Home Properties prides itself on its "family feel." This public real estate investment trust (REIT), formed by Nelson and Norman Leenhouts in 1967, is run more like a traditional family business than a corporation.
The company specializes in acquiring and repositioning older properties, typically from smaller family-run businesses that are looking to get out of the multifamily industry, says Nelson Leenhouts, co-CEO in charge of operations. The average property age of the company's portfolio is 30 years.
It upgrades and enhances older properties to at least class B quality, says Norman Leenhouts, co-CEO in charge of investor relations. "Most of our competitors deal with [properties] 10 years or less in age. When their properties are 10 years old, they get nervous about keeping them."
But not Home Properties; it has carved out a niche for itself. Seventy percent or more of the U.S. housing stock is more than 10 years old, says Norman Leenhouts. "We are the only public company focused on improving the country's housing stock over 10 years of age and using private sector funds as opposed to federal, municipal or state funds," he says. And, the Rochester, N.Y.-based REIT likes the fact that its game plan is distinct from other multifamily REITs.
Home Grown Home Properties is not typical of public companies which have Wall Street constantly demanding returns and looking toward the CEO to lead the company, and Home Properties prides itself on being different. It has a bottom-up approach to management.
"People like coming to work," says Jodi Falk, Nelson Leenhouts' stepdaughter and senior vice president of information systems. "We have a very open environment and we let the best decision-maker make the decision."
Home Properties boasts about the amount of training it offers its employees. Every other week, different on-site staff attend their annual week-long training programs at the corporate office. Alternate weeks have leasing and leadership training sessions for superintendents, community managers and multi-site managers. "We emphasize training, and give [employees] a tremendous amount of decision-making power," says Nelson Leenhouts. "We have them involved in the preparation of the annual business plan. We treat the community managers like they are the president, [allowing them to make decisions]." This approach works because on-site managers have direct contact with the property and know what is needed to be productive. They make daily decisions, such as purchasing supplies, without having to check with the corporate office first.
It's what the company calls "servant leadership," says Josh E. Fidler, general partner of Boulder Ventures Ltd., an investor in Home Properties. "That is a great phrase; it sums up a lot of their outlook. The senior management is the servant to the on-site staff and to its shareholders."
Servant leadership is the cornerstone of the company's culture, says Norman Leenhouts. "We consider the people who deal with our customers the most important part [of the company]; the rest of us are here to serve them so they can do their job and give our customers the best service possible."
As a result of this philosophy, Nelson Leenhouts believes that the company has the best trained and motivated on-site people of any real estate company.
"[But,] the best indicator of [Home Properties'] success is that [it has] made it comfortable for old-time property owners – who built up significant local portfolios – to become involved with a large public company," says Fidler. "The company has a very understandable game plan and a traditional approach, plus [it pushes] authority and responsibility down to local management."
Risk Return Part of the company's game plan is producing the highest risk adjustment return in real estate, and it does that by following specific standards and techniques when repositioning its properties.
Home Properties targets properties that are at least 150 units and 10 years old, and in high-barrier-to-entry markets – which includes the New York, Philadelphia, Detroit, Chicago, Boston and Washington, D.C., metropolitan areas. The company typically buys brick properties (because they tend to be very well constructed) that have outdated kitchens and bathrooms.
When repositioning properties, the company generally focuses on landscaping, interior improvements and the addition of community centers. Home Properties also includes activities and services in its property makeovers, such as social programs, computer training and other educational programs.
Lounges where neighbors can sit and talk are very popular. The company tries to host "meet the neighbors parties," says Nelson Leenhouts. "It's just amazing to introduce neighbors that have lived practically across the hall from each other for 10 years and have never met."
Adding exercise facilities, business offices and computer centers, and offering educational programs, also promotes communication among residents.
When feasible, the company adds amenities that are found in class B+ to A properties. "In property management, a large part of our mission is to enhance the quality of life of our residents," says Nelson Leenhouts, "and that goes well beyond just the physical structure."
According to Nelson Leenhouts, a typical family-owned property has great difficulty financing the improvements needed for older properties. If a new kitchen costs $3,000 and a new bathroom costs $2,000, it's very difficult to finance that upgrade without remortgaging the property, he says.
Home Properties' criteria is to get a 15 percent return on that $5,000 investment, says Nelson Leenhouts. But with the demands from Wall Street, the company needs to be able to finance the improvements without carrying too much negative cash flow. The company is committed to having an average leverage of 50 percent or less. It does that by financing some projects at 60 percent leverage and leaving others free and clear of debt.
Because the company has debt free properties, it can remortgage those properties when it needs to raise funds. In addition, Home Properties' pay out ratio is about 70 percent, so only 70 percent of its funds from operations (FFO) are distributed, which leaves the company with available cash flow for capital improvements.
At every project the company purchases, the goal is to improve the facility, raise the rents and improve net operating income. At the recent acquisition of a Long Island, N.Y., property with 500 units, the company raised rents $170 immediately. As the units turn, the company will spend approximately $10,000 per unit on renovations, and raise the rents an additional $170, says Nelson Leenhouts.
