Overseeing the merger of two companies with contrasting cultures on different coasts is no easy task. But Richard Michaux and his associates have pulled it off by merging Avalon Properties and Bay Apartment Communities into Alexandria,Va.-based Avalon Bay Communities Inc.
The year-old, $3.7 billion REIT owns more than 140 communities totaling more than 40,500 units in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest and Northern and Southern. The properties are located in 29 high-barrier-to-entry markets.
Michaux's experiences on a nuclear submarine have made him the right guy to enjoin the Avalon Bay forces. Spending days on the sub taught him to be quick on his feet with numbers, to get things done on-time under pressure and to expect quality. And after spending days submerged in a metal tube, those culture clashes and high barriers to entry don't seem so challenging after all. He has combined the cultures of the East Coast and West Coast to make the new company work.
MM: What was the most challenging part of last year's merger?
Michaux: The cultures - a West Coast company vs. an East Coast company. In the end, while the cultures appeared to be similar, each company had a long history of operating with a set of beliefs and values that were, at least from a bi-coastal standpoint, interpreted somewhat differently. It took us a while to understand a West Coast take on the same kind of value system that we had on the East Coast. Ultimately, it's worked out fine. We have come together with a similar set of values, beliefs and practices. But it took some time to learn how to talk to each other, to figure out what each meant by "spirit of caring" or "sense of integrity."
It's been gratifying, but it took a little longer than I thought it would, and it was more challenging than I thought.
MM: Compare yourself, in general, to other REIT CEOs. I know you spent some time in the Navy. How has that influenced you?
Michaux: I was on a nuclear submarine, so I would say my experience provided me with a quick mind as it relates to numbers, a discipline to move things forward on a timely basis and to expect high standards. I don't know if that differentiates me from other CEOs. I suspect all of them would say they have budgets and want things done on time and have high standards. But on a nuclear submarine, we had to have that.
I don't think I'm any different from other CEOs from the standpoint that we're here to serve a lot of constituencies. For example, shareholders - we've got to satisfy them and give them the best return we can for the risk. We have a lot of people working for us - our associates and officers - who want to have productive careers and who want to feel as if they're fulfilling their potential. We've got residents who want to be treated well and who want to feel like they're part of the community, not just a number or name. Then we've got the communities we live within. We're part of a community, whether it's in Alexandria [Va.], San Jose [Calif.],or Boston. We make certain representations to those communities.
MM: You mentioned that one of the constituencies you have to please is your stockholders. How do you like being the CEO of a public company?
Michaux: I think it's terrific. At age 48, I was able to reinvent myself. I've been in the private partnership markets for about 14 years and then, over a six-month period, we became a public company. I believed at the time that it was the right thing to do. We needed to bring more equity into real estate and more transparency about what we're doing in order to mute the real estate cycles.
There was a steep learning curve to becoming a public CEO, but I've enjoyed it and think it's very challenging. I hope the public will realize that there are some great public companies in the real estate world. The General Electrics and Cokes of the world just happen to be in their various industries, but there ought to be some great public companies in the real estate industry. My goal is to set our company on that path.
MM: I'm sure part of getting Avalon Bay on that track includes a lot of regular meetings with analysts and the other Wall Street types. Do you enjoy that aspect of what you do?
Michaux: It's a necessary part of the job. I am fortunate enough that I don't have any kids at home and my wife is very understanding and likes to travel as well. I think for some people it is a necessary evil. If you have a young family, you want to get back to home base as quickly as possible.
[Wall Street types] can be - and should be - a friend. We're here to transmit information so that investors know what we have planned. If they know that, then they'll be less surprised and you'll be less surprised [about our strategy]. The worst thing is for someone to say to us, "Geez, I didn't know you were going to do that. I don't like that, and I'm selling your stock summarily." Now, all of a sudden, there's selling pressure on your stock all at one time.
It's much better to be as informative as possible to everybody who's willing to put the word out about our plans and their take on our plans so people are well-informed, they can make a good decision, they can stick with it, and, as long as we don't do a head fake on them, they have confidence that they know where we're headed and that they're investing for a certain reason.
MM: What's your growth strategy for Avalon Bay? How is the company doing one year after the merger?
Michaux: The strategies of the predecessor companies were fairly similar. We were development and redevelopment companies, meaning we did a lot of major rehab to older apartments that were well-located. We had a high-barrier-to-entry strategy, meaning we were not in the Southeast and Southwest, where land for apartments is a commodity. We were in the coastal areas that were harder. First, we had to manufacture the apartment land, then we had to manufacture the apartment. We had a similar strategy there. We also had high-quality assets and had a service mentality to provide customers with excellent service. We had the best platform for increasing the NOIs of the communities.
It wasn't necessary for us to modify those strategies for growth. We wanted to stay in these high-barrier-to-entry markets, and we wanted to penetrate them more completely with new product. If there's a slight turn in our strategy, it would be for us to be more urban with our product.
We still enjoy tremendous results from our suburban communities because in high-barrier-to-entry markets, when you do get a suburban community approved, it isn't like Atlanta, where you can have somebody building the other three-quarters of the street over the next year. That's just not going to happen in Wilton, Conn., or in Farm Park, N.J. When we get an approval in those areas, we may be the first apartments built there in 20 years, and may be the only one built there in the next 20 years.
We do believe in great service, a great product and great locations in high-barrier-to-entry markets, which gives us a strong cash flow increase stream. But there's one thing that differentiates the company in that regard, and I've had a lot of my co-CEOs agree with this: We have the highest yields on cost in the industry. We've averaged 11.4% first-year stabilized NOI against cost, and I think that's at least 100, if not 150, basis points higher than anyone else. That's in 27 different communities. We have not sold any of our new communities, but we have sold some of the outlying communities, meaning those in locations further out than the suburbs that are older.
We sold about $300 million in the last year at an 8.2% cap rate. That would suggest to me, that the inventory that's left would certainly sell for a cap rate well below that. So if you're developing things at 11.4%, but you can sell for under 8%, that's a huge value creation. Every dollar we spend creates more value than our competitors. That's the value of the high-barrier-to-entry strategy.
MM: Have you changed your management style as an executive as a result of the culture clash?
Michaux: I think what it has required me, and others, to do is to be more effective communicators: to communicate more frequently through various avenues, and to be face to face more often. Better communication has been the thing that I have noticed a huge difference in - the requirement for and the request for better communication.
So, [Wall Street types] serve a very good function for us, and I look at every time I talk to one or see one as an opportunity to continue that thought process.