It's pretty common knowledge that developers have the shortest memory of any human species. But David Gruber remembers each and every downturn in the many real estate cycles he's seen over the last 14 years as president of MEPC American Properties.
Through it all, he learned something. Amazingly, the Dallas-based company never turned over the keys to any of its considerable property holdings, and, after riding out the rough times, the $700 million company with almost 9 million square feet in assets is poised to acquire/develop some $300 million in property every two or three years into the foreseeable future.
Admittedly, the words "conservative" and "Dallas real estate" have never really been synonymous (and in fact, there are already serious rumblings about new speculative office development in Dallas). But MEPC has bucked the "fly high/crash & burn" trend, choosing instead to focus on its core retail and industrial properties located in markets it knows (Dallas, Minneapolis and Washington, D.C.).
Foreign ownership hasn't hurt either. MEPC American Properties is the wholly owned U.S. subsidiary of MEPC plc based in London, which owns more than $6 billion of commercial real estate assets worldwide and is ranked among the top 100 stocks traded publicly on the London Stock Exchange. MEPC also has offices in Germany and Australia.
"It certainly is a huge benefit from our cost of finance, from our ability to raise debt or equity capital for major acquisitions or developments or build-to-suits, or whatever we might be doing," says Gruber. "Because we've got the strength of a large UK company we have a very low cost of finance and access to capital that most other companies don't have."
As a public company, MEPC's policy line has been decidedly conservative. "We've had to be a lot more selective, a lot more yield conscious," says Donn Fuller, MEPC American's senior vice president. "We've got shareholders, we have to pay dividends. We didn't get in as much trouble in the late-'80s, early-'90s, because we didn't do a lot ofthat were tax driven. We've always been economic and profit driven."
The combination of conservative thinking and low-cost capital pulled the company through the lean times. "We didn't get in as much trouble as a lot of the other people did," says Fuller. "We had to be pretty cautious on developments, on acquisitions. We could never afford to buy a shopping center when they were trading on six and seven yields. We couldn't do anything that didn't pay for itself. When you don't have any debt on your property, at least you can stay alive. We weren't drawing on bank lines, we were using our own money. We didn't have to lay off a lot of people or cut a lot of overhead. Our structure helped us a lot."
Focusing on its three key markets has also helped. "Long term, our success has been that you have an office there, you have staff there, then you know your deals," says Fuller. "In, for instance, every time we saw a deal it was because nobody else wanted to do it. All of the local people had already seen it and flushed it. Otherwise they would have done it because they were there. You've got to have a local presence. You just have to be there day in and day out."
Senior vice president and CFO Peter Johnson, the third leg of the MEPC American management team, agrees that local market knowledge wins the day. "We're not just going to hop on a plane because somebody says there's a great deal in Pittsburgh. One of of the lessons learned from the '80s is that you really need to know and understand your markets. In the office side of the business, every city has its own submarkets, and you've got to be a niche player."
These days, MEPC American's niche is decidedly retail- and industrial-oriented. But over the last couple of years, the company has become known for two dramatic/traumatic events, each at opposite ends of the emotional scale.
Let's make a (good) deal
In late 1994, MEPC Amercian closed on its purchase of American Property Trust (APT) and its $300 million, 3.5 million sq. ft. commercial portfolio. The properties included the 1.5 million sq. ft. Northridge Fashion Center in the San Fernando Valley of Southern, the 1.2 million sq. ft. Cumberland Mall in Atlanta and the 12-story, 76,000 sq. ft. Walker Building, a landmark office structure in Washington, D.C.' CBD.
MEPC American already owned The Boulevard Mall in Las Vegas, at 1.2 million sq. ft. the largest mall in Nevada, and the 765,000 sq. ft. Apache Mall in Rochester, Minn. Its first office development was the Colonnade, a two-building, 600,000 sq. ft. project in North Dallas which serves as the company's headquarters. The company also is developing more than 1.5 million sq. ft. of industrial space in Dallas and Minneapolis.
"This was not an asset purchase, it was a corporate acquistion," says Johnson. "We bought the entire corporation, lock stock and barrel in a turnkey deal. That allowed the seller to effect their exit strategy so much quicker vs. if they had to go and market those assets individually."
"That was a home run deal, and we'd like to see another one," says Gruber.
The earthquake strikes home
The second and probably more memorable major event did not yield the same success -- the Los Angeles earthquake in January 1994 literally destroyed the newly acquired Northridge Fashion Center less than 30 days after the APT deal closed.
"Certainly we were absolutely crushed that it happened," says Gruber. "We were brought to our knees. Here we had just finished a big acquistion and were barely basking in our glory and then a month later to find out that the biggest asset in that portfolio had suffered substantial damage from the earthquake really let the air out of the balloon."
Resilience and perseverance were put to the test. But now, after 18 months working with the Dallas office of RTKL Associates and million of dollars in labor and construction, Gruber and his team are finally putting the finishing touches on the Northridge work, as the center celebrates its grand reopening this month.
The grand reopening is the latest in a series of positive events for the mall. Sears and The Broadway opened in November 1994. Then JCPenney opened last month. Bullocks is set to reopen on Aug. 15. Last but not least, the Robinsons-May store opens in September.
"There were many months where things just looked worse and worse," says Johnson. "But now we're to the gratification point where every day it just looks better and better."
Gruber is optimistic that Northridge will regain its market prominence. "It will be about one year after we have all of the stores open and we're really firing on all cylinders that the center will be standing tall and the net operating income will be there that was there before the earthquake." He expects to stabilize the center sometime between September 1995 and September 1996.
