Fueled by Growth

Alliance Residential Co. isn't in the property management business to make money. The company's president, Bruce Ward, a self-described developer at heart, is adamant about that.

That's right: The former fee-management arm of Trammell Crow Residential West—which found a three-year home at San Francisco-based REIT BRE before heading back into the private sector under the Alliance moniker in 2000—doesn't think of property management as much of a profit center.

“We need to have other reasons to be aligned with our third-party partners other than [fee management margins],” Ward says. Still, he admits that Phoenix-based Alliance, which started out managing 12,000 units and now manages more than 47,000, is certainly not in property management to lose any money. Parsing these words takes some doing, but the basic gist is this: Properties are not managed solely to generate income in the short term, but rather to improve the value of an asset that ideally was designed to thrive under effective property management in the first place.

“We are running our property management arm to create excellence and increase the value of our real estate to ourselves and to our third-party clients,” says Ward, who has headed up Alliance in its various forms since the Trammell Crow days. “We want to have the very best management company so that we are maximizing the value for Alliance, for our institutional clients, and for our clients on site.”

Put another way, there's a master plan afoot at Alliance: Achieve success in property management and that will lead to the creation of a national platform for development. The strategy seems to be working. Third -party property owners and institutional investors point to Alliance's spectacular financial performance over the past 24 months. What's more, they say, undergirding the company's success is hard work, not sheer luck.

Prudential's Gary Kauffman counts his firm among Alliance's largest partners when it comes to providing joint venture equity capital. Says the managing director, “They have gone full bore to build that organization since they left BRE with smart people who understand the business, who execute development on a very timely cost-effective basis, and who understand what it takes to lease and manage projects. In a nutshell, we try to do as much business as we can with them.”

DEVELOPMENT BY DESIGN In 2006 alone, Alliance grew gross revenue by 41.4 percent to $783 million, while increasing the size of its management portfolio by 26.6 percent to 47,400 units. Those enormous gains followed a blockbuster 2005 in which revenue and unit counts jumped 84 percent and 50 percent, respectively. Moreover, the proportion of units that the company has developed in its portfolio is also on the increase. Last year's total of 4,840 multifamily starts landed Alliance at the top of the 2006 MFE top 50 builders list, second only to Trammell Crow.

The company's swift growth is fueling further investment in the systems and people necessary to move the needle in Alliance's $1.2 billion development pipeline. “Our intention is and has been to have a national development platform, but to do it in a controlled manner,” Ward says, adding that an increase in size and economies of scale naturally lead to better knowledge of market values and construction costs. “On every front it helps us—better market knowledge, better people, and better institutional capital attracted to our company.”

Alliance aims to have its platform in place by the end of 2008. That's light years ahead of where the company was in 2000 when Ward and Alliance CFO Jay Hiemenz led the buyout from BRE. Attracting capital then was a tall order for a company that had zero units under development. “When we joined BRE, our motivation was to access the public capital markets [for development], because we thought they would have a cost-of-capital advantage going forward,” recalls Hiemenz.

That advantage never came to fruition. In fact, capital markets began a shift toward private equity in 1998 while BRE made a concurrent move to centralize its focus on the California market, making the national footprint issue moot. “Our motivation in creating Alliance was to undo what we had done when it did not come to pass that public companies were going to gain market share and ultimately be the cheapest cost of capital,” Hiemenz says.

Accessing the private capital markets involved “a lot of cold calling and trying to beat down doors to solicit vendor partners,” Hiemenz recalls. That process marked the genesis of leveraging the company's strength as a property management company to get deals and joint ventures rolling with institutional partners and third-party property owners and developers.

“At the end of the day, Alliance has become a company that is about [asset] development and creating a product,” says John Woo, senior vice president of San Francisco-based McMorgan Co., a real estate investment firm with a $1.7 billion portfolio.

“Since they have been on their own, they really have taken the quality of their properties to a whole other level, and a lot of that is driven by the property management group,” says Woo, who traces his property management relationship with Alliance back to its ties with Trammell Crow. “They have the latest pulse in terms of what tenants want, and they manage to the extent that after they sell the property, the new buyer wants to keep them.”

BENCH BUILDING Alliance depends on a growing team of professionals to run its operations at all levels—national, regional, and local. According to Ward, designs for Alliance properties—not to mention leads on land acquisition—will increasingly have to come from talent in the regional offices as Alliance pursues its national platform. “We see ourselves doing a series of deals where each one has to stand on its own and be successful and deliver the same consistent quality,” Ward says, recalling the solid reputation on the property management side that first led partners to team up with Alliance on development.

