Catching the Next Big Wave
A vibrant and dynamic economy depends on a multitude of factors, none more important than specialization and division of labor.
For Commercial Executive Magazine‘s fourth annual Fall Forum, we have assembled a panel of experts from across the real estate landscape to explicate Arizona’s “Next Big Wave” forward. These industry dignitaries, with their specific and differentiated knowledge set, have placed their imprimatur on the landscape of the Arizona economy. In doing so they have created thousands of jobs, invigorated communities and propelled the Grand Canyon State to a recent Forbes magazine listing as the nation’s eighth fastest growing city.
The profiles in the following pages reveal powerful stories of ingenuity, determination, strategic insight and passion. From Jerry Moyes’ riveting saga in the trucking industry with Swift Transportation, to Scott Peters’ launching of Health Care Trust of America amidst the backdrop of the comprehensive Affordable Care Legislation, to Mel Shultz’s involvement in some of Arizona’s most recognized and transformational projects, you will find compelling narratives of Arizona vitality.
As the state moves to its next wave of growth, it will be leaders such as those in the following pages who drive the development of Arizona forward…each adding his or her indelible mark of specialization.
Nearly four decades ago, Philip Bell had a vision to bring several real estate services together under one roof. That vision evolved into The P.B. Bell Companies, a locally owned and operated real estate company that specializes in the development, acquisition and management of multifamily apartment communities in Arizona. Leading this multifamily powerhouse is Philip’s son, R. Chapin Bell, who oversees strategic direction of the company. Coming out of the recession, Bell has big plans for the company, which includes continuing to grow its development pipeline, increase acquisition activity and expand its property management services.
“My father started this company in the ’70s, and we want to build on what he has created and grow stronger for years to come,” says Bell. “Real estate is a business we are good at and enjoy and want to continue to grow, innovate, improve and be best in class.”
P.B. Bell has developed more than 4,000 multifamily units and plans to add more than 1,000 this year with four new development projects currently under construction.
“We’re not a cookie cutter builder,” says Bell. “Everything we build is innovative and different than the others we have built. They may have similar floor plans but the exteriors are completely different and make all of our properties unique.”
The new communities push the envelope when it comes to luxury with innovative new design features and community amenities preferred by residents.
“The communities we’re building today address the new renter demographics and for the residents that can buy a home but choose to rent,” explains Bell. “We build a higher level of design today in regards to our amenities and unit finishes than the past generation for developments. Renters recognize that and are willing to pay higher rents levels for this quality.”
The company’s largest development project is a 389-unit luxury apartment community in Chandler. Almeria at Ocotillo is located on the northeast and southeast corners of Dobson Road and Market Place inside the 73-acre, mixed-use project known as The Waters at Ocotillo. The community will feature a Santa Barbara style design and many of the luxury finishes P.B. Bell communities are known for. The size of the community has enabled P.B. Bell to build some of its most luxurious amenities to date, according to Bell.
“This community will have the largest clubhouse we’ve ever built to date and amazing resort pools that overlook the lake,” says Bell.
The company also has a second 194-unit community under construction in Chandler at the southeast corner of Dobson and Germann roads.
“This community will be the first contemporary designed apartment developed in Chandler,” says Bell.
Other projects in the works include a 228-unit apartment complex in Gilbert in the master planned community of Morrison Ranch. The complex will be of a lower density with only 16 units per acre to create more open spaces with lush landscaping and an “open feel,” according to Bell. Many new developments in the Valley have 24 to 60 units per acre. The Morrison Ranch buildings, he says, will be in one of three different styles: ranch, prairie and farmhouse.
The company is also developing, with Michigan partner IPA, the 240-unit Liv North Scottsdale community on the site of the old Barcelona night club. This is a new also a new design for Bell. The project is four levels of elevator served apartments over a on grade parking structure.
These new development projects are a sign of growth for the company and paint a much different picture than years prior. The recession definitely affected the development side of the business, according to Bell. The company’s land acquisition strategy was to get control of developable land early in the recovery cycle as the market started to improve.
“We wanted to be in front of the wave when the market started improving,” says Bell. “We began looking for sites in 2011 and our timing has been really good on the site we have acquired.”
Even with the housing market improving and new home sales on the rise, Bell doesn’t see that as significant competition for the multifamily sector. New housing doesn’t concern Bell. He points out that as the market improves, home prices will rise and cause affordability to decrease, thus continuing to keep renters in the renter pool. One challenge that remains, despite an improved economy, is the ability to secure capital.
