Real estate is a business. But the way the business has changed, and is still changing, from a deal-to-deal mentality to more of a long-term, relationship-building focus, plays into the hands of companies that have stuck to their knitting and built a reputation that leads to both repeat business and new business.
The Berkshire Group, based in Boston, has become a well-known player in the multifamily finance and management business based precisely on that premise. Over the last 10 years, the holding company's operating subsidiaries, Berkshire Mortgage Finance Co. and Berkshire Property Management Co., have keenly focused on this property niche and along the way developed many a synergistic relationship or two amongst themselves.
"One of the things that The Berkshire Group brings to all of these companies from being in the multifamily business is the perspective of playing on every side of that business," says Berkshire Group president Lawrence Gerber. "We're in the property management business, we're an owner, we're a REIT (real estate investment trust), we are a lender, and we're also in the development business in a moderate way. There's no question that every aspect of the multifamily housing business is one that we understand intimately well."
Two other components of The Berkshire Group include Harborside Healthcare, which is an NYSE-listed company founded in 1987 that owns or manages 3,000 nursing home beds in 26 centers located in five states, and BG Affiliates, a private investment firm. Yet another firm, Berkshire Realty Co. Inc. (BRI) is a publicly traded multifamily REIT with some $300 million in market capitalization.
Gerber is a 13-year Berkshire Group veteran, and his vision has changed in the last decade about what the real estate business is all about.
"If the operating business happens to involve a piece of real estate, whether it's lending on it, managing it or building it, you're in the business as an operating business in order to create value as a business," says Gerber. "l think it's very much consistent with what's happened in the REIT industry, which is people no longer think about a REIT as a real estate fund or as a real estate portfolio. They think about it as a living breathing company that provides retail space for retailers or in our case provides rental housing. Our focus has moved much more from being focused on being purely real estate investors/owners/managers to being people that create value through creating a franchise in a real estate or service business. We have much more of a service business mentality now."
Now Gerber's role is largely to work with each of the company's presidents on strategic direction, new business initiatives and capital access and formation. But the bigger picture is clear -- relationships are important.
"We are a very relationship-focused company and we very much believe in the value of long-term relationships. Quite frankly a miniscule amount of our mortgage company's business relates in any way to any financing for our own real estate company, and it's not like any of these businesses through its relationships is driving the economics. But nonetheless there are tremendous synergies. There are people we have bought properties from, sold properties to, managed properties for and financed properties."
As an example, Berkshire Realty Co. (the REIT) recently purchased an apartment property which was sourced by one of Berkshire Mortgage Finance Co.'s mortgage correspondents.
The sharing of information is worth noting for Berkshire's size. The property management company runs about 22,000 apartment units, while the mortgage finance company services about $2.5 billion of mortgages on roughly 80,000 to 100,000 apartment units.
"It is not at all uncommon for us to be looking at a property to buy where we have a mortgage on a property down the street, or for us to be doing a mortgage on a property where we own or manage something down the street," says Gerber. "You get tremendous informational advantages in terms of what's going on in the market and what rents really are, and what expenses really are running in that locale, etc."
In essence, the companies under The Berkshire Group umbrella operate as separate, distinct companies with their own presidents and a high degree of autonomy. But the point is the ability is there to foster relationships when needed. "If they're sharing an office in Boston or in Atlanta, somebody can walk down the hall and say, `Do you know this guy?' or `Do you know this deal?' and there's tremendous advantages."
Berkshire Mortgage Finance Co. (BMFC) started from the ground up in 1987 and today is one of the country's largest multifamily lenders. Last year the company originated almost $500 million of loans and has become one of the largest Fannie Mae DUS lenders. "We're a premiere player in that business, and it's an industry that a moderate-sized company can be dominant player," says Gerber.
BMFC runs regional offices in Atlanta, Rosemont, Ill., and Boca Raton, Fla., and has exclusive loan origination correspondents in Dallas, Washington state, Massachusetts, San Francisco, Los Angeles and Colorado. That gives BMFC a national reach, but it prefers to think of itself as a multi-regional player.
"We decided that we'd rather become a national player known, hopefully dominant at some point although certainly not there today, in a product type, a specialty that we truly understand and can bring value to the customer as a result of that," says Peter Donovan, president of Berkshire Mortgage Finance. "We have the ability to truly understand the local conditions and make perhaps a more intelligent credit decision hopefully to the benefit of the borrower because we truly understand the unique conditions of that particular asset and that market and we're not simply seeing it from the perspective of somebody who's 1,000 or 3,000 miles away," says Donovan.