"We have to deliver the same level of quality on every project so that we can maintain that reputation, so the local operating companies drive all of our real estate decision-making,” Ward says. “They choose the submarkets. They choose the product types. The centralized company provides financial support and risk management.”

To maintain a talent roster well suited to develop and manage properties in the pipeline, the Alliance home office has started providing new-hire screening and hands-on personnel training. In particular, the company has begun using the Wonderlic cognitive ability test, a 12-minute general intelligence quiz used in the hiring process. “It's used in the NFL, and there is a similarity there in that we are really looking for great multifamily athletes,” says Alliance COO and property management head Jim Krohn. “We know exactly the type of individual that we need to work on our properties, and this test helps us funnel down to the candidates that are bright, have high energy, have positive marketing skills.”

Once on board, all new hires endure a three-day boot camp in Phoenix, where they are immersed in all things Alliance, from acquiring land to leasing up properties and managing residents.

The strategy isn't top secret, and it isn't rocket science, but it is extremely effective. Nor has it escaped the notice of the institutional investors that Alliance has been courting since leaving BRE. “They don't need to use top-down management, because who they have hired is as good as it gets. All they do is turn them loose, and they are going to go out there and make the right decisions,” says Kauffman of Prudential.

Alliance's work in the L.A. market provides a case in point. There you'll find Alicia Scott, a marketing director and strategic markets analyst based in the Irvine, Calif., field office, who doesn't shy away from the nitty-gritty. She'll take blueprints home and measure wall lengths to make sure residents have enough room for a 44-inch plasma TV. She'll calculate storage space for a resident's jackets and vacuum cleaners. “It's about not taking no for an answer from a design standpoint,” says Scott, who spent nine years as a property manager for Irving, Texas-based JPI. “Managing properties effectively begins with the design.”

Three years ago, the self-described former “company cheerleader” for JPI joined Alliance. “I have theories about what people will pay for and won't pay for versus what developers tend to do for the sake of their own design,” Scott says. “Alliance was focused on building the best product for the resident, and in turn that would reflect positively on the developer and property manager. It's about getting the details right.”

That approach is forcing increasingly unique designs and resident amenities at developments like downtown's Canvas at Beaudry. The 204-unit property incorporates LED lighting into site design and has enormous sunglasses of differing colors moving across the façade of the podium-style project that boasts 22 different floor plans [see “In the Spotlight,” LOCATE].

Just up the street, Alliance has purchased the historic 52-unit Hollywood Tower from L.A. real estate investor Jack Dell for $34.5 million. The challenge there will be to revitalize the fading glory of the landmark Art Deco building that Bogey once called home while developing an adjacent property to complement the Tower with 146 additional units.

“There's so much going on in Hollywood right now. It is really in its renaissance,” says Alliance partner Chad McCollum, who led the Tower acquisition along with Southern California development director Drew Colquitt. “When we saw this property, we decided we had to figure out how to make it happen. I would have been hot on the deal even without the adjacent property available for new development.”

McCollum says moving quickly on deals such as the Hollywood Tower while pushing the envelope on new development design at Canvas takes adaptability and local empowerment. “There are different product types all over, so you've got to be an expert, and you have to stay on your toes—but the company allows us to do that. They let us go in the market and let us make the decisions and make them quickly.”

FUTURE PROSPECTS Hiemenz says partners like Prudential are “hungry” for as much development as Alliance can put on the table, and the company will continue expanding, with regional offices set to open in Florida this year followed by Baltimore and Washington, D.C., in late 2007 or early 2008. “At that point, I think our footprint will be established,” Ward says, “and we will be concentrating on gaining market share.”

As for property management, it will be business as usual for Alliance. The company will continue to manage its entire portfolio and do business with a select number of third-party owners. Ward admits to moving toward having fewer clients on the property management side and being increasingly particular about fee management. Regardless, “the notion is that our management company is all about value creation, whether we are doing it for ourselves or another client,” Ward says. “If we want to continue to do business, it's our responsibility as a service provider to stress that value creation as a property management company rather than stressing immediate profitability.”

The endgame seems to be unfolding for Alliance. Forgoing the quick management revenue stream for longer-term property valuation is keeping investors on board with the company's vision. “They clearly have more things to do, and my guess is that we are going to keep doing it with them,” Prudential's Kauffman says. “We help them out, they make a lot of money, and we all keep things going. It's been great.”

LEADERSHIP LESSONS: BRUCE WARD