We have a saying at Insignia that if you ever drive down a country road and you see a turtle sitting on top of a fence post, you know he had some help getting there."
That's the wisdom behind the management style of one Andrew Farkas, chairman, president and CEO of Insignia Financial Group, the nation's largest owner and manager of apartment communities, based, in Greenville, S.C.
At only 34, Farkas already has learned that staying on top in the real estate business takes skill, brains and a lot of luck.
"We all acknowledge fully that we are turtles on top of fence posts and we had tremendous amounts of help getting there. In fact we tend to call ourselves the turtle-lifters. It's important when times are as good as they have been for us to remember that they have not always been this way nor will they always be this way. The other shoe always drops. And you just need to be prepared for it and make certain that you do not mortgage your future," says Farkas.
Indeed, the times have been very good for Insignia. This multi-faceted company is involved in property management, commercial and retail leasing, investor services, partnership administration mortgage banking and real estate investment banking services. It provides property and/or asset management services for over 2,400 properties. Insignia's portfolio consists of about 300,000 multi-family housing units (including about 50,000 co-op and condominium units in the New York metropolitan area) and about 64 million sq. ft. of retail and commercial space. Since 1991, the company has grown its residential portfolio by some 400%, and its 1995 earnings and FFO growth were phenomenal.
Access to Wall Street has meant a lot to Insignia's success. "The relationships that we have on Wall Street with firms like Lehman Brothers and Dillon Reed are really what have allowed us to fuel the business plan that we developed five years ago," says Farkas. "It's a delicate thing to have. It can be fleeting if not handled gingerly and if not covetously protected as one of your primary assets. Wall Street is very quick to punish you if you deceive it, or if you fail it," says Farkas.
And since Farkas is on a roll, he isn't about to slow the machine down just yet. "We, have been able to achieve 35% to 70% annual growth rate over the last several years, and I don't see any reason why we cannot continue to achieve that over the course of the next several years."
"There are innumerable opportunities in the apartment sector. You just have to understand the nuances of the market and how the market moves and where the inefficiencies and inadequacies lie. There are even vehicles that have been created over the course of the last several years which in our opinion are destined to have some difficulty, and Insignia expects to be there to help them out when that difficulty arises."
To track those moving targets, Farkas will continue to rely heavily on his inhouse research capabilities. "Nobody has access to the kind of data that we have. Nobody. We are in 600 cities in 48 states with material operations. I can do a thorough due diligence on a portfolio of 25,000 apartments in 72 hours. That is market power."
Is bigger better?
Being the biggest doesn't seem to be a key goal for Farkas - he prefers to believe that size alone is no answer.
"Size for size,s sake is not good. To build a company by increasing volume when the volume does not generate a profit margin is not good. It's like running in place - you don't get anywhere."
"Size is important to the extent that you can manage it, make it profitable and make certain that quality does not suffer for size. In so long as you can keep your eye on those three balls, then I think that side, properly managed, can provide you With a number of competitive advantages."
Farkas says one obvious advantage comes in the ability to generate economies of scale in the operating company so that marginal business is incrementally more profitable. Size also brings tremendous buying power. Since Insignia buys huge volumes of wall paper, carpeting, ceiling tiles, mini-blinds, light bulbs, etc., it is able to pass any savings it achieves directly on to its customers (the third-party property owners).
In fact, though, those owners constitute only one of at least five of Insignia "constituencies," the others being the company's employees, its apartment residents, its many limited partners and its shareholders.
Insignia employs some 9,000 people, and with a market cap of close to $1 billion, "You don't have to worry about being employed by a company that won't be around tomorrow morning," says Farkas. "I would submit that between 1987 and 1993, job security in the real estate business was virtually nonexistent. Insignia has made a big difference there."
It also invests in educational programs for its people, through Insignia University, which offers a commercial college, a residential college and a financial services college. The curriculum includes almost 500 courses, taught in classrooms by Insignia trainers around the country.
A third Insignia constituency is its residents, which number more than 600,000 across the country.
