If a penny saved is a penny earned, then Berkshire Property Advisors has earned many pennies indeed. At every stage of a property investment and every level of the company, Berkshire searches for the “alpha,” the seemingly small factors in acquisitions, renovations, and management that add up to superior returns for the Boston-based firm, which currently owns nearly $1.5 billion worth of multifamily assets.
“We're looking for pennies at all levels,” says Frank Apeseche, Berkshire's CEO and senior partner. “You have to link all the pieces together to get the total return.” At Berkshire, that adds up to between 13.5 percent and 19 percent, a figure the company projects to beat the rest of the market by three to six percentage points during the next five to seven years, thanks to a mix of smart deals, sensible renovations, and operational practices on value-add properties.
“They're always looking for an angle to enhance retur ns,” says Peter Donovan, senior managing director of CB Richard Ellis's multi-housing group. “They see opportunities, they pull them off, and they move more quickly than others.”
No wonder institutions entrust their investment dollars to Berkshire, which grew its portfolio to 20,432 units in 2006. “Berkshire's long track record of successful real estate returns is a product of their thorough knowledge of the markets and their on-the-ground property management and renovation team that has extraordinary high professional standards,” says Dee Dee Sklar, managing director, capital markets, for the New York branch of West LBAG, a large commercial European bank and investor in Berkshire's Multifamily Value Fund.
EARLY ADOPTER For the past two years, the question of “public versus private” has been an oft-discussed one among multifamily REITs, but Berkshire found its answer long ago. Founded in 1969 by brothers George and Douglas Krupp, the company went public as Berkshire Realty Co. in 1991, becoming one of the first public REITs.
Then, in 1998, Berkshire leadership took the company private in partnership with the Blackstone Group and Goldman Sachs, which freed the firm to sell what had become a $1.4 billion multifamily portfolio in 2004 and deliver those gains to its investors. ( The company also sold Berkshire Mortgage Finance, one of the biggest mortgage lenders in the country, to Deutsche Bank that same year.)
Big deals, to be sure, except in the mind of Berkshire executives, who say such choices were simply the reasonable response to market conditions. “We're just playing the cycle,” says David Quade, Berkshire's CFO.
Berkshire, which made an unsuccessful play for Town and Country Trust last year, watches cycles closely and responds accordingly. “I think the model for REITs and capital in real estate has changed,” Apeseche says, pointing to cap rate compression, cheap and available debt, and a now close relationship between cap rates and interest rates. “A public company can't harvest appreciation” in real estate properties the same way a private firm can, he believes.
Such observations led the firm to the relatively complicated mix of public and private corporate structures it uses today. Berkshire Property Advisors is the real estate operating company that manages and rehabilitates the apartment properties held both by Berkshire Income Realty, a public REIT traded on the American Stock Exchange, and the Berkshire Multifamily Value Fund, a $335 million equity fund that focuses on properties with value-add potential. (By year's end, that fund is expected to be fully invested in $1.2 billion worth of real estate.) And a third multifamily fund, which will open to investors in mid-2007, is expected to raise between $500 million and $600 million of equity by early 2008.
“Their ability to raise capital has been extraordinary,” Donovan says.
FAB FOUR Throw four executives, all of whom have run multifamily businesses before, in a room together, and you're likely to witness a few clashes of the titans.
Unless you're at Berkshire, that is, where CEO Apeseche, chief investment officer David Olney, CFO David Quade, and COO Tom Shuler have coalesced into an unexpectedly collaborative team, despite their individual C-level resumes. Shuler, for example, who handles Berkshire's property management division, previously oversaw a 200,000-unit portfolio at former multifamily powerhouse Insignia Financial Group.
“A lot of it has to do with the fact that each one was successful in their and the others recognize that,” believes Donovan, who served as CEO of Berkshire Mortgage prior to its acquisition by Deutsche Bank. “They show a lot of respect for each other.”
Under the watchful eyes of George Washington and Abraham Lincoln, whose portraits hang in a large Berkshire conference room, Berkshire's four top leaders share the corporate vision and their respective roles in executing that strategy. They don't interrupt each other, they give each other credit, and they return repeatedly to the importance of collaboration in the Berkshire model.
“We all take ownership of each piece of the value chain, allocating resources and support so everyone gets the support they need,” says Shuler.
His statement is soon corroborated by Olney. “It's cross-collaborative,” the chief investment officer says. “Having run property management in the Berkshire/Blackstone/[Goldman Sachs] partnership for five years, I have great empathy for the property management team, so I can direct acquisitions to opportunities that best fit our property management skill set.”
Such an attitude and practice represents quite a departure for most multifamily companies, where acquisitions typically does the deal and then turns it over to management to make the operations numbers work, no matter how unrealistic those financial expectations might be.
But Berkshire executives at all levels say their strategy of getting acquisitions, renovations, and operations to work in partnership with each other on everything from due diligence to building an asset's value is the heart of their business strategy.
At other multifamily companies, “you rarely have a senior person out at the property before initial bidding,” says Stephen Zaleski, Berkshire's senior vice president of acquisitions. “We're developing a vision for a property together.”
Obviously the culture of collaboration reaches beyond Apeseche, Shuler, Olney, and Quade: Zaleski's comment is made during an afternoon of touring suburban Maryland properties in a Lincoln Navigator with division vice president Dean Holmes, regional manager Cathy Robinson, and vice president of redevelopment Zach Maggart. When you work at Berkshire, you always travel with a team.
