Every company likes to think that it's different from its competitors, that its processes and management techniques, as well as its luxury properties, set the organization apart. But, the desire to be different at Gables Residential really flows from the top. Chairman and CEO Chris Wheeler is not a conformist – as indicated from the activities in which he participates in his personal life to the way he runs this multibillion dollar real estate investment trust (REIT).
This 45-year-old executive likes to be different. Unlike other CEOs, you won't find him drinking a cup of coffee or playing a round of golf; Wheeler is more likely seen in a Hawaiian shirt drinking diet Mountain Dew. And, in his free time, he'd rather be on the beach or flying one of his airplanes.
His aversion to following the norm is evident in the way he runs Gables. "One of the worst answers to the question of 'Why are we doing this?' is 'That's the way we've always done things,'" explains Marvin R. Banks Jr., senior vice president and CFO at Gables. "Wheeler believes that in order to continue to succeed, we have to continually challenge the way we do things."
It should be no surprise that the difference between Gables, which manages more than 44,000 units and owns more than 26,000 units, and its competitors comes from the core of Gables' business philosophy. Most multifamily REITs don't include development in their business strategy because it's costly and they've found that they're not very good at it. But at Gables, development is part of its history. It was originally formed in 1994 out of the Atlanta, Dallas, Houston and Tennessee divisions of Trammell Crow Residential, which was known for building high-end apartment complexes. The Florida operation, which Wheeler ran, opted not to go public at that time. However, by 1997 the Florida group believed that it would be better served by going public, says Wheeler. In '98, Gables bought the group and Wheeler joined the firm.
According to Wheeler, the poster child for failure is a company that tries to develop all over the country without local knowledge of the market.
"Yes, development is risky if you try to do it long distance, without great local people," explains Wheeler. "We will not do development unless we have great local talent making all the decisions around the process."
"We are very conscious and thoughtful about development," agrees Dawn H. Severt, vice president and chief accounting officer at Gables. "We won't go into a market we are not familiar with."
That is why Gables' shareholders invest in the company, says Wheeler. "Gables is known as having a very competent development team and we manage risk through local competency," he says.
Gables also has a good leasing management arm and the ability to meet deadlines, says Mike A. Laverty, senior vice president at Fleet National Bank, which has provided construction financing for the company. "Gables has been able to bring deals in as proposed and projected. The reason I like to do deals with Gables is because the deals are well thought out, properly margined, well-executed transactions."
Amenities Not Necessary But it's not just the fact that Gables is developing projects that makes the company different; it's the type and size of the development properties that makes Gables stand out.
Conventional wisdom would dictate that higher rents are synonymous with a higher quality amenity package, says Wheeler. But Gables disagrees. Gables believes that residents of truly high-end properties already belong to the best health club in town and that they already own several computers. "They're not going to come use your pool because they're not going to come hang out with a bunch of teenagers," explains Wheeler. "This clientele isn't going to put on their bathrobe in the morning and come down to your business center and send a fax. They've got a fax machine in their home.
"So, as you move up the rent scale, the amenity scale can go down," he says. "This is a hard thing for many developers to understand."
In fact, some of Gables' highest-end properties have no community amenities. Gables believes the customer at this level cares about security, privacy and the quality of the unit. "As we've moved up the scale in terms of a higher profile renter, we've used the money that we would have spent on the amenity package and spent it on the interior of the units – in terms of quality finishes, marble counters, better plumbing fixtures and bigger units," says Wheeler.
Another difference about Gables and its development philosophy is the number of units it's building per community. The company is trending toward smaller properties in terms of number of units.
If all things are equal – i.e., the quality of unit and the amenities package – Gables believes residents would prefer to live in a 40-unit community vs. a 300-unit complex.
There are several reasons why Gables is targeting smaller projects in its future development pipeline. First, the company believes it will be easier to go through the entitlement process and that neighborhood opposition will be considerably less.
Second, Gables believes the customers prefer smaller properties. Third, smaller properties make excellent condo conversions. Finally, Gables believes it has carved out a niche for itself. "The private guys can't finance this type of deal – it's too small," he explains. "Where do you go to finance a $4 million deal? You can't do it. Their financing sources all want to do $20 million, $30 million, $50 million deals. For the larger players, a 40-unit deal is not really going to impact earnings. They've got to do big stuff in order to get growth."
And in the end, turnover is lower at smaller properties because the residents really get to know their neighbors, they become part of a neighborhood and they don't want to leave, he says.
Hands-Off Management But it takes more than just developing properties to be successful in the multifamily arena. While Wheeler's expertise was development, he knew that in order for Gables to succeed it had to provide excellent management.
"One of the smart things [Wheeler] did when he came to Gables is he focused heavily on the operation management side of ledger sheet," says M. Austin Forman, president of American Marketing & Management Inc., a third-party client that uses Gables for management services. In addition to development, Gables invested in personnel and focused on the management of properties. "They continued the development arm, but at a controlled pace," he says.
That system stems from a decentralized organization. "We don't make all the decisions in the corporate office," says Banks. "We empower people to take accountability and responsibility for their parts of the business and to make decisions."