They benefit not only from Insignia's management exercise but also its ability to establish cutting-edge alliances with the likes of HFS Inc. and GE Capital-Rescom. "These allow us to pool our collective buying power and to bring to our residents programs pursuant to which residents can purchase quality consumer goods and services and telecommunications services if they are living at Insignia properties or other properties that happen to participate in Insignia's Compleat Resource Group program," says Farkas.
Another major Insignia constituency is the 400,000 limited partners in the company's operating partnerships.
"By virtue of our size we can operate these partnerships less expensively than the smaller operator. In addition to which Insignia's market power and its ability to attract capital in the capital markets benefits the limited partners and the partnerships directly because we've been able to refinance a lot of the assets at rates that are unavailable to smaller operators."
Over the last several years, Insignia has completed over $1 billion in securitized debt financing that has replaced the former short-term, floating-rate high-coupon debt on many of these assets with long-term, fixed-rate low-coupon debt.
Last but certainly not least are Insignia's shareholders. They benefit from the company's higher profit margins on incremental business and ability to attract growth capital. Of late, Insignia also has been a dominant buyer of securitized real estate interests in the industry, "and accordingly we're right smack in the middle of all the deal flow, and we see just about every single opportunity that exists in the marketplace, and we have the opportunity to participate to the extent that we want to," says Farkas.
Technology's impact
No question about it, technology is a major driver behind Insignia, and that culture is driven from the top.
"Systems to us are extremely important I have a little bit of a leg up here because the generation of manager that came before my generation was virtually computer illiterate, so management had to depend entirely on their IT (information technology) department to tell them what they needed and how they were going to get it. The manager really didn't know what to ask for, or if they knew what to ask for they didn't understand what was involved in getting it."
Farkas describes himself as "a wicked computer nerd as a kid. I was designing computer systems back in high school for use in doctors' offices and dentists' offices back before the word PC was part of the vernacular. So I'm very computer literate. Our ability to communicate with our IT department, and my ability to help the other managers within the organization understand what technology can do for them and then to help bring that technology to their applications to solve problems, is significant."
"Technology is not a scary thing I don't understand. So from a corporate standpoint, I think technology drives our growth, it drives our ability to continue to manage the growth."
Insignia has a national e-mail system that networks out to its 2,400 managed properties. Every employee in the company is on the systems so that communication is a way of life. "It helps people to communicate important issues more quickly and more effectively and people tend to like to use e-mail because they think it's fun," says Farkas.
All of Insignia's systems are centralized. "We support probably every single major real estate accounting package that exists. We have a system of proprietary systems that we've developed for ourselves that communicate with all of those packages. We have an IT (information technology) division that consists of almost 70 people who are just in information technology for Insignia (in Greenville. We invest millions and millions of dollars every year in the development of new technology, maintenance of existing technology, expansion of applications and development of new applications."
That's the corporate angle, but from an apartment resident standpoint, the challenges technology presents are equally strong.
Farkas believes that technology that was originally created to free our time has actually enslaved us. "What technology has done is it has eaten substantially into the amount of leisure time that the average worker of any sort has, it cuts across races, it cuts across gender, it cuts across profession. It's just a fact."
That time squeeze puts a premium on leisure time, so Farkas created Insignia's Compleat Resource Group, based in Nashville, Tenn., the entity that has its affiliations with HFS Inc. and GE Capital-Rescom.
Farkas envisions a world where every Insignia apartment community has a dedicated channel (provided by GE Capital-Rescom) on property, just like hotels, giving residents access to a choice of discounted goods and services via HFS. By becoming a member of a "buying club," residents of Insignia and non-Insignia communities alike can access a network of services.
The key comes back around to total value enhancement for the owner, says Tom Shuler, president of Insignia Managmenet Services. "How are you, as a managment company, approaching that piece of real estate, to create new equity for the ownership? Technology is one of the tools to make that happen."
Alliance partners
Farkas has been ahead of the apartment market curve in pushing toward strategic alliances with well-known name companies.
"I am a great believer in not reinventing the wheel. One thing at Insignia is that we do not suffer from what I call the NIH syndrome (not invented here). We are very interested in other people's programs, ideas, thoughts and things like that. Every time we go out and acquire another company, one of the things we look at most closely is how are they doing what it is they are doing., and are they doing something that we are doing better than we are. If they are, let's take their idea and discard the one we are presently using."