“The capital is out there, but you just have to work harder to get it,” Bell says. “Development is not a focus for many investors has it was in the past. There is concerns about supply and the higher developments costs for the new product when compared the sales prices of existing properties. Additionally, capital availability is reduced as investors are generally choose to developed one deal in the market versus multiple deals that they many have done during the past cycle. Everyone is just much more cautious.”
With multiple development projects in the works, Bell forecasts continued growth for the multifamily sector.
“We have a fair amount of new inventory in the pipeline but based on the unit absorption expectations and the pace this new inventory will be introduced to the market we feel the Phoenix area apartment market fundamentals will remain strong,” shares Bell. “There may be short-term periods of increase concessions in submarkets with larger amount of inventory being introduced but long-term the markets will remain strong.”
Bell admits the economy still has a way to go and job growth will be the major factor for continued strength in the multifamily market
“We will continue to develop quality projects as we have in the past,” adds Bell. “The market still has number of years left to go, and we will be here to take advantage of it.”
According to the Greek philosopher Heraclitus, “No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.” While this axiom suggests opportunities foregone are never presented again, Charley Freericks, president of DMB Associates, Inc., would articulate opportunities simply reappear in different forms. So it is with DMB’s latest and arguably best accomplishment, the master-planned community Eastmark.
Eastmark is the first large-scale integrated community opened in Phoenix in 10 years. With its grand opening on June 1, the 3,200-acre site sits at the center of a major transportation hub anchored by the Phoenix-Mesa Gateway Airport, three major freeways, numerous businesses and acclaimed educational institutions. Grand Canyon University recently announced it will build its second campus at Eastmark. As president of DMB, Freericks is championing the development of the property, which has piqued the company’s interest since the early 1980s.
Originally from the “north to the future” state, Alaska, Freericks transferred to Arizona State University in 1979 after becoming disillusioned with pre-med studies and the weather at the University of Oregon. His longtime interest in real estate drew him into the business program at ASU.
“I knew I wanted to work for a developer but did not want to pursue a narrow real estate degree,” he says.
Freericks points to a particular professor, who later became his academic advisor and routinely invited industry experts to lectures. One guest was Bill Gosnell of Grubb & Ellis, the juggernaut commercial real estate services firm.
Freericks began a seven-year working relationship with Gosnell. First, he worked as a runner earning $5 an hour in 1983, where he nicknamed himself “Fetch.” He progressively assumed more responsible roles and was eventually named a junior partner in the firm. A seven-year cycle saw the duo perform phenomenally in the bull market years with an earnings peak in 1987 followed by the bust of the S&L in the following year. The team earned zero income in 1988 and 1989. “At that point I wanted out, but the opportunity and knowledge I had earned was in Phoenix,” says Freericks.
Coming out of the real estate collapse, Freericks found ways to put his talents to use in the sluggish economy. He began a seven-year stint at Talley Industries, a conglomerate with ventures across defense technologies, air bags, consumer products and real estate holdings. Freericks distinguished himself at Talley serving in executive roles in real estate development.
Freericks had crossed paths with DMB while at Talley. After leaving Talley in 1996, he started a consulting practice and found an opportunity to work with the growing DMB Associates team, who had their eye on the Caterpillar proving grounds near Buckeye where they wanted to develop their next large scale community. They engaged Freericks to help them earn the rights to develop Verrado.
He successfully landed the project and ultimately joined DMB to help develop this coveted 8,800-acre site. From 1997 to 2003, Freericks participated in projects in the DMB portfolio, including Verrado, Santaluz, DC Ranch, Silverleaf and One Scottsdale. In 2003, Freericks’ focus shifted to operations, executive management and enhancing the organization’s reputation as a top employer and multi-disciplinary real estate company.
The storied GM Proving Grounds in Mesa attracted the interest of nearly every major Western developer during the 80s and 90s. “I first eyeballed the General Motors proving ground (site of Eastmark) at Grubb & Ellis in the mid-’80s,” says Freericks. During his days at Talley Industries, Freericks had meetings with GM about a possible venture in the 90s. DMB had also expressed an early interest in the Proving Grounds. Finally, in 2006, these discussions with DMB culminated in the company purchasing 3,200 acres of the 5,000 acres property for $260 million, which leadership at DMB has joked “came within a half hour before or after the peak of the market.”
