“It’s not what I expected when I jumped on a Southwest flight from Dallas to El Paso expecting to see a mom-and-pop shop,” says Wells Fargo senior vice president Kent Howard, who visited Hunt Cos. in 2003 and has since been acting as the firm’s primary banker and treasury manager. “But here’s this family-run company out of El Paso that started out in the contracting business and then became a military builder—really one of the most dynamic forces in that business—and what you see isn’t mom and pop; what you see is an incredibly complex and diverse real estate company.” Hunt executives aren’t oblivious to the rather distinct evolution that has brought their firm from nail-banging barracks builder to its current amalgamation of multibillion-dollar real estate investment funds manager, tax credit syndicator, and affordable housing owner/operator. On a wall in the lobby of the company’s otherwise nondescript headquarters just north of downtown El Paso is a picture of the current executive team, including chairman and CEO Woody Hunt; president and COO Mike Hunt (Woody’s brother); chief investment officer Chris Hunt (Mike’s son and Woody’s nephew); and executive vice president Ryan Luxon, standing in a boardroom. Just below it is a nearly identical shot of the Hunt executive team from the late ’60s, just subsequent to Woody joining the firm.
“Would the gentlemen in the bottom picture recognize the company that Hunt is today? Probably not,” Mike Hunt says. “That photo was taken probably two years after Woody joined the company. He was really the one who came up with the idea to take the company public to raise capital for a new business—military family housing done on a new concept of turnkey design/build. We went public in 1969 and then reprivatized in 1977. Back then, we were a construction company. The other people in the photograph rightly wouldn’t recognize Hunt as that now, even though construction continues to be one of our core skill sets.”
Indeed, at a time when development is the culprit behind the demise of so many long-standing companies, it was construction—and specifically the contracted construction of privatized military housing communities—that has Hunt positioned with one of the strongest balance sheets coming out of the recession. In 2009, when multifamily housing starts plummeted to an all-time low of 108,900, when apartment developers were laying off staff and shuttering regional and national offices, and REITs were taking write-offs on stagnant landholdings, Hunt pulled in $1.2 billion in construction revenue, close to 100 percent of which was for military housing projects. What’s more, Hunt had spent the years between 2004 and 2007, arguably the zenith of multifamily asset values, liquidating its market-rate apartment stock.
“We’ve ended up stronger at the end of this financial panic than we were going in, and I think that’s an exception, particularly within the multifamily industry, and maybe even within business in general,” says Woody Hunt, who is described as a soft-spoken and patient yet methodical and persistent manager. “If there was any part that was strategic, it was that we sensed where the pricing was on market-rate assets and took advantage of it to significantly build liquidity. We had a large construction backlog going into the 2007–2008 time period, and the profits there are all cash, creating additional liquidity to exit the recourse debt that we had. Our internal hedges all worked, we have capital to deploy, and at some point you need to continue to expand geographically, and you need to expand your product line and services, and we’ve really been doing that over the last year.” Fast forward to today, and there’s a challenge front-and-center for Hunt Cos. With military contracts rapidly drying up and a portfolio of stable yet mostly affordable properties under management, the family leading this Texas company on the journey to reorganize must face a daunting new question: What’s next?
The Necessity of Reinvention
In the same conference room where the Hunt Cos.’ executives posed for photos last month, there are shelves and shelves of military housing awards. The plaques and trophies are capped with die-cast model F-4 Phantom and F-16 Eagle fighter jets or are set against dioramas of sandbagged artillery cannons and highlight Hunt’s on-time or ahead-of-schedule delivery of military housing projects; thousands of hours of construction with perfect safety records; and overall best-in-class achievement awards from U.S. Army, Navy, Air Force, and Marine Corps bases around the world. While there’s not much room left on the shelves for additional decorations, Hunt executives are keenly aware that there aren’t a lot of awards left to be had, either. “We’ve been in military housing since 1969 and have probably built more units than anyone else since World War II, with a market share at times bordering on 60 percent,” Woody Hunt says. When the federal Military Housing Privatization Initiative was launched in 1996, Hunt began to contend with a group of much larger competitors, including Balfour Beatty, Actus Lend Lease, Lincoln Property Co., and Forest City, but volume nevertheless went up as the players vied for 180,000 units’ worth of construction contracts. “Our volume increased dramatically over the past decade, even as we lost market share, but that market is on the back end now,” Woody Hunt says. “There are only a handful of contracts left, and so [we need] to embark on a journey to re-create ourselves.”
