Bruce Ward was born in 1960. But if you talk to him long enough, you might think he was born in the ’30s. The 54-year-old chairman and CEO of Alliance Residential Co. somewhat begrudgingly admits he has the outlook of a “Depression baby.”
It’s easy to see why. The free-spending, raucous early ’80s and ensuing crash cemented his views of business.
Upon graduating from the University of Texas–Austin, he latched on with a mortgage company in Dallas called Lomas and Nettleton, doing loans for developers of all stripes before later seeing them get “crushed.” While the Tax Reform Act of 1986 caused part of the carnage, he also learned the dangers of carrying too much debt.
“To see the death and destruction associated with the fallout from that debacle, it seemed that was not the way to build a long-term company,” Ward says. “You can try to make the money during the up cycle. But, as soon as the music stops, you’re headed to restructuring.”
At Phoenix-based Alliance, Ward took the lessons he learned from surviving the ’80s bust to build a diversified, entrepreneurial platform that boasts a conservative underwriting strategy, a national footprint, and a cadre of loyal partners and accomplished staffers. That combination insulated Ward during the recession, powered his continued growth in the dog-eat-dog management segment of the industry, and launched him to the top of multifamily executive’s Top 25 Developers list.
Just look at the numbers: In 2013, Alliance started 5,200 units and claimed 71,972 units in management, ranking it first and ninth, respectively, in those categories. It also owned 23,133 units, putting it on the NMHC Top 50 Owners list. And its 7,000 planned starts this year would put the company in a stratosphere that hasn’t been occupied since Dallas-based Trammell Crow Residential (TCR) developed 8,194 units in 2008.
To get there, Ward followed a classic formula for making money in real estate—get in position to buy at the bottom of the market, and harvest those opportunities at the top. His mastery of the strategy is why he’s MFE’s Executive of the Year for 2014.
Depression Baby
In 1986, Ward got a chance to apply the development lessons he learned in the banking world, landing a job in the Phoenix office of TCR, a prolific, entrepreneurial builder with a national footprint. His ascent was rapid. In the early 1990s, Ron Terwilliger promoted Ward to partner in the West region, making him the TCR CEO’s youngest regional partner.
“He was young, and he had a really good business sense,” Terwilliger says. “He was really hardworking, and he just had a nose for the bottom line.”
Throughout the ’90s, TCR spun off regional satellites into REITs, including Arlington, Va.–based AvalonBay Communities; San Francisco–based BRE Properties; and Atlanta-based Gables Residential. Ward’s West region wasn’t turned into a REIT, but it was for sale. Ward took an active role marketing it to BRE, which sought development capabilities.
He then moved to San Francisco and became an executive vice president, but Terwilliger thinks he should have held a different title. “I think BRE, personally, made the mistake of not making him president of the company,” Terwilliger says.
Ward would get to run his own company soon enough, however. In 2000, he and TCR veterans Jay Hiemenz (formerly CFO and now president and COO of Alliance), John Rippel (Alliance’s CIO), Bob Hutt (a senior managing director), and Jim Krohn (president and CEO of the firm’s Management Services Division) bought management firm Alliance Apartment Communities from BRE, built development capabilities, and called it Alliance Residential.
Alliance started with offices in Arizona, California, and Seattle before expanding into Texas, the Southeast, and, eventually, from Washington, D.C., to New Jersey and New York. It grew with the backing of select institutional partners, such as Prudential Real Estate Investors, which has done 12,000 units with Alliance and did even more with Ward at TCR.
“They are very prudent,” says Soultana Reigle, managing director for Prudential. “Risk management is ingrained in their day-to-day operations. They pick good sites and have a good grasp of their cost to build and rents. There aren’t a lot of surprises with them.”
Even as he built his development pipeline to 7,022 units by 2007 (ranking third on the MFE Top 50 Builders list), Ward eschewed higher returns for more certainty. Going into the downturn, Alliance maintained leverage levels of just north of 60 percent, which Ward says placed him below other private builders and just above the REITs.