From that peak followed the real estate recession, which affected Eastmark and the DMB portfolio. Thanks to committed ownership, DMB had an operational plan that would carry the company through a bad cycle through 2012. Experience certainly played a role, as Freericks and other DMB management executives had lived through the serious downdraft of the real estate bust in 1988 to 1990 and were ready to adapt and perform.
Out of the protracted recession, Eastmark and the firm’s other developments and properties, such as Centerpoint on Mill in Tempe, have stabilized and are performing on an upward trajectory.
Freericks has been a part of the planning for the Eastmark development since its purchase. The company spent years working to understand the market needs and the future development planning of the airport, the university and the Sun Corridor. Today the outlook on the industry has changed and Eastmark debuted over the summer with seven home builders feverishly constructing neighborhoods.
“Traffic has been amazing since the opening…better than we expected,” Freericks says.
DMB has ambitious plans for major employers, tourism and educational partners to be key components in their Eastmark development. Grand Canyon University’s new campus will total up to 160 acres and is projected for 10,000 students through a seven-year build out.
DMB secured the development rights for the Gaylord Hotel when Marriott purchased the brand last year and is working to bring the proposed hotel and convention center, which was originally to be an anchor component of Eastmark, into development. “Eastmark has significant commercial entitlements that we’re trying to capture; DMB’s move into commercial at Eastmark needs to be bold,” he says of the 29-year-old firm. “We strive to achieve enduring business success by creating extraordinary new environments that enrich people’s lives, are appreciated and rewarded in the market and have a positive impact on the larger community of which we are part.”
Vanessa Hickman, appointed by Governor Jan Brewer on December 3, 2012, to serve as Arizona State Land Commissioner, manages and directs the operations of a government agency that may be the most noteworthy and interesting organization you have never heard of.
A graduate of Arizona State University’s Sandra Day O’Connor College of Law, Hickman began her career working in private practice in the areas of real estate law, zoning and entitlements, then with Brewer’s Deputy General Counsel. She began her tenure at the Arizona State Land Department in 2009 as the Deputy State Land Commissioner.
“I knew of the Land Department from my time in private practice, but there was always a bit of mystery because it is both a Trust and State Agency and is governed by the Enabling Act, Constitution and State Statute,” she says. “People can be a little unsure about how the Land Department functions and what items it chooses as priority but those decisions are governed by the laws that guide the Department and allocation of staff resources to meet our Congressional mandate.”
The Trust, which has served Arizona’s schools and public institutions since 1915, has over 100 years of case law which have given the Agency direction on how it must manage the assets of the Trust. Hickman’s first months on the job at the Land Department were spent learning the history, laws, functional divisions and gaining an understanding of what role each person at the Department plays in protecting and enhancing the assets of the Trust.
As the State Land Commissioner, Hickman oversees an Agency of 124 people who manage approximately 9.3 million acres of surface and 9 million acres of subsurface land, representing 13 percent of land ownership in the state. Hickman also has a specific charge to maximize revenue for the Trust’s beneficiaries, predominantly K-12 education. This mandate is achieved from revenue produced in two main divisions within the Land Department: real estate and natural resources. The last five years from recession to recovery have produced considerable variations in the revenue streams largely tracking the markets ups and downs, she says.
Real estate revenues comprise the larger portion of Trust revenue, so when real estate revenues are down so are the overall Trust receipts. In fiscal year 2008, revenue peaked at $382 million, fiscal year 2010 was the lowpoint of the cycle at $155 million in Trust receipts received (in comparison, revenue in fiscal year 2013 was $289 million).
Hickman says the Trust is gaining revenue as higher land values give the Department the opportunity to engage in more land sales and leases of State Trust land. It is the beginning of fiscal year 2014 and there are $200 million in real estate transactions in the pipeline, Hickman says. This is a function of market recovery; the land values have recovered to an extent that we are starting to see a large volume of applications to purchase and lease State Trust land at pre-recession pricing.
The State Trust inventory produces revenue streams for the purpose of growing the Permanent Endowment Fund, which in the first 90 years of the Department’s existence reached approximately $1 billion. Between 2001 and the 2013 that value has tripled.
The value of The Permanent Endowment Fund (the fund for all beneficiaries) as of June 30 was $4.1 billion. The Permanent Fund for Education (K-12) – the largest endowment fund of all of the beneficiaries – is valued at nearly $3.9 billion as of June 30. It is quite possible for the K-12 Permanent Fund to be worth an additional $2 billion a decade from now, or more depending on market opportunities.