The property manager runs the asset, explains Wheeler. The property manager makes the decisions regarding what Gables needs to do to service the residents best. "We really empower local people, believing that local on-site management know best how to run an asset and how to increase net operating income," he says.
Gables makes sure that all of its employees have the proper tools and the training to make decisions. The company uses a prospective model to help determine the impact of supply and demand, employment and vacancies on the multifamily industry and specifically its communities.
The model, called Proact, is a forecasting tool that compares the future to historic patterns. The information is passed to the local level, and it's up to the local and regional staff to figure out the best way to react to and implement the predictions, says Wheeler. "We try to make decisions based on what we think is going to happen over the next six months, as opposed to looking at what's happened in the last quarter and say, 'hmm, we better do this,'" he explains.
In addition, Rheo, the web-based property management software that Gables uses, helps its employees do their jobs better. It frees up the on-site people from the monotony of filling out reports and looking at numbers, explains Wheeler. "They can input information once and get back to what's really important – which is taking care of the residents," he says.
The software also allows the executives at the company real-time access to all information about the properties, which helps them make better decisions.
By having the proper training and access to management tools, associates at Gables not only know what they are doing but understand why they are doing it, explains Banks.
Economies of Scale Part of being a good management company is being able to manage with the proper economies of scale. Gables operates in seven markets and in each of those it has at least 3,000 units.
For example, the company's presence in Florida allows both its third-party clients and its own properties to get better rates on products and services. Due to his relationship with Gables, Forman was able to receive a better price on insurance.
This not only helps with pricing, but also allows the company to run all of its properties efficiently. "[Rheo, the] new property management software program [that Gables is using] also has helped manage my property better and some of the trendings," he says. "Gables is very interested and very much joined in my success. If you are having a problem, [Gables] will put the resources and staff behind your property to bring it up to where it needs to be."
Having flexibility in staff not only helps with problem properties. It also helps smaller properties – with 40 to 100 units – run more efficiently.
It's expensive to staff a smaller property with a full property management team. However, Gables has found that it can share its resources. A smaller property will use the same maintenance manager and leasing staff as a nearby complex with 300 units that Gables manages.
"At a smaller property, we might have a leasing person on-site during lease-up, but after that there will be a sign on the door, that tells residents to 'call for appointment,'" he explains. "As long as I've got a way to get a leasing person there in 15 to 30 minutes, I'm covered. You have to rethink the way you do everything."
At most properties, the response time for a maintenance request is an hour or two. With this sharing system, Gables still falls in that timeline. "I'm sure a lot of people think 'this is crazy, it will never work,' but I think [smaller properties will] give us a more competitive advantage," says Wheeler.
Planned Growth One of the things that has helped Gables continue to have greater total returns than some of the largest REITs is that its growth has been through internal strategic planning rather than acquisition of other companies, says George L. Ochs, vice president at JPMorganFleming Asset Management. Dividends in 2001 were 2.34, up .14 from 2000.
"The [staff is] conservative and thoughtful in the way they have approached growing the company. They aren't jumping into markets without first taking a look at how it will incorporate into the existing company," says Ochs. Using a combination of management and development techniques has helped Gables exceed the total returns of the National Association of Real Estate Investment Trusts (NAREIT) Apartment Index for the past five years.
"In the next five to 10 years, I would like to continue to have our total returns exceed the NAREIT index to an even greater degree than it has," says Wheeler. "Our ultimate objective as a company is to produce total returns that beat the index." And to reach that goal, Wheeler plans to figure out a way of developing smaller properties better. Gables believes that this type of housing is what its customers want and by providing it, Gables will be able to outperform its competition.
In addition, the company wants to continue to grow net asset value (NAV) per share. "We can be smaller in terms of units next year and I'd be happy as long as we were growing NAV."
At the end of the day, Wheeler likes what he's doing and likes being the guy in charge, he says. "I hope that if I continue to do a good job," he says, "I can still maintain that privilege of being a leader at Gables."
Wonders Never Cease The one thing that makes Gables Residential really different from its competition is the way it treats its associates. Gables offers benefits that aren't commonly found in corporate America, let alone the real estate industry.
One truly unique program it offers its associates is a six-week sabbatical with pay to any one who has worked for the company for 10 years. "Don't call in, don't check your e-mail, go have a life," is what Gables tells its staff, says Chris Wheeler, chairman and CEO of the company.
This program has enabled the staff to come back renewed and rejuvenated. "The turnover ratio in our company is half the industry average," he says.
"I go off to [executive] conferences and the other CEOs grab me and say, 'What the hell are you doing with this six-week sabbatical, are you nuts?' A lot of these guys are old school. They sit there and think six weeks, how can I afford that," explains Wheeler. "It didn't cost anything. Everybody else that's around just bucks up and covers for the other person because they know they're going to get a sabbatical."
The final result, says Wheeler, is a really motivated, excited staff.
Another program Gables offers employees is a tuition reimbursement program. "It doesn't have to be related to the job," says Wheeler. "You want to work here and you want to get your education to become a nurse, fine. We'll pay for that. I'm just thrilled to have you here while you're learning to be a nurse. If you decide to be a nurse and leave, so be it. I'm glad we helped you in that effort."