Hunt’s first step on that journey—and at the top of the company’s expansion wish list for several years—has been the establishment of an “assets under management” arm to leverage the firm’s operational platform and real estate experience in the management and co-investment of funds for institutional players in the multifamily space. While Hunt divested itself of its owned market-rate apartments of its own accord (a single remaining legacy market-rate development in Honolulu is expected to be sold this year), the company simultaneously sought opportunities to reinvest that liquidity into fund management, providing the firm with market-rate exposure at reduced risk and greater buying power from a range of institutional partners.
That opportunity availed itself roughly a little more than a year ago: In March 2010, Hunt’s fledgling TRECAP investment management and advisory services firm acquired Capmark Investments and the $4.3 billion entirety of that company’s investment management contracts and general partnership interests in real estate equity. In total, the deal brought to TRECAP a portfolio of 21,621 apartment units along with a little more than 12 million square feet of office, retail, mixed-use, and industrial real estate.
“There’s a lot of creative destruction that has taken place creating opportunities to both build businesses and buy them, as we did with TRECAP and the purchase of Capmark,” Woody Hunt says. “We had been strategically looking at creating an assets under management group, and when Capmark became available, we thought it was a great match, and we were successful in being the acquirer there. Where that will go we will see, but we’ve picked up the people, and we’ve picked up the contracts. The real gold standard there will be our ability to raise new money with institutional investors.”
Whether or not Hunt meets that internal standard should prove out over the course of 2011 as TRECAP raises capital for its Fund 4 in earnest, with a not uncommon goal of targeting institutional-grade assets in high-barrier-to-entry markets that should well suit its pension fund and sovereign wealth clients—all 40 of whom approved the TRECAP/Capmark transaction. “Traditionally, we’ve been investors of our own capital almost exclusively—all the juice has really been coming from us,” Chris Hunt says. “I think in the effort to scale our business, it’s been important to begin to serve other institutional clients, which also gives us access to markets as a general partner and co-investor that we have not been in. Our recent acquisitions have been in Seattle, Portland [Ore.], San Jose [Calif.], Raleigh [N.C.], and Chicago, and we expect that type of market focus, with a target on Class A and B properties, to remain consistent.”
Pre-TRECAP co-investment clients offer up testimony that Hunt can be extremely successful placing capital into market-rate deals. According to Newport, R.I.–based Landings Real Estate Group president Chris Bicho, Hunt Cos. has shown an impressive attentiveness and alacrity in building an institutional-investor mind-set, providing his firm with expertise in addition to equity as Landings builds out its garden apartment portfolio. “We’ve been partners since 2007, and they’ve invested in all of our apartment deals, typically in the 40 percent to 45 percent range,” Bicho says. “They have definitely come into their own over the past four years as a more professional investment and development real estate company. They have a new persona, and they don’t live in a universe where if you have an A property, you do X, and if you have a B property, you do Y.”
The Angle on Affordability
Credit that asset adaptability to Hunt’s experience in and exposure to the full spectrum of multifamily housing. In addition to the firm’s market-rate and military sector acumen, the company has made significant investments to bolster its strength as an affordable housing capital provider and asset manager. Equity investments in affordable housing properties currently account for roughly half of Hunt’s 62,097 units under ownership nationally, with a concentration of units in the South, Southwest, and West. What’s more, the firm moved in 2010 to increase its vertical integration in the affordable sector with a significant equity investment in Memphis, Tenn.–based LEDIC Management, as well as the creation of Hunt Capital Partners, an internal division that will focus on the syndication and placement of low-income housing tax credit equity and proprietary debt securitization.