Of the 9.3 million acres of State Trust Lands, 8.4 million are leased for agriculture and grazing. Grazing and Agriculture lessees are the best stewards of the land and serve as our on-the-ground land managers. They bring an immeasurable value with respect to taking
care of land that would otherwise require tremendous financial expenditures to manage. Instead, the Trust receives steady revenue from these lands of between $6 million and $7 million per year.
The composition and determination of the Trust lands are determined by geography, but there are also historical statutes that govern the Department’s management.
“It was determined that Arizona should not sell its Trust land outright, as other states had done,” Hickman says. “Instead, it should put the lands to their ‘highest and best use.’ The decision to sell or lease the land should be based upon the potential use of each parcel.”
A unique advantage of holding such a wide stock of real estate is the potential to explore its use and utility in new platforms. With the “highest and best use” directive, the Land Department has recently explored leasing site options for solar and wind projects.
In late 2011, the State Land Department approached APS about building a solar plant on State Trust land. After APS conducted an independent assessment of the proposed parcels, management confirmed the first solar facility ever to be built on Arizona State Trust land would be the 400-acre Foothills project site, located in Yuma County. In addition to the APS project, Hickman notes the Department currently has three signed solar leases. The 4 leases stand to generate a minimum of $22 million for the Trust.
With wind development, Hickman points to a successful collaborative venture on private, state and Bureau of Land Management (BLM) public lands located in Navajo County, Arizona.
As the state’s first commercial-scale wind farm, the Dry Lake Wind Power Project generates 63 megawatts (MW) of clean, renewable energy and contributes jobs and tax revenue to the local community. In tandem with solar, the Department has three existing wind leases with another to come on line in the near future. The wind leases stand to generate a minimum of $26 million for the beneficiaries.
As Commissioner Hickman closes in on her first year of service as Commissioner, she sees potential for the Department’s mission of generating revenue for education. “There are approximately 600,000 acres of urban State Trust land that will be the focus for foreseeable real estate growth, allowing the Trust to receive appreciable returns on valuable real estate in key locations,” she says.
Of these acres, Hickman notes the Department holds most of the developable land around the Greater Phoenix Metropolitan area. With the Department’s significant land holdings, mission to generate revenue for K-12 education, investment endowment and effect on the real estate community in Arizona, Hickman stands as a leader heading an agency that is open for business and now far less mysterious.
It is a rare honor to ring the opening bell for a corporation’s initial public offering, and Jerry Moyes, CEO of Swift Transportation, has done it twice for his company – more than 20 years apart. The story of how Moyes went from a trucker’s son to taking his transportation company public is one worthy of Steven Spielberg’s attention.
Trucking is in Moyes’ blood. His first stint was maintenance on his father’s trucks in Plain City, Utah, a hamlet with a population of 850 people.
“Four of the largest trucking companies in the U.S., probably in the world, came out of this little town,” he says of his hometown, which is only a few miles away from the main artery of the then-U.S. Route 91, now the I-15.
From the Beehive State, the young Moyes journeyed south to Greater Phoenix. In 1966, he began hauling steel from Arizona to Los Angeles ports with a single truck. Three decades later, Moyes’ solo treks would develop into a $150 million company of 800 trucks armed with a critical Interstate Commerce Commission Number from a scion of the Swift Meat Packing family, operating as Common Market Distribution Corp and subsequently Swift Transportation. The decision to take Swift public by initial public offering in 1990 was absolutely necessary to raise capital for massive expansion.
As only Moyes could tell it: “I’ve never taken any cocaine in my life, but the day Wall Street gave me $22 million, we were on one heck of a high around here.”
That share issuance also meant, for the first time in the company’s history, Moyes was not fully in ownership of the company. However, from 1990 to 2007 the company expanded revenues from $150 million to $3.7 billion.
“If you bought Swift in 1990 and Berkshire (Warren Buffett) the same year and sold them in 2007, the Swift stock would have yielded you an 1800 percent return versus 1600 percent for Berkshire,” Moyes says.
The 17-year ride to success wasn’t always smooth. The trucking guru got himself involved in 2001 with real estate investor Steve Ellman and the Phoenix Coyotes hockey team. In 2006, Moyes took full control of the team but had to take the franchise into bankruptcy after mounting losses near $300 million. The NHL then bought the team out from bankruptcy for $140 million. Legal battles ensued, with the NHL demanding damages from Moyes of $70 million.
Even as the Coyote experiment was underway, Moyes had to deal with a concern far closer to his heart. In 2005, the Swift Board of Directors forced the Chairman and CEO out of the company he had created. Moyes indicates the Board was simply too focused on the short-term success of the organization and not on the long-run growth. Out of a job in 2005, Moyes draftd a comeback plan that would return him to control.
