Albert Berriz’s BlackBerry is blowing up. Typical of a CEO of any top 50 multifamily enterprise, a lot of the e-mails are from clients, lenders, equity partners, and senior staff. But those aren’t the only e-mails jamming his inbox. Through his company’s My.McKinley.com website and mobile apps, Berriz’s e-mails shoot in straight from his customers. Which, by the way, is the way he likes it.
“We haven’t seen the full impact [from the McKinley mobile app],” says Berriz, CEO of Ann Arbor, Mich.–based McKinley. “In just six weeks since we got Android and Apple approved, the floodgates opened. There’s been a firestorm of feedback.”
The company’s website and app are telling Berriz things he never knew. His team is acting on the feedback immediately. In an era where companies are trying to optimize their amenity offerings to consumers, Berriz’s may be on to discovering how to deliver exactly what customers want. It’s not what you’d expect from a company that puts boots on the ground in local markets, places long-term bets with fixed-rate debt, and, thus far anyway, believes revenue management would distance the firm.
Historically, McKinley has employed a strategy that you’d expect from a private operator of its ilk. It has found problems (and taken on other peoples’ problems), made long-term investments, fixed the problems, and made money. In the past cycle of distress, it found a lot of opportunities. Ultimately, that pipeline is bound to slow.
The number of multifamily properties in distress moved above 1,000 in January 2010, peaking at 1,102 in June. Since then, it’s been in a slow fall, hitting 669 in March of 2012. Manus Clancy, senior managing director of New York–based commercial real estate research firm Trepp, expects it to stay flat or rise slightly over the next couple of years. So McKinley will have an opportunity to pick up more distressed deals, but the volume won’t be as great as it has been. That could mean less business for the firm, but Berriz insists the company can find other lines of business to compensate.
“I am very confident we can bridge from work-outs to institutional long-term management because we are in the mix or acquiring assets for ourselves and others in our key markets,” he says. Contrary to being a detriment, as the work-outs wind down, they’ve been a benefit and have even provided an entry with institutional clients, Berriz says.
“The work-out business has been accretive to our institutional long-term management business, and the national exposure and growth we have experienced in the work-out business has been what’s fueled our growth in that book of business,” he says. “Many institutional clients have come to us for our expertise in buying distressed assets in secondary and tertiary markets, and, of course, in addition to assisting them with acquisitions, they have retained us to manage those assets as well.”
An Old-School Model
Berriz came to the United States as a very young child, on Jan. 7, 1959, when he and his sister, mother, and father escaped Cuba six days after the revolution and the rise to power of Fidel Castro. His brother was already in the States at the time, attending Villanova University. Berriz, who has the appearance of an academic, went on to undergrad at the University of Miami School of Engineering, where he earned an architecture degree, and later to the Kellogg School of Management at Northwestern University, where he earned a master’s degree in management.
In 1979, his first taste of the professional world came as a real estate loan officer with the real estate department of the Continental Illinois National Bank and Trust Co. of Chicago. At Continental, he worked with McKinley, a company founded in 1968 by Ronald N. Weiser, the United States ambassador to the Slovak Republic under President George W. Bush. His next stop was Altamonte Springs, Fla.–based Granada Construction, where Berriz served as president and put together joint ventures on new developments with McKinley during the 1980s. In 1989, he joined McKinley, which had been an opportunistic buyer of troubled real estate since it started. That skill set eventually led to new business.
“People lending money asked us to do for them what we’ve done for ourselves,” Berriz says. “We’ve always been value-add guys. We’ve always bought distressed assets and turned them around.”
But managing work-out problems in about 17,510 units is only one part of the business. McKinley manages 4,984 units for institutional investors and owns 11,663 units in Michigan, Indiana, Illinois, Georgia, and Florida. Though it has properties in major markets such as Tampa, Orlando, Houston, and Atlanta, McKinley also loves places like Augusta, Ga., and Norfolk, Va. McKinley focuses on job corridors along interstates, like I-85 from Raleigh through Charlotte in North Carolina, and into smaller towns in South Carolina, like Spartanburg, Columbia, and Charleston, or along I-4 from Tampa to Daytona Beach in Florida.