The HFS alliance came about after Farkas followed the company's successful launch of its preferred vendor program throughout its network of hotel properties. "I felt that it was easily transplantable, and the buying power represented by a half million hotel rooms and 300,000 apartments and 64 million sq. ft. of retail and commercial space, and 400,000 limited partners combined with what they had would be extraordinary, and I've always felt that Henry Silverman was a brilliant individual, so why reinvent the wheel?"
Farkas fashions Insignia as "the HFS of the apartment industry, at least that is what we would like to be thought of. I would consider that a humongous compliment to the company because I think that HFS is a brilliant operation. I felt also that by affiliating ourselves with HFS and Henry, the credibility that would come with that would inure to the benefit of all of our different constituencies in lots of different ways."
Insignia's alliance with GE Capital-Rescom was an extension of that thought process. "GE is one of the powerhouses of the consumer products industry and the capital markets industry in the country and perhaps in the world. How could a strategic affiliation with GE, in an area in which they are making a tremendous strategic push, be anything but a positive element for a company like Insignia?" says Farkas.
Differentiating products
Those alliances allow Insignia to differentiate its communities from others. "You may have three apartment buildings on three different corners of a major thoroughfare. They all have swimming pools, they all have tennis courts, they all have ceiling fans, they,re all nicely done. And they're all professionally managed by a large national professional management company. The bottom line is that it's very, very difficult if not impossible for the consumer to differentiate between and amongst those three complexes, they're so similar in what they offer."
Branding has become another popular way of creating image-awareness in potential customers' minds. Will Insignia brand all of its communities?
"Look, everybody wants to create a franchise. We believe that Insignia is a franchise in and of itself. The name Insignia means certain things to certain people in the industry. Does the name Insignia mean anything to a resident? I'm not certain yet that it does. Is it something that we would like to be able to achieve? Certainly it is. Frankly, over time, as you continue to do a good job you may be able to accomplish that. But most apartment residents are looking for location and price. That's what's really going to drive their consumer decision. If there are three properties in the same location at the same price, and one of them is owned or run by a company with whom they've had a pleasant experience, they will choose that one.
It really comes down to the localized nature of the business.We may be national, we may be the largest, but we are a `multi-local' company," says Shuler. "We have that local district manager right there with the property, knowing that market, living that market and what we do is support those local people. My job is to make certain the resources are there to support them in their daily decision making and where specialty expertise comes into play, that we deliver that expertise to that property."
What the future holds
There are always other worlds to conquer, but Farkas won't stray far from his roots. "We may diversify the businesses in which we participate, but we will tend to stick to our knitting, which is that anything we do will be directly in the real estate business or in businesses that are ancillary to real estate."
Insignia also plans to grow its commercial business to dominate that industry on a national basis.
"We would like, at some point in time, to be as dominant in the commercial segment of the business as we've been able to become in the residential segment of the business," says Farkas. "We are working to create the infrastructure necessary to accomplish that objective. We expect over the course of the next year or so to increase our commercial operations by almost 100%"
In terms of financial structuring, Farkas also has new plans in the works. "We are seriously looking at various different securitized strategies for redeploying a lot of the limited partnership interests for which we have tendered over the course of the last 12 months or so," says Farkas. "The ownership of those assets in a C Corp., is highly tax inefficient for the ownership of real estate and real estate interests. So it would be a natural progression for us to move those interests into a more tax-efficient type of vehicle."
Through it all, Farkas will continue to follow the caveats he has learned along the way.
"I learned these things: Don't borrow too much money, no matter what. Never sign personally. Do not sell limited partnership interests to your parents' friends. Do not believe what the write about you or say about you. Never believe that you are infallible. Success is 50% good fortune. I've worked very hard on things that have not been successful, I've also worked very hard on things that have been successful and the difference has been timing and being in the right place at the right time. Vince Lombardi said that luck is when preparation meets opportunity. An opportunity arose and we were there."