“Obviously, Hunt wants to take a big pile of cash and the expertise from building out a military construction franchise and diversify that within the category that they know best, which is multifamily,” says Pierce Ledbetter, president and CEO of LEDIC, which closed 2010 with 29,142 affordable housing units under management. “Our goal is to grow to have 10,000 units under management in each of 10 different markets within the next three to five years—an addition of 100,000 total units—and I think that fits with Hunt’s growth strategy. If they are going to grow to be one of the biggest multifamily real estate firms in the country, they need to be a facilitator to help others grow. If they can help developers on the affordable side build hundreds of thousands of units via Hunt Capital Partners and invest in hundreds of thousands of units on the conventional side, then within years, they are one of the biggest owners of apartment equity in the country.”
While Hunt executives are diffident about whether the firm uses unit count as a growth metric, they nonetheless point to the LEDIC investment and creation of Hunt Capital Partners as moves to create both geographic and business synergies with their existing tax-credit ownership portfolio. “I don’t know that becoming one of the largest owners of multifamily apartment real estate is one of our goals,” Chris Hunt says. “We like the culture and the focus on affordability at LEDIC, which we think presents us with some significant synergies with Hunt Capital Partners. As we re-enter the affordable multifamily market as an equity provider, we are interested in providing management and development expertise to our clients there to help manage the risks inherent in that business.”
The Appetite for Construction
Woody Hunt similarly characterizes the Hunt Cos. affordable housing strategy as a diversification play, one that might offer a microcosmic look at what the firm plans to implement across the broader multifamily development, ownership, and finance sectors in the years to come. “We had been outsourcing our tax-credit affordable housing management, and this is a way of putting our management on a national footprint that is complementary to Hunt Capital Partners as it tries to build up the syndication business and the placement of debt and tax-credit equity,” he says. “So we’ve now got a property management firm which we have a significant investment in that sells a service in that business. It’s part of our journey of adding complementary services that are trying to earn multiple profits out of contractual relationships that we control.”
As diversified and dynamic as Hunt Cos. has become, it’s interesting to hear the company’s senior executives cast all of the firm’s strategies against a backdrop of re-righting Hunt’s core construction platform. In a way that perhaps belies a contractor-to-the-core spirit, the leadership team frequently returns strategic discussion back to the long-term interests of preserving and evolving Hunt Cos.’ roots as a construction firm even as the military housing boom comes to a close. “The Air Force has three privatization deals left, and we are in the midst of proposing on those and hope to be successful on one or more, but then the program is virtually over,” Mike Hunt says. “That has been our core business for almost 40 years. We’ve done many things, but the mainstay was building family housing for the military, and the program is over, so we need to find other things to do.”
Creating a portfolio of multifamily investment, finance, and management services is likely to carry the day as Hunt Cos. looks to evolve. And despite buzz that market-rate apartment development may be primed for a comeback, Hunt remains noncommittal when it comes to a merchant-build mind-set. “If we think the time is right to build and develop conventional multifamily, we are in a position to do that as a JV partner with developers, as a builder [of] our own accord, or as a provider of capital and construction services,” Chris Hunt says. “The construction business will find equilibrium at some point. And maybe we find another program where we can again grow that business and sell those services at an attractive risk/reward basis, but in the immediate term, it will be the portfolio of companies that we have recently started—and the ability of those companies to raise new capital and make investments—that will drive new growth.”
In that way, the Hunt Cos. executives who were seated at the conference table with Woody Hunt in 1969 just might recognize the pedigree of their progeny, after all. Just as they sat on the cusp of an IPO to raise capital for a venture that would carry Hunt Cos. to a new future in multifamily via military housing, so, too, is the current reinvestment of Hunt’s military construction proceeds back into a full-service real estate firm consistent with the continued reinvention of what it means to be a builder, owner, and manager of multifamily real estate assets. The company asserts that it has the internal know-how to achieve this latest reinvention, and is looking to gauge its success over the coming years on the performance levels of its new entities. “Our hope is that as we build these other entities, we can rebalance our construction platform at a lower level so we can still leverage that core competency somewhere in multifamily housing,” Woody Hunt says. “We remade ourselves from a materials supplier into a general contractor in the ’50s; became a design/builder in the ’60s; expanded nationally into development in the ’70s; and added property management expertise in the ’80s. Over time, we’ve kept adding more pieces as the jobs have gotten bigger and the complexity has gotten greater. If you’re going to make it, you are going to have to be able to reinvent yourself and look at business as a journey.”