Since 2008, Berriz has found success piecing fractured condos back together, buying 3,300 units in 15 Florida properties. He’ll also buy distressed assets, like the 122-unit Palma Ceia Hyde Park, a failed condo in Tampa. The project was essentially red-tagged with serious roofing problems, as well as acid and concrete in the plumbing lines (poured by disgruntled contractors), and its certificates of occupancy were revoked by the city of Tampa. At the Apple Tree apartments (now known as The Villas) in Ypsilanti Township, Mich., major exterior renovations were required, crime was rampant, and vacancy and image issues dragged the property down. Today, Palma Ceia Hyde Park is at 100 percent occupancy and The Villas is at 98.69 percent.
“They’re good at fixing problems,” says Daryl Carter, founder, chairman, and CEO of Irvine, Calif.–based investment manager Avanath Capital Management and a longtime Berriz colleague. “The REITs are buying finished, clean assets that don’t have a lot of problems. McKinley is buying from special servicing shops. These properties have physical and management issues. They roll up their sleeves and fix things.”
McKinley will replace its original debt after the renovation with nonrecourse debt from Fannie Mae, Freddie Mac, CMBSs, insurance firms, or HUD—basically whoever has the most attractive debt at the time. It then puts long-term debt on the property. “They don’t ever want that gun to their head,” says Ernie Katai, SVP of manager Berkadia, a McKinley lender.
McKinley’s conservatism appeals to lenders. “Their discipline in underwriting and management practices has certainly factored into their success,” says Karen B. Case, president of commercial real estate at The PrivateBank, a Chicago-based McKinley lender. “They’re realistic. They know what realistic rents and realistic occupancies are.”
Berriz says a friend once characterized his strategy as a “slow bake” method. He likes that characterization and uses it to draw a clear delineation between his model and institutional investors seeking a quick fix.
“The apartment business is not a three- or five-year hold business,” Berriz says. “If I buy a building, I expect to make money on cash flow and refinancing proceeds in the second 10 years. If we do our job right, we fully recover our equity and hold it forever.”
The McKinley culture rotates around three core values: the firm has no offices (asset managers and regional managers operate out of their cars), the organization is flat (Berriz wants to be three heartbeats from customers), and it is geographically dispersed.
“You make money in apartment communities, not offices,” Berriz says. “We’re in the field all the time.” Kenneth Polsinelli, chief real estate officer for McKinley, visits each property in the company’s portfolio six to 10 times a year, and Berriz visits each one three to four times a year. “The senior guys come to a property and if they see a cigarette butt on the sidewalk, they pick it up,” says Matt Schwab, managing director of Karlin Real Estate, a Los Angeles–based private real estate investment firm and a McKinley client.
Berriz eschews revenue management, in part because he doesn’t think he needs it with boots on the ground. Theory suggests that not using revenue management leaves as much as 3 percent to 5 percent in revenue on the table, a notion Berriz dismisses. “If you have 100,000 units and 12 heartbeats to a customer and the CEO never visits, I can be convinced in that world that the computer is smarter,” he says.
Where outside companies have capabilities that McKinley doesn’t, Berriz will outsource. He subcontracts accounting and information technology but keeps groups that handle legal, tax, marketing (which handles Facebook, Twitter, apps, and websites), and finance issues in house. “We aren’t world class in accounting and IT,” he says. “We are world class in operating real estate.”
But the old-school company is finding that new technology can help it operate real estate a lot better.
Full Sail University in Winter Park, Fla., bills itself as a place where people “can take their passion for entertainment and turn it into a career,” according to its website. Graduates end up in entertainment careers like film, design, show production, games, animation, and Web design. Right across the street from Full Sail sits McKinley’s 319-unit Indigo.
With a technologically savvy student base, the site provided a petri dish for McKinley’s website and mobile apps, which allow customers to send instant messages to McKinley, along with scheduling work orders and paying rent. “We got a ton of feedback about problems they’re having, questions they have for us, and ideas they have for us,” says Albert Berriz Jr., Berriz’s son and the company’s vice president and managing director of residential real estate.
