A partnership of developer/operators with hands-on real estate experience backed by the strength of an international private investment firm is the synergistic key to success for Dallas-based Olympus Real Estate Corp.

Established in 1994 as the real estate investment affiliate of Dallas-based Hicks Muse Tate & Furst Inc., Olympus has invested more than $3 billion in real estate transactions worldwide, including equities, mortgages, securities and operating companies. Olympus manages substantial discretionary equity capital from its principals and limited partners, which include many public and private pension funds, corp-orations and financial institutions. Olympus also provides equity and mezzanine capital to real estate owners, operators and developers.

In 1996, the firm closed its first investment fund, Olympus Real Estate Equity Fund L.P., a $270 million fund set up to opportunistically pursue real estate acquisitions in major markets throughout the United States. In July 1998, the firm closed Olympus Real Estate Fund II L.P., an $812 million fund making diversified investments in global real estate assets.

Michael G. Medzigian, managing director and partner at Olympus, spoke with NATIONAL REAL ESTATE INVESTOR about the firm's strategies, transactions and market opportunities.

NREI: Please explain your investment strategies and competitive advantage as a private equity fund.

MEDZIGIAN: We manage a series of discretionary funds, and the focus of our activities is in value-added situations where we can apply redevelopment capabilities and asset management skills to take a lagging property in a given market and turn it into an asset that outperforms its market.

While there are similarities in a lot of funds, one of the differences in our organization is that each of the partners in Olympus have all acted as either real estate operators or developers.

While we have significant financial expertise through our affiliation with Hicks Muse, we also have hands-on real estate experience that translates into a slightly different mindset than one that might come from a purely financial background. It enables us to reposition assets rather than arbitrage, for example, buying a portfolio or pool of properties and then arbitraging the individual components. That is our primary difference from other funds.

While institutional investors have a number of ways to invest in real estate - direct investment, securities, etc. - the fund format works very well. While we don't look at what we do as the only way to operate, it is a logical part of an institution's portfolio that gives them exposure to a deal flow they would otherwise not see. This comes from giving a general partner discretion and confidence and allowing them to react and execute transactions in a way that would be difficult for a large institution that has an extensive board process before it can perform. Pension funds as direct investors just couldn't do these kind of deals on their own.

NREI: In which property sectors are you finding the best investment opportunities?

MEDZIGIAN: Olympus has invested a-cross most product types, although we have not been a big investor in the retail sector, given the dramatic changes, such as e-commerce, in that industry. We also have not been active in industrial properties for different reasons, one being that investment there requires a large national control of a tenant base.

Beyond that, we continue to see opportunities across various property types, and we continue to provide joint venture equity capital to developers and operators who are out in the markets in all sectors. While any given sector may look less attractive today, you can always find some opportunity because something is usually out of equilibrium in some market.

In terms of overseas investments, Hicks Muse has been a large investor in Mexico and Latin America, and also has a presence in London. We are seeing strong deal flow in those parts of the world because of that relationship. Right now, however, there are a lot of opportunities in the United States, and that is where the majority of our focus has been.

NREI: Are returns expected to stay at the relatively high levels funds have recently provided investors? Generally, what is your average holding period for assets?

MEDZIGIAN: If you look at most funds, they have generally targeted leveraged returns in the 20% range. Early funds and performance to date has been at that level or higher.

If you think about the impact of leverage on property performance, while some may find that a high return, a 20% leveraged return on an unleveraged deal, is not that high. We continue to see these levels as achievable, but perhaps the days of 50% leveraged returns are not achievable anymore. But the opportunities we are looking at are as attractive on a yield basis as they were two years ago.

Regarding holding periods, with any kind of value-added strategy, if you run computer models on maximizing returns, generally three-to-five year or four-to-six year periods are best. Our fund has that capability and may invest for a longer period. As a generality, the key is to maximize returns without exposure to multiple cycles.

NREI: How do some of your more recent acquisitions best illustrate your value-added strategy?

MEDZIGIAN: In the hospitality sector, a recent acquisition is the Casa Madrona Hotel in Sausalito, Calif., would be a good example. (In early May, Olympus acquired a majority interest in the hotel, a 34-room luxury facility built in 1885; Olympus plans to expand the facility working with its current proprietor.) This property is reflective of what our hotel strategy has been over time in that it represents a unique asset in a market with significant barrier to entry. The entire Sausalito hotel market has less than 200 rooms available, and the Casa Madrona is the largest hotel property in that market.

Other hotel acquisitions include the 1997 purchase of the famed Algonquin Hotel in New York with The Camberley Hotel Co. of Atlanta; The Copley Plaza in Boston; the Ritz-Carlton in Rancho Mirage, Calif.; and the Cheeca Lodge, a 203-room luxury resort on Islamorada in the Florida Keys, which was purchased in partnership with Coastal Hotel Group Inc., Chicago. Each of these assets has unique characteristics and a unique clientele.

We focus on properties that are one-of-a-kind in their market, such as the La Posada in Santa Fe, N.M., which is a historic resort with 5 acres of land within the downtown core, which is an extremely dense market.

We purchased the Rosario Resort, a 127-room luxury hotel and 65-boat marina on Orcas Island, Wash., between Seattle and Vancouver, British Columbia. This property is unique in that it includes approximately 16 acres of adjacent land than can be used to expand the resort and approximately 95 acres of nearby land for residential development.

With Westbrook Partners LLC, New York, we acquired Rancho San Carlos, which is a 20,000-acre parcel in Monterey County, Calif., near Carmel. It is a one-of-a-kind piece of land that will ultimately be developed to include a golf course, approximately 300 single-family residences and an equestrian center, while 18,000 acres will remain permanently as a nature preserve.

In many cases, we focus on demographics and the aging of baby boomers and where that is taking real estate needs. This has led us to focus on the golf resort sector, which is a consolidating industry.

In 1996, we invested in Arnold Palmer Golf Management Co., San Francisco, and have grown the company, which is one of the nation's leading owners and operators of golf courses and clubs. The initial investment represented $35 million of equity capital to fuel growth plans, and in April 1999, Olympus committed an additional $50 million to expand our partnership.

We see Palmer as a company that has the ability to grow brands and not just golf course properties. Olympus also has completed other golf-related activities outside of Palmer in joint ventures with operators and developers.

Other activities involving operating companies include an investment in Stratus of Austin, Texas, which is a significant landowner in Austin. Besides making a stock investment in a public company, Olympus also is providing development capital for land assets.

We have acquired majority ownership of Park Holdings LLC, Scottsdale, Ariz., in which we are developing a full-service brand. Park Holdings controls Park Plaza Hotels, a four-star hotel brand, and Park Inns, more of a three-star limited service product, which has significant holdings worldwide.

We also have completed a number of transactions in the multifamily and single-family residential markets in joint ventures with the Holigan Companies, a residential development group based in Dallas, and with Ceebraid-Signal Corp., a West Palm Beach, Fla.-based owner and manager of multifamily properties.