Fuller predicts that sales at Northridge could be up 15% in 1996 from their preearthquake levels.
Too much of a good thing?
That's goodconsidering the proliferation of competition on the retail scene these days. Power centers are everywhere, especially near regional malls so as to benefit from the destination traffic. But is there too much out there?
"I think we're going to have some significant fallout in the big boxes, the deep discounters, the category killers ... there's got to be some fallout," says Fuller. "They just can't keep going at the pace they're going. We're regional mall owners, but again, sales are sales and I think in general we are overbuilt."
Gruber sees a glut. "The problem is with all of the big box users and the destination, power-center type tenants. There are so many new concepts and so much new venture capital available for this type of development it's going to cause a glut, an oversupply. Then you'll have the double-whammy that not only will you have a chain or two that goes bust because there are only so many retail dollars and only the better concept is going to win. So the strong survive and maybe the weak won't survive. Then you'll have developers bringing new buildings on line and then potentially some of these people going broke."
The potential "syphoning" effect is not lost on Gruber. "Those sales affect other types of retail, including regional malls and community centers. There is a finite pot of disposable income available for retail purchases. How many electronics stores and sporting goods stores can we have before somebody is not able to survive in it?"
Entertainment is certainly a hot topic these days when discussing how to strengthen the malls' market position and remain attractive destination properties, but Gruber sees the "entertainment" concept a little differently.
"I think the regional shopping centers need to have an entertainment component. By that I don't mean rides and carousels and video games. They need to have those exciting retailers that almost make it an entertainment facility as you browse through the shopping center, those stores like the Warner Brothers and the Disney Store, the Crate & Barrel and the Williams-Sonomas where they really merchandise their store so that they make it almost an entertainment to shop there. Also there are other parts -- the food service, the cinemas, the Oshmans superstores and things like that -- they are also part of the entertainment. I'm not a believer in needing to combine amusement parks with shopping centers," says Gruber.
So far, the MEPC American team has hit it right. Solid financial footing has been a key. "Our financial group here in the U.S. has been extremely active and successful in the public markets and that is one of the things that has helped us along the way," says Johnson. "We have over $300 million outstanding in a commercial paper program. We've always had available resources. We have $379 million in floating rate preferred stock that was used to finance the business with."
Are more buys ahead?
Continued growth is a given in any good business, but MEPC American's management is taking a "steady as she goes" stance.
"The majority of our growth will come through acquisition," says Gruber. "I would hope we could get ourselves on a schedule where every other year we do a very large, substantial portfolio purchase like we did with American Property Trust. We could go out and make a major puchase, absorb it, sell the assets that don't fit into our long-term strategic plan, and better the assets that do. That could account for 75% to 80% of the new business that we do."
The other 20% to 25% growth could come from more emphasis on asset management, value enhancement and disposition of properties.
"I'd like to see us more active in the buy/sell phase of the business," says Gruber. "In the last 18 months we have had three fairly large sales of assets, industrial buildings that we either bought and leased up and sold or we built and sold. It will be important for us to be more actively trading assets rather than just buying something, locking it up and throwing away the key. We would tend to buy something, improve it as much as we think we can, and when we think the timing is right sell it to raise capital for new investment."
Industrial swings into action
Though MEPC American's portfolio is heavily skewed toward retail (at the moment), the company is best known in both Dallas and Minneapolis as an active industrial player. Right now in Dallas alone, MEPC American has seven buildings under construction, with just over 1.5 million sq. ft. of space, and three more buildings are in the construction pipeline. In Minneapolis, they're just getting started with two or three buildings under consideration.
Johnson is quick to point out that timing has been a critical factor. "We hit it just about right at the bottom of the cycle. As the economy started to turn around, particularly here in the Southwest, and the industrial market picked up, there was no more building going on so the vacancies started to be absorbed."
MEPC Amercian has become a household name in Dallas industrial circles. "It's been fast and furious here," says Johnson. "We've also been right on the verge in Minneapolis in doing two transactions and have more than 350,000 sq. ft. there, but we'll probably double that this year."
All of the activity comes with plenty of precommitments. "These aren't spec buildings, they're build-to-suit or substantially preleased with maybe a small portion of spec space, because the industrial markets are pretty good in both cities," says Gruber.
Not the "D" word!
Believe it or not, this conservative company has designs on that dreaded "D" word, development of new office space.
"Ultimately, in two to three years, we will be building office buildings again," says Gruber. "Not on a speculative basis, but where we have demand and we put together several tenants for a very sizeable prelease commitment. Minneapolis and Dallas could certainly fit into those categories. People might think I'm crazy, but hopefully it will never return to the crazy speculative feeding frenzy that we had in the '80s when people were just putting up million-square-foot buildings without a tenant or paying attention to what else was happening."
Gruber is particularly focused on the suburban markets. "The suburban markets in both cases (in Minneapolis and Dallas) have tightened up substantially and rental rates are moving upward in both cases. There is still a lot of vacant space, but, at some point in time, there will be a need for additional accommodations. I'd like to see us add additional office investments in the Washington. D.C., area. We think long term that still is a pretty good place to be," says Gruber. "We're out actively looking all the time in those three markets."
Johnson sees selective opportunities for buying existing office properties, "And the time is soon that there may be development potential in Minneapolis. Of course after what everybody went through in the late-'80s and early-'90s you've got to be pretty brave to put a crane up and start an office building in Minneapolis or Dallas."
Making it all work hasn't been easy, but if the last few years are any indication, MEPC American looks to be looming as a larger national presence on the American real estate scene.