McKinley discovered that the AV crowd at Indigo wanted a digital recording studio as an amenity. “We took a laundry room and converted it into a studio because they wanted to be there at 2:00 in the morning,” Berriz says. “That mixing room got us increases in sales.”
Indigo isn’t the only place McKinley has discovered what residents need by monitoring MyMcKinley. At Azure Winter Park, in Winter Park, Fla., resident feedback alerted the company that the HVAC system needed to be repaired and that a grading problem was causing flooding in the parking lot. The firm fixed both issues quickly because the feedback chain provided evidence there were problems. “[Repairing the lot] cost over what a community manager would normally be authorized to spend,” Berriz Jr. says.
Social media helps McKinley fine-tune its rehabs, but it has always sought to make long-term investments that reduce energy consumption and insurance costs. That cost savings plus rent bumps give McKinley a return of 20 percent to 22 percent on rehabs, according to Polsinelli.
Upgrades like water-saving devices, double-pane argon-filled windows, and recycled materials save money. In fact, something like just adding insulation can pay huge dividends in increasing retention (residents are more comfortable), save energy costs (by eliminating drifting between spaces), and save on insurance costs (adding rigidity to the buildings and adding fire-retardant products).
To get rent pops of 6 percent or more, McKinley will add hard-surface flooring that’s either tile, laminate, or wood; upgraded appliances; and, perhaps most importantly, washers and dryers, which Polsinelli says are the most consistent request customers make.
“You’re now seeing rental rate increases for those improvements,” Polsinelli says.
The Servicing ?Pipeline
McKinley doesn’t take the same strategy into the distressed properties that it manages for servicers, like Berkadia. The manager simply tries to stop the bleeding, not push huge rent bumps (this is usually the first step when it buys a troubled property, as well).
“We are liquidators,” says Michael Carp, Berkadia’s Commercial mortgage managing director. “We get assets in REO, fix them, put lipstick on the pig, and move it out the door within six months. It takes a well-organized group to assess and execute [the turnaround]. Lots of people can assess, but few people can execute as well as McKinley.”
In properties starved for cap-ex investment, life safety issues come first. That happened with the 3,709 units from Babcock and Brown FX 3 Portfolio, from Houston-based special servicer Situs Cos. To fix that portfolio, McKinley repaired hurricane damage in Houston and cleaned up raw sewage in Jacksonville, Fla. After dealing with the life-and-death matters, McKinley moves on to stabilizing the resident base, trying to fill the buildings, and attacking expenses and management problems.
“McKinley finds qualified long-term tenants to put in the building, which helps with sales,” Carp says. “Their work produces higher sales proceeds for our customer.”
Though institutional clients are a growing portion of McKinley’s management group, work-outs still drive the train. When the credit markets froze and the world tumbled into recession in 2008, that gave the company an opportunity to grow its managed portfolio by 10,000 and add 3,300 condos to its owned portfolio.
The maturities may flow through to 2014. Question is, as that pace normalizes, will growth continue? Berriz says submarkets in Houston, Atlanta, and Las Vegas provide a work-out pipeline of at least three years. As distress slows, new institutional business will pick up.
“McKinley is actively involved in institutional long-term management, and that business has grown significantly over the past several years,” he says. “In fact, we fully expect [it] to grow at a pace that replaces our work-out deal flow over the next five years.”
But Berriz should still see his share of distress. His old friend Carter sees opportunities revitalizing aging properties in the urban core. Carp also thinks the “problem solver” reputation will keep McKinley busy into the future. “The fact that Albert has been so successful in distress will carry them for a long time, because they have such a great reputation,” Carp says.
Berriz plans to shepherd the company for a stretch. “I am 55 and ‘never plan on retiring,’?” he says. “If I do, it won’t be for a long time. My dad was a real estate developer, and he retired at 88. If genes have anything to do with it, it will be a while.” For now, he’s keeping one eye on his BlackBerry to see how he’s doing and another eye toward the future.