Brand Name Recognition This method of repositioning properties has enabled the company to create a brand identification among residents. "I think we have a strong brand and as our presence increases in each of the markets, our brand becomes more and more valuable to us," says Nelson Leenhouts. And brand name recognition is very important, especially during an economic downturn when people are living in apartments longer.
For the first time since the company went public in 1994, it missed its numbers in the last quarter of 2000. "We are a very predictable mainstream American apartment business," says Nelson Leenhouts. "We had 22 quarters where we made our numbers."
The spike in gas prices caught the company off guard, because at 70 percent of Home Properties' communities, gas is included in the rent, says Nelson Leenhouts. To ensure that the company doesn't get caught unprepared again, it's working with a consulting company to purchase gas on a long-term, fixed-rate basis. This way, the company will have predictable gas costs.
And while missing the company's numbers might seem like a failure, Nelson Leenhouts can turn a problem into an opportunity, says Falk. "With the increase in utility expenses that we've been faced with, obviously the Street was nervous about how things would go for us – how bad of a hit it would be on our bottom line. With a very short-term perspective, one might overreact to that concern," she says.
However, while the company felt the blow for including gas in the cost of rent, it believes that, long-term, the problem will net itself out. "The perceived value of the gas [to the residents] may be greater than what it is costing us," says Falk, so including gas in the rent still makes sense to the company.
That's why the company decided against submetering and ratio-allocated utility billing system options, explains Nelson Leenhouts. "We think our residents are very intelligent, and that if we were simply to add on a gas surcharge, like a hotel does, they would say 'gee, that doesn't make sense.' We chose to raise the rents instead and we had tremendous success," he says.
But while the cost of gas was a setback for many multifamily companies, Nelson Leenhouts is not going to let that stop him from growing. The company grew from 3,000 units in 1994 to more than 50,000 units in 2000. Now, the company is the 10th largest apartment management company in the country.
The company has grown in units managed by an average of 46 percent on a compounded basis for the last six years, including last year, when it only grew by 13 percent. More importantly, FFO has grown 10 percent on a compound annual basis since 1994, while paying out a dividend in excess of 7 percent of its stock price. The stock price has grown from $19 per share to $29.80 per share as of July 10.
This year, the company will reach its goal of 10 percent FFO growth "by strengthening our acquisitions department, utilizing the wonderful local talent that we have in each market, working closely with our regional offices and just working harder," says Nelson Leenhouts.
In addition, the company will continue to concentrate on its six metropolitan markets. "Our goal is to be the dominant owner and manager in the niche markets within those six metropolitan markets," says Nelson Leenhouts. "By that, I mean we have the extraordinary goal of owning 10 percent of each of those markets."
While 6.4 percent is the highest portion of a given market that the company currently owns, it's willing to wait patiently for the right opportunities.
In the meantime, the company continues to focus on resident satisfaction. Because residents are such an integral part of Home Properties' success, the company offers a money-back guarantee, says Nelson Leenhouts. "If a resident is unsatisfied for any reason, we'll give back that day's rent. Or, if they move into one of our communities and choose to leave within 30 days, we'll give them their deposit back," he says.
The money-back program costs the company about $3 per unit per year, says Nelson Leenhouts, but "it demonstrates that we put our residents first." And, since residents are so important to Home Properties, the company wants them to feel like part of the family. It even offers them a 2 percent stock discount on the company's stock.
For investment purposes, Nelson Leenhouts believes that residents often would be better off renting and investing in Home Properties than leaving and buying a house. And by offering them the discount, it's another way for Home Properties to make its residents feel like part of the family.
Twin Strategies There is nothing like grunting and having someone understand exactly what you mean, but for Nelson and Norman Leenhouts, twin brothers and co-CEOs of Home Properties, that is an everyday occurrence. "We really can anticipate [what] each other [is about to say]," says Nelson Leenhouts. The brothers started their company in 1967 with a 50/50 partnership, investing in single-family homes and renting them. As the company grew, Nelson Leenhouts started forming more partnerships so they could take money out of their existing properties and buy new buildings. By 1971, the company transitioned into multifamily properties, and it has never looked back.
The company grew into a diversified real estate company with a mix of office, retail and multifamily properties. In 1994, the company had about 400 limited partnerships and realized it was time to change the format of how it operated.
The company became a real estate investment trust (REIT) on July 27, 1994, and formed what is now known as Home Properties. Their primary reason for becoming a REIT was to provide liquidity for their partners and to provide estate planning for themselves.
Now, at 65, the brothers are ready to make another change. They're planning for their succession. "We plan to continue as CEOs for approximately three more years and then sort of have our jobs reduced but not eliminated. We recently hired a very strong person [Edward Pettinella] ... from the outside, who is the lead candidate to be CEO of our company."
And while there are several family members in the business, both Nelson and Norman Leenhouts and the board of directors look first to the qualities of the person and not to the family relationship.
"This process is a very bittersweet process," says Nelson Leenhouts. "If it was up to me alone, I would probably vote for five more years. But it's really a team effort with many people involved. So I think three years works well."