It has beefed up its technology platform, too, bringing BRE’s buildings into the YieldStar Price Optimizer revenue management system, while hiring Toby Pennycuff, formerly of JC Penney and Southwest Airlines, to bolster its IT and analytical firepower.
“Doing that has given us a whole new way to look at our customers,” Schall says. “Instead of looking at them on a property basis, we can actually see them as individuals now. So if you go to one of our properties in the central business district of L.A., and then you show up at another one close by, we know you’re only one piece of traffic, rather than two.”
Macro Manager
Schall’s tendency to talk in the first-person plural is indicative of his management style. Namely, while he’s the ultimate decision maker at Essex, he makes his choices only after getting input from his team. That includes Essex founder George Marcus, of Marcus & Millichap fame, as well as former CEO Keith Guericke, both of whom sit on Essex’s board. But it also includes the 12 division heads who make up his senior management team, among them Craig Zimmerman (head of acquisitions); John Eudy (head of development); and Angela Kleiman, who’s been tapped to succeed the retiring Mike Dance as CFO.
Schall seems to know when to get out of the way of the people working for him. Take Zimmerman, for instance. Schall likes to tell the story of how the exec lugs around company reports to drill into data before reporting back to him.
“Once a week, he goes through all the rental transactions for the entire company,” Schall says. “Last year, he told us rents were up in Fremont and Milpitas. So we went and bought two buildings there.”
Those buildings, Apex and Paragon, are two properties with which Essex has positioned itself north of North San Jose, where the continued expansion in tech markets has driven new renters. The two sites also highlight how Essex uses economic data to identify opportunities.
“I think a lot of companies use economic research as a way of confirming what the deal guys see,” Schall says. “We do it the other way around: We use it offensively instead of defensively.”
Constructive Tension
That kind of teamwork is also apparent in how Schall runs a meeting. “When we meet with Mike, it’s not just with Mike,” says Bragg. “It’s his whole team. An important assessment of Mike as a CEO is he has assembled a good team of investment personnel, operations personnel, and finance personnel around him.”
Those personnel, and their roles at the company, have become increasingly important since Schall took the helm at Essex. Shortly after succeeding Guericke as CEO in 2011, Schall, who had been CFO and then COO at Essex, separated the asset management and property management teams. Doing so has created a type of creative tension between the groups that Schall uses to justify each group’s decisions.
“We have back-and-forth on almost every deal,” Schall says. “The real estate team generally wants to get the best properties in the best locations. But then the finance team sits down and takes a very disciplined approach to running the numbers.” The result is a reputation for having amassed one of the best capital allocation teams in the business.
Take, for example, a tale of three properties in downtown L.A. With annual effective-rent growth surging as much as 7%, development activity has picked up significantly, with AvalonBay recently opening AVA Little Tokyo at 236 S. Los Angeles St., and Equity announcing plans for The Beacon, a 33-story tower at Hill and Fourth streets.
According to Bragg, Avalon spent $392,000 per unit on its development, while Equity’s proposed deal pencils out at $595,000 per unit.
But Essex, which has maintained the development pipeline it inherited from BRE, has also owned a property, Bunker Hill Towers, in the same area since 1998. Essex has launched a $76 million overhaul of the 456-unit property to capitalize on the upswing of the market there. Even with the $37 million it originally paid for the building, Essex will have put in just $248,000 per unit for a property that will be able to compete with the new darlings.
“For Essex, the Bunker Hill [Towers] all-in cost is well below replacement cost,” Bragg says. “The rents will be somewhat lower than rents at new construction, of course, but this is a nice example of Essex’s capital allocation and asset management skills.”
On the Level
When colleagues and associates describe Schall, you hear terms such as “humble,” “modest,” and “down-to-earth.” Indeed, just as Bragg points out that meetings with Essex are team-focused, others in the industry highlight Schall’s understated nature.
Ask Schall what his weaknesses are as an executive, and he’ll tell you he tends to work too much and spend too much time analyzing deals. In fact, according to Guericke, he takes time out for little else.
“You know what’s interesting? Mike’s actually a pretty good golfer,” Guericke says. “But unlike a lot of other people in his position, he doesn’t go golfing every week. He doesn’t go fishing every week. He doesn’t do anything every week other than go to work.”
Indeed, while outspoken multifamily leaders such as Equity’s Sam Zell, Camden’s Ric Campo, and UDR’s Tom Toomey are the usual suspects for industry conference keynotes and roundtables, Schall and Essex, while widely respected in the industry, seem to make far fewer appearances. As head of a company that now has a $15.3 billion market cap, one would think it’s not for lack of invitations.
“I don’t think Mike likes to stand at a podium and opine in front of a large group,” says Alexander Goldfarb, an analyst with New York–based Sandler O’Neill. “Even when you look at the way he interacts with his colleagues, investors, or analysts, he’s always very much right in there with everyone else, on the same level.”
Grounded Growth
Keeping his feet on the ground, and being at the same level with his team, has become more challenging for Schall since the BRE deal.
“It’s a lot more complicated running a larger company and getting all 1,800 employees on board,” says Schall, though he notes there have been unforeseen benefits as well, such as more market heft while making deals, and economies of scale. Still, “there can be five layers of management between me and the property-level staff,” he says. “That’s why it’s so important I have my senior management team. Each of the 12 people who report to me need to be their own, mini-CEOs.”
Indeed to Bragg, it’s Schall’s ability to defer power—and praise—to his team, along with his lower profile, that makes him such an effective leader.
“Mike uses his time wisely, for the benefit of Essex,” Bragg says. “He doesn’t seek attention or the gratification that might bring. It’s not just about him. It’s about the team and developing solutions to the challenges they face together.”
Schall’s understated style has been a hallmark of the BRE deal. Since its closing, analysts and investors say Essex hasn’t taken to BRE bashing. Instead, any challenges they’ve encountered—and, with a collective $20 billion in assets, there have surely been a few—have been handled below the radar of the public markets.
“Essex has handled the BRE merger very respectfully” and without a lot of drama, Bragg says. “They call it a merger, even though it was really Essex acquiring BRE. I’m sure it would be easy to share less-than-flattering stories about how BRE was run, but that isn’t Essex’s MO. They have not been proactively sharing the challenges that they inherited with BRE, because they don’t need to. They’re just fixing them as they go.”
That quiet, steady MO might be just what’s expected from a CEO who spends all of his waking—and sleeping—hours focused on the job at hand.