In 2007, Moyes bought his company back with a $2.5 billion loan at 12.5 percent interest. Taking the company private was an enormous risk.
“The interest expense was $1 million a day, which was the bad news,” he says. “The good news was there were only five days in a work week.”
The other concern was the fact that the Great Recession would begin in 2007, decimating nearly every industry but especially trucking and transportation. Moyes rebuilt the company, piece by piece, reclaiming his initial vision. Capital expenditures returned on truck purchases to a regular yearly pattern of retiring and purchasing, which is critical on the standard operating life of four years per truck. With more than 16,000 units, the fleet needed to turn over 4,000 units a year. Swift Management was not doing that in Moyes’ absence.
With the company back on course with Moyes’ vision, he once again turned to the equity markets for capital to retire debt, consolidate and expand. In December 2010, Swift was a public company again with an issuance of $73 million shares at approximately $11 per share. Though this was a smart move for Moyes, Barron’s financial magazine suggested the deal was better for him than investors, reporting that “trucking fans probably would do better with shares of Swift’s better-financed rivals.”
As of August 2013, the stock trades at $18 a share, the earnings are solid and beating guidance and the financial statements are strong.
Moyes indicates the company’s real estate terminal holdings are fully owned and land is bought and developed by the company as needed. It’s also the only U.S.-based trucking company to own 100 percent of a Mexican trucking company, Trans-Mex. On natural gas, Moyes sees 10 percent annual growth in the fuel market for trucks.
Overall, Moyes sees profitability and opportunity for Swift. His company has more than 22,000 employees and recently announced a purchase of Central Refrigerated Transportation, Inc., an industry leader in refrigerated trucking services.
For Moyes, though, the focus will always be on the business he has loved. With a powerhouse company, a large family, charitable work and a myriad of other responsibilities, Moyes is the exemplification of the American success story. Now the only question is who will play him in that Spielberg movie.
As with the panel of industry experts selected for Commercial Executive Magazine’s fourth annual Fall Forum, moderator Nate Nathan was not handed a successful business venture, the keys to the CEO’s office or provided a sure-fire blueprint for beating industry rivals. Nathan’s accomplishments were earned in countless 12-hour workdays, pressure-packed deals and intense competition.
Born in the Greater Chicago area, Nathan battled dyslexia, a difficulty in test taking, and the advice of many around him that he should set his expectations low. Determination and fortitude saw him graduate high school and Arizona State University four years later. His work ethic allowed him to pay for his education while supporting himself as a lifeguard at the Mountain Shadows Country Club. A CAREER IN land and property was never in Nathan’s blood. However, Nathan succeeded in his first foray into the business through perseverance, phone time and copious study of the single-family home market. “I was the youngest million-dollar salesman in the history of Tom Fannin Realty,” he says. His achievements and connections in the industry led him to Joe Lampe, a seasoned real estate executive, with whom he formed Nathan & Associates in 1980 with $30,000 from the sagacious veteran. Nine months later, Nathan had repaid the loan and took sole ownership of the company with a promise to Joe he would provide the same opportunities to other young adults. FROM THE BEGINNING, land was the meat and potatoes of Nathan’s operation. “We focused solely on brokering land acquisitions for master-planned communities, commercial, retail and multifamily deals in Arizona,” Nathan says. As the market dynamics changed in the early- to mid-1990s, Nathan had to pivot the company’s strategic focus to representing and marketing master-planned communities. Nearly 20 years later, the firm’s core competencies are tracking land acquisitions, interpretation of the Southwest real estate market, marketing and geographical mapping. The roster of past projects by Nathan & Associates include Verrado, Vistoso, D.C. Ranch, Grayhawk, Troon Village, Las Sendas and Trillium – examples from more than 100 completed transactions. Current listings for the company underscore multiple zoning types: residential, commercial, industrial, multifamily, retail and the master-planned community.