FIELD TESTED As financially driven as Berkshire is, it remains a real estate company, not an investment firm, with considerable local expertise in its markets. Regional executives know countless details about current holdings and potential acquisitions, from past ownership to rent comps. They tell the story of a significant deal as if it were a favorite family anecdote. They follow market-making (and market-breaking) news, even interviewing newsmakers and influential land-use figures in their market studies and presentations to Berkshire's investment committee.
“We'll turn over every rock that's available to us,” says Holmes, whose team talked with the general overseeing the federal military base realignment for one market report. That information helped Berkshire make the decision to purchase a Maryland property whose interior and exterior renovations and resulting rent growth of $200 per unit have made it the example of choice for Berkshire's “deep rehab” strategy.
“A typical Berkshire property is one in need of capital in a B or B-plus location,” Shuler says when asked for a description. “It's more of a closer-in asset [relative to the city]. It's a 1980s asset, although we have some 1970s properties.”
Depressingly dark cabinets, a permanently grimy bathtub, aging kitchen appliances, and no in-unit washer/dryer all qualify as opportunities to Berkshire, which typically spends between $10,000 to $15,000 per unit to update and upgrade its apartments.
The company decides what investments to make at a property during due diligence, when acquisition, operations, and redevelopment staffers all visit the site—sometimes repeatedly—to learn everything they can about the property and its operations before Berkshire makes an offer. “We've gotten very good at getting everyone together and making a decision, because time really is at a premium for everybody,” Holmes says.
Sometimes the decision on a particular property is a no, but when it's a yes, that level of research brings accuracy and credibility to Berkshire's bid, often allowing it to pay slightly less for the property in exchange for offering a sure close on the deal. “We bring all the facts to the table early in the process,” Olney says. “Ninety-five percent of the time, the price we bring will be the price.”
It also enables Berkshire to move quickly once the papers are signed. “We own the timeline,” Shuler says. Contractors and in-house construction staff get to work nearly immediately. Property management begins working with on-site operations. And the returns start climbing, even before rents do. “What we've done is developed a way to develop yield in a time frame standpoint,” Olney says. “We have a very aggressive execution plan to get those incremental dollars.”
GROWTH PLANS Berkshire plans to grow its portfolio right along with those incremental dollars. By year's end, the company expects to own 28,700 apartments, with projected revenues of $174 million in 2007. That's up from just over 20,000 units and $139 million in revenue in 2006. By 2008, Berkshire wants to scale up to 40,000 units.
It's an ambitious plan, but investors aren't worried. “Success is being prepared, and Berkshire established its infrastructure long before launching its first private equity fund,” says Sklar of WestLB.
Neither is Donovan. He points to Berkshire corporate history, which has included not only multifamily, of course, but also the mortgage company and even a successful healthcare business in the 1990s. “When you see that happen three or four times, you know it just can't be luck,” he says.
A lucky penny, perhaps.
- What: Multifamily investment management firm that acquires, redevelops, owns, and operates apartments in major markets from Baltimore to Seattle
- Founded: 1969 by Douglas and George Krupp
- Headquarters: Boston (corporate), Atlanta (property management), and Dallas (rehab and renovation)
- Leadership: Frank Apeseche, CEO; David Olney, chief investment officer; David Quade, CFO; Tom Shuler, COO, property management
- Portfolio: 20,532 units (as of December 2006)
- 2007 Revenue: $174 million (projected)
- Employees: 560
Online:www.berkshireapartments.comPROPERTY PARTNERSAt Berkshire, property managers get authority and respect.
From the very beginning, Berkshire leadership has sought the on-site insight of its property managers. “Whenever [founder] George [Krupp] came into town, he wanted to hear from the manager. He'd look at leases alone, but he paid an interest in the on-site manager,” says regional manager Cathy Robinson, a one-time Berkshire property manager who has now logged 15 years with the firm. “He wanted to know what was happening at the property.”
That attitude continues today at Berkshire, where property and district managers are considered an integral part of the business, from acquisitions to operations. “We're trying to push the value-chain concept as deep into the organization as we can,” explains division vice president Dean Holmes. “We're trying to create a sense of ownership in the asset.”
So on-site staff participate in due diligence on potential deals. They set their own rents, without the assistance of revenue management software. They renovate test units to see if the changes could drive rents. “This company is not shy about giving you $100,000 to test” potential rent boosters, says Zach Maggart, Berkshire's vice president of redevelopment.
Such autonomy gives Berkshire property managers, whose tenure is typically between eight and nine years, a decision-making confidence often lacking in property managers at other apartment firms. At property after property, Berkshire managers greet company leaders by name, taking advantage of the visit to propose upgrades—six-panel doors, for example—that they believe will improve the property's NOI. They know they are responsible for the value of their properties, and they welcome the challenge.
“We've created an acquisition model that allows everyone to speak the same language,” Holmes says. “We have demystified acquisitions and allowed them to see how their operational decisions affect the value of the asset.”
LEADERSHIP LESSONS: FRANK APESECHE
- Title: CEO and senior partner, Berkshire Property Advisors
- Age: 49
- First job: Consultant at Accenture (formerly Andersen Consulting)
- Best business decision: Spending the time and suppressing my personal ego to form a partnership structure at Berkshire. We would have never been able to accomplish what we have without a true shared leadership model.
- Best advice received: Your best assets leave the building each night. Your job is to make sure they look forward to returning the next day.
- Favorite quote: “Good is the enemy of great.” —Jim Collins, author of Good to Great