“Our notion was, ‘Let’s forgo that opportunity [for higher returns],’?” Ward says. “?‘It’s a cyclical business and it seems to cycle every eight to 10 years. Let’s not be a one-hit wonder.’?”
Alliance’s approach to recourse may have been even more conservative. Its mantra: If you take care of the downside, the upside will take care of itself.
“The market would have given us 85 percent if we had gone full recourse or given guarantees,” says Hiemenz. “The hardest part of my job in the go-go days was holding our partners off of being too opportunistic.”
Ward also stayed short on land commitments by waiting until he was ready to put dirt into production before taking down parcels. And, he stayed immunized from condo fever, which buried a number of developers. “They could have been in a much worse position,” Reigle says. “One of the things that set them apart is they didn’t have large land positions. There were a couple of large categories of risk they avoided [including condos].”
When the market collapsed in 2008 and 2009, Alliance still had sticky situations that it needed to work through with banks and partners, but they were manageable.
“We had a number of deals that were in a little bit of stress, but we didn’t lose any assets,” says Bradley Cribbins, COO and executive vice president at Alliance. “The existing relationships with banking and joint-venture partners were actually strengthened in the downturn.”
As other builders fought to keep their doors open in 2009 and 2010, Ward could be aggressive.
“In almost all of our markets, we had people ingrained in local markets and ready to get started,” he says. “They had first-mover position on great deals. It was expensive because we carried overhead where we didn’t have to, but it’s paying off for us today.”
One way it’s paying off is in the 16 sites, valued at about $68 million, that Alliance secured at a discount in 2009 and 2010. At that point, the company corralled several high-end, infill projects that offered pedestrian access to retail, entertainment, and office buildings for a fraction of what they’d bring now.
“We were able to get into a number of land pieces at a great basis,” Cribbins says. “For that reason, we’re continuing to enjoy a lot of success through this window.”
And those rock-bottom purchases gave Alliance access to new capital partners. In 2011, Ward bought a site that had been zoned for condos next to Balboa Park in San Diego. He took the deal to a new potential equity partner, Dean Rostovsky, a director at New York–based institutional investor Clarion Partners. Rostovsky scrutinized how Alliance responded to the 2008 bust on a project-by-project basis, including overrun impacts and lender pressures, and was impressed.
“We spent a fair amount of time back-testing their ability to manage their balance sheet and construction projects,” Rostovsky says. “That back-testing was tremendously positive. Their ability to manage projects and cost, and the references they got from their lenders and partners, was excellent.”
Complementary Drivers
Alliance’s experience, relationships, and development acumen weren’t the only things that drove its deals with new partners. Its management arm helped as well.
“They were managing stuff in Southern California for us,” says Ron Miller, director of acquisitions for Atlanta-based institutional investor Invesco Real Estate. “That comfort level, and their help on the value-add side in Southern California, certainly played into us doing the first development deal.”
That symbiotic relationship between development and management groups at Alliance is by design. “Our institutional investors, many of which we do projects with, are often our third-party clients,” Ward says. “Their assets range from $100 million to $150 million in value. They want a lot of personal attention. They’re looking at value creation.”
Ward, who owns about one-third of the units he manages, wants the scale to satisfy his clients’ needs for “necessary infrastructure support services,” such as marketing, risk management, information technology, audit, and accounting. “If we need something in support, we aren’t afraid to hire what we need,” says Alliance’s Krohn. “We focus on what we can do to get better.”
Alliance improved its marketing department to what Krohn calls an “advertising agency level.” It’s focused on generating leads online and understanding young renters. The company also employs a group dedicated to environmental issues that inspects both future and existing properties to find ways to reduce their environmental footprint.
“That’s been a really big surprise on the upside,” Ward says. “It’s been great for employees and been great for projects. And, it’s been great for marketing. We really do believe the Millennials are interested in this. It’s the right thing to do.”
