressive approach may now have been used in buying 50 Milk St., with sources claiming that most of the remaining bids were in the $110 million to $112 million range.
On its Web site at AFRT.com, the company acknowledges that it is focused on acquiring and operating properties leased to regulated financial institutions. “As banks continue to divest their corporate real estate, the company believes that its contractual relationships, growing visibility within the banking industry and flexible acquisition and lease structures position it for continued growth,” AFRT explains in its overview. “American Financial seeks to lease properties to banks and other financial institutions, which are typically high credit quality tenants, using long-term net leases with terms ranging from 10 to 20 years, resulting in stable risk adjusted returns on [AFRT’s] capital,” the firm adds.
Sources said that AFRT has been actively looking in Boston for similar opportunities, but it is unclear whether the firm is continuing to target other deals in the area beyond One Lincoln St. and 50 Milk St. Formed in 2002, the real estate investment trust apparently has plenty of capital to spend, having announced recently its $546 million acquisition of a portfolio from Bank of America that encompasses some 7.5 million square feet of space. AFRT has holdings throughout the country, including the Pacific Coast states of California and Washington, and throughout the Midwest and Southeast.