Scott D. Peters
Jim Cramer, the inimitable creator of CNBC’s “Mad Money,” claims daily “there is always a bull market somewhere.” On November 29, 2012, Cramer informed his millions of viewers about the enormous investment opportunity in Healthcare Trust of America, Inc., a charging bull in the medical real estate space, led by its competitive and passionate Chairman, CEO, and President Scott D. Peters. || AMBITIOUS BEGINNINGS In the investment world there is “street cred” in an appearance on “Mad Money.” It demonstrates the achievements of a competitive market company among its peers. For Peters, the appearance just five months after HTA went public on June 6, 2012, provided a “spotlight moment” experience in a six-year evolutionary cycle for the company. “I always wanted HTA to be a public company when I founded the company in 2006,” he says. The success of HTA was not a foregone conclusion, but there was certainty Peters would see the process through from start to finish and give his full energy in the effort; a seemingly indefatigable desire to succeed, which has always been present. From the years he spent putting himself through school at Kent State University, by working multiple jobs, the energy and commitment were evident early on. Unlike the average 22-year-old graduate who might take six months off before finding a job, Peters graduated on December 1980, and started working the next day for Arthur Andersen & Co. Working four years at the Accounting big eight firm in Cleveland, Peters garnered early experience in accounting and finance. A brief sojourn to Phoenix to pursue an opportunity with a local accounting firm led Peters to appreciate life in the desert and the Southwest, an experience that was instrumental in his decision to headquarter HTA in Scottsdale some 25 years later.
|| PHASE TWO Peters defines the real start of his success as working for David Murdock of the Dole Food Company for eight years. “The basis of my foundation from a business perspective, the emphasis and majority of whatever business success I have achieved, I gathered from the knowledge, foresight, and creativity of an exceptional business man and gentleman,” he says of the man who recently took the Dole Food Company private in a $1.2 billion transaction. Those eight years provided Peters with a definitive knowledge and skill set in the finance and real estate arena, along with solid credentials. In 1996, Peters’ resume won him a place as the CFO of Golf Trust of America, Inc., a Real Estate Investment Trust, which CEO Brad Blair (currently an HTA board member) was looking to take public in 1996. In the intervening years until the sale of the company between 2003 and 2004, Peters developed some core tenets of his persona: a passion for real estate (“I knew I would never go back to accounting.”) and a certainty in the public markets as the ultimate proving grounds for a company and its management team. “You have all the complexities of trying to be successful, competing with your peers, trying to be unique, and demonstrating that your model can create shareholder value,” he says.
|| A BRIEF RETIREMENT With the sale of Golf Trust, Peters looked forward to a chance to take it easy and reap the rewards of a successful career. Moving back to Phoenix with his wife and family, the rest and relaxation lasted all of several weeks, says Peters. Anxious to stay busy, Peters unknowingly took the inchoate steps of HTA via Triple Net Properties. The firm was a leading provider of real estate investment programs, including non-traded REITs and tenant-in-common offerings. Peters spearheaded the efforts to take the firm public, rolling up the investment offerings with the sponsor / advisor and raising $160 million in capital through a 144-A equity offering. The firm eventually acquired the real estate brokerage Grubb & Ellis through a reverse merger, keeping the Grubb name. During this time, Peters founded HTA in 2006 as one of the REITs sponsored by the firm – one focused on the medical office building space, a field he had become familiar with over the years.
|| A SELF-DEFENDING SECTOR Peters wanted a health care REIT that focused on the MOB arena. Through a series of transactions in amounts often not exceeding $30,000 per investor, raised thru the retail brokerage network. Peters was able to expand the REIT to more than $700 million in equity by 2008. Then the recession hit. “Luckily, the MOB sector has a defensive posture. Health care is a staple industry. It offers yield, return and stability,” Peters says. In late 2008 and early 2009, after leaving Grubb & Ellis, Peters began assembling a local management team from scratch to grow the REIT with designs on making it an industry leader in the MOB field. HTA now has over 150 employees with over 60 in Scottsdale. From that $700 million base, the company has built a portfolio of properties that totals approximately $2.8 billion, based on purchase price, and is comprised of approximately 13.6 million square feet of gross leasable area located in 27 states. HTA’s growth trajectory benefited from the recession as property values plummeted. Real estate transactions that wouldn’t occur in stable economic times were available to savvy investors. In retrospect, Peters says, those deals were generational buys. “If you gave me $2 billion today and said go buy great properties in these markets over 24 months at those values, I would have to give you the check back,” he says. However, from 2008 to 2010, HTA seized those opportunities to expand its portfolio in powerhouse markets of Atlanta, Phoenix, Indianapolis, Greenville, S.C., Pittsburgh, Albany, N.Y., Boston, Dallas and Houston, acquiring over $1.5 billion in MOB assets. The focus for HTA, Peters says, has always been on acquiring, owning and operating medical office buildings predominantly located on or aligned with campuses of nationally or regionally recognized health care systems in the U.S.
