When looking at what it takes to get to the top in any given industry, the leadership roles of the corporation usually tell the story of its success. Chicago-based Equity Residential Properties Trust (EQR), the nation's No. 1 apartment real estate investment trust (REIT), has moved forward with planning to acquire a huge number of multifamily units since its IPO in August 1993. But is bigger really better in today's marketplace? EQR's answer must be yes.
Plenty of growth has been achieved by EQR's dream team of Sam Zell and Douglas Crocker II, and their acquisitions, in 1997 alone, have proven that EQR will move into 1998 with aggressive plans to acquire units and set the pace for apartment REITs. At last count, EQR's market capitalization was $7.6 billion with a portfolio of more than 120,000 units. EQR notes its market capitalization at the beginning of 1998 will be around $9 billion with nearly 140,000 units and by the end of the decade almost 200,000 units with a market cap value between $13 billion and $15 billion.
"Hopefully we'll continue to get more than our fair share of mergers as they pop up," says Crocker, president and CEO of EQR. "It is very difficult to get a merger done because of the people issues. Most of the REITs were formed by people who took their individual companies public. They had stakes in these companies, they had built these companies over many years, and the public arena may not be the place they're suited for because they don't know how to operate in the public arena, but they can be pretty good real estate people."
Consolidation will play a key role in the multifamily REIT environment into 1998, with smaller multifamily companies merging into public companies. "I think this will continue, not only with EQR, but with other companies. We have done a lot of private-to-public mergers, accessing public capital and getting quick access to capital, so speed and the sureness of execution is one of the things that makes the public arena very attractive," says Crocker. "One of the problems getting these public mergers done is that the CEOs of these companies were the founders. Like when we bought Evans Withycombe, that company was Steve Evans' company and has been around for almost 15 years with his culture."
The Evans Withycombe Residential Trust (EWR) acquisition was one of three major deals for EQR toward year-end 1997. The EWR portfolio encompassed 55 properties consisting of 15,932 units in the Southwest marketplace, including 953 units under development. This merger brought EQR's market capitalization to $7.6 billion. The two other significant acquisitions for EQR were the Ameritech Pension Trust portfolio with 5,015 units on 17 properties for $292.4 million, along with the CAPREIT transaction of 10,724 units on 45 properties for $609 million, which closed in December.
Today, EQR is in the middle of the REIT war on Wall Street for the top slot. "We have a set of goals, and our goals were basically to be the No. 1 apartment company. And that's what we are. We don't compare ourselves to others, we wanted to be the No. 1 apartment company and the premier apartment company in the United States," says Crocker. "So we not only wanted to be the best in size and stature, but we want to be delivering the best services to our residents. When we went public, we set a goal of being right around 100,000 units by the end of the decade. Because of a couple of mergers and some accelerated growth, we have doubled our goal to the 200,000-unit range with a market capitalization of between $13 billion and $15 billion. And by the year 2005, being a $25 billion company. At that level of acquisition and capitalization, it will definitely put us as the No. 1 or 2 apartment REIT out there, and that's who we compare ourselves with."
EQR is the perfect target for its competition to focus on. "There's a culture here that we have created and the culture is one of drive, competitiveness and an eagerness to excel. I think the strategy that we put together, when we went public, is that I would not try to take us over," says Crocker. "We have accomplished something from a personnel standpoint that I think is unmatched in the marketplace, and good people in the final analysis are what makes this company work."
EQR's competitive strength is a no-holds-barred attitude. "Both Sam and myself have a very significant understanding of the public marketplace and what the public market wants to see with our sole ability to project EQR's name in the public eye, which is a critical part of our image," says Crocker. "EQR has more institutional investors than any other apartment REIT by a huge factor, because we have a program that does nothing else but call on institutional investment firms. The strategy we put together of being a national REIT and building consistent earnings growth, while showing how what we told people in 1993, actually happened when the market started to be overbuilt. I think the investors started to come on board and have real estate as a base core investment. That is what we have always wanted that if you were investing in the apartment sector, you should always own equity and then pick other apartment REITs to fill in the markets you want to go after."
EQR has done a lot for the present push in the REIT market and drove it early after its IPO. "I think Sam really saw the 'equitization' of the real estate marketplace," says Crocker. "And what has happened over the last four to five years is that the equitization process will not stop, nor will it be stopped. When you think about it, it's the right thing for the industry and, in reality, it is being taken to the public marketplace."
And what will become of REITs during a down cycle in real estate? Will they carry the earnings volume the present market is witnessing? "I don't think there will be a 'down cycle' on a national basis. Because historically, and I have been in this business for 30 years, the problems that we've had is too much money that has no responsibility behind it always chasing real estate," says Crocker. "We're forced to put money into real estate and chase it and, through accounting practices, savings and loans made huge profits because there was no public valve to turn. Well, Wall Street is pretty smart. In the final analysis Wall Street prices things correctly, because each trade is obviously priced a little bit off the higher or lower of what the real value is."
"If real estate starts to get overbuilt because too much money has flowed in from the public arena, then the public arena will turn the valve off and the multiples of these REITs will decrease. This makes it significantly more difficult to raise equity to the point where the people that are running the REITs will turn around and say 'it is too expensive' and can't get their rate of return, so they will stop building and you will get into a recovery period," adds Crocker. "So what you will have are waves of overbuilding vs. the drops of overbuilding, where you went from tremendous times to awful times in the 1970s and 1980s. Over the last 30 years, there have been major booms and major busts in real estate during each decade."
The company has to play off of many outside variables that come into focus. "The outside variables that we have no control over are, of course, overbuilding in a specific submarket, and how we take care of that is that we're spread on a national basis," adds Crocker. "It has never happened in my 30 years in the business, that every city is overbuilt at the same time, so it just doesn't happen on a national scale."
EQR plans on being in a very different position in the near future with its investor base and equity volume. "Where I think we're going to be in five to 10 years is a substantially different place than we are today with our investor base," says Crocker. "My goal is to have this company in the $15 billion to $20 billion range in five years and an investor base which has a significantly greater institution incentive. The three constituencies that mean the most to EQR are the shareholders, our residents and our employees."