Berkshire has become one of Fannie Mae's leading DUS lenders, and has now done over $1 billion in DUS financing.
BMFC's experience as a DUS lender helped win it a major coup in hooking up with NationsBank to become the fifth major mortgage lender to join the NationsLink conduit program. "All of the players had to be DUS lenders because there was a certain standard that would help in a consistency in a pool, how the rating agencies might look at it, etc. They wanted us for our expertise on the Fannie Mae side, and they wanted us for our ability to originate multifamily nationally, and I think that's what we gave them," says Donovan.
Timing also was a critical factor. "It was a confluence of events.," says Donovan. "NationsBank had decided that through Hugh McColl that they were going to be in the loan securitization business, that they felt this is an important strategic place for them to be. The most logical place to initiate that business was in fact on the real estate side because that was where the market was developing. So it solved a couple of issues for them, and I think they also believe this is just the harbinger of things to come."
BMFC's target is to do over $100 million for the NationsLink program in 1996.
BMFC touts its vertical integration. which has been crucial in terms of market differentiaton. "There are synergies in ways we don't even appreciate," says Donovan. "We're owned by a real estate company. The holding company itself had its genesis in real estate, so we understood the equity side of the transaction, we understood what it really cost to run properties, we understood what the dynamics were in the market. We had immediate access to good information because it was our own corporate information. We had tremendous comfort as a result of that in terms of our understanding the business, particularly when we're taking credit risk and our ability to react to situations."
As far as growth aspirations, BFMC is on a potential fast-track. "We have aspirations of doubling in size and being at $5 billion by the year 2000, and our plans are well on the way to getting us there. You have to grow. There are tremendous competitive pressures to be cost-competitive, and you need size among other things to do that," says Donovan.
As with mortgage finance, the property management business is packed with competitors. Berkshire Property Management has gradually carved out its own niche, working primarily with Berkshire Realty Co. (the REIT), BMFC and more recently soliciting third-party fee management business.
"We have such a great mortgage group that we do get referrals because they have such a strong network out there and they're so active in the marketplace," says Donald Taylor, president of Berkshire Property Management (BPM). "That's the kind of business we want. Business with clients that the company already has."
In a crowded field, differentiation is important. "We differentiate ourselves by being very service oriented," says Taylor. "The business never changes. The nuances of the business change. We've had for 11 or 12 years here an extraordinarily strong training program. We started the university concept about 12 years ago here and have taken the principal that people will own a problem until it is solved. Today we don't find that the competition is extraordinary from company to company. The industry itself is competing more against the inexpensive single-family home and lower interest rates than we are from apartment community to apartment community."
BPM's growth strategies include more of the same, focusing on its core markets and letting its services lead to other business. "We like to grow within the marketplaces that we are already in," says Taylor. "We know those markets. We don't try to tackle too many new markets all in any one year because management is always a local business. You have to be strong in each marketplace and have personnel that can understand each marketplace. Our strategy is to broaden our base in those marketplaces. We're not out to be the largest management company in the country. We just want to be one of the best in each marketplace that we're in. By concentrating our growth efforts in those marketplaces that local owners can benefit from our expertise, they can benefit from our buying power and our marketing power and we think that's a good strategy for them and for us.
Computerization has been key to BPM operations and has given the company a huge hand in organizing its services, projecting revenues and tracking rents and occupancies in its markets.
"We were one of the first management companies in the country, 12 years ago, to computerize our budget control system," says Taylor. "We monitor what's available year in and year out, try to stay as current as we can. And technology has vastly improved communications. The days of being able to simply react to the marketplaces are over if you want to be competitive today. You have to have good planning and manage as far into the future as you can.
So instead of a fly-by-the-seat-of-your-pants attitude, BPM takes a more plan-specific approach. "A lot of folks basically take what they can get when they can get it. We've always been very strong on merchandising our rents and on making the best of our income situations, but today in this competitive marketplace and with as much new product as is coming in you need to plan and understand what your assets need and work as far into the future as you can. Technology makes that possible. Ten years ago you just didn't have the computer power to be able to do that," says Taylor.
[check] Operating companies include: Berkshire Mortgage Finance, Berkshire Property Management, BG Affiliates, Harborside Healthcare
[check] 3,700 employees
[check] $3.8 billion under management
[check] 22,000 apartment units managed
[check] $2.5 billion loan portfolio in 42 states