In stark contrast to Dallas-based Riverstone Residential Group and Charleston, S.C.–based Greystar, which saw meteoric growth before merging earlier this year, Ward isn’t focused on quantity. But the management platform has grown over the past decade, going from 25,000 in 2004 to more than 70,000 this year. That growth has occurred organically, not through acquisitions.
“You won’t see us trying to get 200,000 units,” Ward says. “We want to be smaller, more boutique oriented, and more asset focused. We want to have lower properties per regional manager than others. Right now, we’re between six and seven. I know our competitors have higher numbers.”
If you’re wondering how Ward can make any sort of margin on that strategy, don’t. The company doesn’t view management fees as a profit driver. “We’re not interested in creating a margin at the property management level,” he says. “It’s a nice business, but it’s not where the money is made. The money is all made in the real estate—for ourselves and our clients.”
Growth on the Horizon
With its growth, Alliance can be a bit of a contradiction. Ward espouses a conservative strategy, but when it comes to his development pipeline, with 15,000 units due by the end of 2016, he’s as aggressive as anyone in the country.
Ward thinks he’s minimized his risk by using conservative underwriting, limiting land commitments, and utilizing in-house research. But the veteran developer’s intuition plays a role as well.
“He’s very intuitive,” Krohn says. “He knows when to put his foot on the brake and when to put his foot on the gas pedal.”
To protect Alliance as development gets frothy, Ward wants to maintain the flexibility to walk away from deals. “On a lot of projects, people get so invested in a deal with their predevelopment pursuit costs that they feel like they can’t abandon it,” Ward says.
Nationally, Ward thinks that despite heading up to 300,000 units, apartment supply is still in good shape, but he admits he’s “pretty careful” about understanding construction costs and cap rates. “We’re still relatively balanced, even for ’14, with demand,” he says. “When that gets out of balance, we’ll be dialing back our production.”
Even if that happens, Ward will continue to expand on other fronts. While Alliance’s development pipeline put it in the forefront coming out of the recession, Alliance actually had a 50–50 development/acquisition ratio before this cycle. Now, it’s more 65–35.
“We don’t think of ourselves as a developer,” Ward says. “We really think of ourselves as a multifamily company. We’re an apartment owner that’s in a development cycle right now, and development is the primary activity for the near term.”
But, one day, acquisitions will close the gap with development again. Later this year, Ward also expects to make a “major” announcement on an active seniors housing initiative. “We’ll leverage off our current infrastructure and put some talent to bear on that,” he says. “There are a lot of great companies in that space, but we just think, with our network of local offices, we can source some exceptional sites and do it in a safe and risk-managed way.”
Alliance has almost filled in the geographical footprint that Ward traced for it when he started the company more than 10 years ago. After advancing up the Eastern Seaboard, his last real target is Boston, and he expects to have a foothold in Beantown by the end of the year.
Once that happens, his market coverage will be similar to that of many of the apartment REITs. And, in fact, Ward admits he’s toyed with the idea of going public.
“At least every two or three years, we studied it,” he says. “What’s happened now is that we’re at a size that makes it difficult.”
While Alliance clears the $2 billion or $2.5 billion in valuation threshold for an initial public offering (IPO), the company has a number of partnerships throughout the country whose entities could be difficult to roll into an IPO. It’s the same problem Terwilliger faced with TCR in the ’90s before eventually rolling up regions into public companies. Unlike the 1990s, however, being public holds few advantages right now, given where private asset valuations currently sit.
But, at a certain point, everyone needs an exit strategy. “We would like to continue to explore [an IPO] as an option,” Ward says. “It begs the questions, do we need more REITs? Does it make more sense to merge? Those are the kinds of questions you face.”
But facing these difficult questions is nothing new to Ward. And, over the past decade, he’s encountered these kinds of tough questions in just about every aspect of the apartment business and has adroitly answered each one. That’s why, this year, he’s at the top of the multifamily mountain.