Peters notes this move develops a national self-management property and leasing platform that offers investors immediate creation of stockholder value through a lower cost structure and stronger tenant relationships. These differentiators have allowed HTA to pursue gains amidst a bruising recession and a plodding recovery. “We continue to have a strong balance sheet with approximately 30 percent debt to enterprise value,” Peters says. “Fifty-eight percent of our annual rental revenue is from credit-rated tenants, 91 percent occupancy fundamentals, and HTA’s investment grade credit rating, which allows HTA to obtain attractive loan terms from its lenders.”
|| LOOKING AHEAD HTA’s horizon is replete with opportunities. The growth in MOB space due to the Affordable Care Act, which the Congressional Budget Office estimates will bring 30 million to 40 million more individuals into the health care system. This demand over the next 20 years, with the baby boomer generation retiring and consuming health care will have vast implications for the MOB space. Additionally, technological advancement that enables cost synergies with HTA tenants will provide a bottom line profit drive for HTA. Peters cites more than $400,000 of savings benefiting Indiana University Healthcare system in 2012 as a direct result of real estate management efficiencies from innovation and property management and in- house expertise. HTA’s competitive position allows the company to pursue value in the MOB space, amidst a backdrop in which it has very few focused public company rivals. The fundamental strength of the organization resides in its strategic application, human capital and long-term vision. “I would like us to be a long-term successful company…with strong positive rates of return, consistent same store facility growth year over year, and the capacity to double the size of the company,” says Peters. Fourteen months removed from the initial public offering, Peters can reflect positively on the company’s success. “You are only as good as yesterday,” he adds. “We want to take HTA to the next level.” With a talented group around him and a fire to succeed, Peters sees the MOB space as very attractive – it has yield and the macro trends behind it, he says. And as Jim Cramer would undoubtedly say, “Booyah! Buy! Buy! Buy!”
Elliott Pollack’s father said he had three vocational choices with which to make a living: doctor, lawyer or accountant. However, navigating those choices weren’t as straightforward as it sounded. Life, Pollack says, is essentially a series of random events. “It’s how you react to those random events that determines how things turn out,” he adds. Take, for instance, how he came to Phoenix. In 1963, his mother was on the television game show “Concentration” for three consecutive weeks. Among all her winnings – ranging from boats to cars – the only trip she won was to Arizona.
“People from New York tend to vacation in Florida, and in 1963 no one knew where the hell Phoenix was,” he recalls.
His parents were in Phoenix for a week before the then-Boston University undergraduate received the news they planned to move there permanently. The second random event was the Vietnam War. To avoid being drafted and pulled from his law studies at Columbia, Pollack had to find a university that would give him enough credits to stay stateside. That’s when he found himself working toward an MBA at University of Southern California. The third random event came in the form of two job offers – one at Bank of America and the other at Valley National Bank, where he would work for nearly two decades. And the last noteworthy event, he says, is the people he ended up reporting to at Valley National Bank kept him from the “bullshit politics of a large organization.” It’s what kept him there for 18 years, he says.
Now Pollack is the CEO of Elliott D. Pollack and Company, an economics and real estate consulting firm he founded in 1987. Pollack’s company has worked with the private and public sector to conduct economic forecasting, develop economic impact studies and prepare demographic analyses and forecasts. In the arena of economics and real estate “the buck stops” with him. Discussing the Arizona economy in 2013, Pollack begins with housing and its role in the recession and recovery. “Housing is necessary and good for sustainable economic growth; it is an essential part of the picture,” he says.
However, Pollack is certainly not taciturn about the government’s involvement in the subprime mess andits egregious effect on the national and state economy.
By this, Pollack refers to affordable housing mandates that required Fannie Mae, Freddie Mac and the FHA to vastly expand their subprime mortgage exposure. When the crisis finally erupted, fully two-thirds of the 25 million subprime and nonprime mortgages in the financial system involved government backstop, regulation or outright ownership.
“Federal fiscal policy is terrible,” he says. “The government should live within its means like any family or business.”
This response underscores Pollack’s value to his roster of clients; he is not shy, as Howard Cosell often quipped, “to tell it like it is.” “Create an environment that is conducive to growth – reasonable tax rates for export related industries, stay out of labor markets and minimize regulation and other government induced costs to business,” he says.
Starting into the fifth year of the economic recovery, Pollack cites the unusually tepid pace of Gross Domestic Product (GDP) growth as a function of the financial meltdown with the addition of lousy federal government policy.
“It is no wonder this cycle has been so mediocre,” he says.
GDP has meandered under 2 percent for most of the last four years, while unemployment has crept lower, as much on reductions in the labor force than strong monthly hiring numbers. On the question of the length of the recession – expansion cycle, typically 10 months and 57 months respectively, and what it portends for this cycle – Pollack quips, “that’s like the man who drowned in a river with an average depth of six inches; It tells you nothing. Forget the averages.”
Going forward, Pollack sees the continued slow cycle of growth for GDP, jobs and wages.
“Americans have come to accept this anemic recovery as the norm,” he says. “It is only because conditions have been so poor for so long that we feel this mediocre recovery is OK.”
Pollack also does not see the Federal Reserve increasing interest rates as an imminent threat to choke off recovery in real estate. “Higher rates will squeeze out people on the margin, but for it to become a major problem rates and prices would have to go up a lot higher from here,” he says. Pollack has seen the booms and busts of economic cycles, and from his commentary there is an expectation that the U.S. will drive forward as it always has, leading in technology, innovation and entrepreneurship. The key for Arizona government, he indicates, is to lean on organizations like the Greater Phoenix Economic Council and the Arizona Commerce Authority to create a universal marketing package for the state. In this way, the state can focus on creating an export-driven, innovation economy, which leads to strong GDP and income growth. For a man who makes a living predicting economic trends, among other things, he can still appreciate the random things in life. “I’d like to tell you that my life was planned out and is what I expected, but, essentially it’s how I reacted to random events,” he says. “I’m pretty happy with the outcome; let’s put it that way.”
It is exceedingly abstruse in discussing Arizona commercial real estate without mention of JDM Partners or the men who comprise its partnership – Jerry (J) Colangelo, David (D) Eaton and the focal point of this piece, Mel (M) Shultz.
The Arizona Diamondbacks, Phoenix Suns, Douglas Ranch-Trillium, Cotton Center Business park and Chase Field are stunning examples of these men’s work and expertise. However, these accomplishments take a backseat to the admiration and respect between the partners.
“We are business partners that are a family, a lifelong partnership, and relationship,” Shultz says.
Though the JDM partnership has celebrated its 30th year, Shultz’s journey in real estate began in his 20s with $5,000 he saved from life insurance sales commissions.
A Modest Start
If a journey of a thousand miles begins with a single step, then for Shultz it began with the assumption of debt on several rental homes in the early 1970s. Over a few years, through buying and selling homes, the nascent investor accumulated enough funds to move from residential to commercial real estate. As he recounts, his purchases of office buildings on Thomas Road near 24th Street might have led him to own all the properties on the same major road in Phoenix if not for other emerging opportunities.
Those opportunities included purchase and sales of Phoenix properties for a California real estate syndicator, which allowed Shultz to continue his wealth accumulation and led to the moment that would alter his destiny.
A transaction involving property on 32nd Street provided a window on real estate development, specifically rezoning. Shultz purchased a 5-acre parcel with home for $240,000, which he agreed to sell to a friend for $720,000 pending a reclassification of the property to commercial office use. In a year, the sale was complete with a handsome profit.
“I learned that I could add value by changing the underlying use of the land,” Shultz says.
Shultz’s successes grew through the 1970s, including a tremendous profit from the purchase, rezone and sale of the McCune Mansion. He quickly acknowledges his successes were the result of “having the best mentors.” Specifically, he points to the relationships he developed with Eaton and Colangelo.
“I asked a lot of questions; I was a sponge…but working alongside these gentlemen inspires you,” he says.
The mutual respect between the men became of the foundation of the JDM partnership formed in 1983.
The Next Leg
With the recent $73 million purchase of the 21-acre Tempe State Farm Campus space; JDM has another landmark win in its inexorable march of success. For Shultz, the work is rewarding on its own merits.
“Being with Jerry and David everyday for half your life, you are inspired,” he says.
This passion in business comes in large measure from the enduring relationship of the three men but also stems from a statement Colangelo made in 1968.
“As a business the community owes us nothing, but as a business we owe the community everything,” Shultz paraphrases. This has really been the mantra of JDM over 30 years, he adds.
A true measure of the quality of an individual resides in the feelings and opinions of the friends which one has.
“David Eaton and I have been partners with Mel for many years,” Colangelo says. “He is one of the most astute real estate executives not only in our community our state but in the country. He possesses all the character traits that you find in an outstanding leader and is the epitome of character and trust. In other words, he is the kind of guy you want to do business with.”