The Waterton planned business model was a solid one, though Vilim and Schwartz did ultimately get two things wrong: that the value-add multi-family investment firm was never going to need a property management platform, and that all of the company’s repositioned apartment communities would be gobbled up at a premium by the publics. As it turns out, today, Waterton manages all of its 14,000 assets for its own account and has only sold one property to a REIT over the course of 15 years and some $3.5 billion in multifamily investments, 112 acquisitions, and 62 dispositions.
Nevertheless, Waterton’s evolution into an accidental apartment operator is about to make a huge difference in the company’s approach to equity raise. How the firm continues to deploy that capital—into value-add debt acquisitions versus its traditional rehab/resell model—could also bring it back onto REIT turf sooner rather than later.
“I think Waterton is clearly taking their game up. There’s no doubt that they understand the need for a high quality, effective operations platform,” says AMLI Residential chairman and CEO Greg Mutz, who continues to watch (and compete against) Waterton. “They are not bogged down with a lot of overleveraged assets or any sort of legacy problems. Waterton has a lot of opportunities and little headwind to slow them down so I think they are likely going to do quite well.”
Institutional Mindsets
Waterton’s core expertise, according to Vilim, has always been finding overlooked deals in great locations and strategically improving the quality of the real estate and its underlying finance structure. The contemplation of building a national management team surprisingly wasn’t on its early radar but quickly became an inevitable evolution of the firm.
Public Possibilities
An IPO could be the perfect exit strategy for Waterton and its investors—if the price is comparatively right.
What do you say when you have reservations about the transactional restrictions on REITs but an investment bank nevertheless claims they can take your multifamily real estate firm public at a 27 multiple? “We said ‘Wow,’” says Waterton Residential co-founder and managing member Pete Vilim of the proposal his company received in 2007 at the height of pre-recession economic optimism. “When it comes to some crazy number like that, we would have to consider it. If our investors knew they could sell out at a 27 multiple they would all elect to sell, and you can’t ignore that.”
In fact, Waterton has conducted three “go public” pro forma analyses of the company since 1995 and regularly watches its REIT peers to determine if an IPO could be a strategic move worth considering. Waterton co-founder and managing member David Schwartz even sat on the board of Atlanta-based Post Properties for two years, offering Waterton a REIT refresher from the company’s executive origins at Equity Residential, Berkshire Realty Co., and AMLI Residential. “An IPO could be a great exit for us someday, so to understand how the board works and to understand the operational platform is a great knowledge base if ever that becomes our exit strategy,” Schwartz adds.
Of course, the biggest reason to go public is to access capital, and with the close of Waterton’s 11th equity fund, capital raise isn’t a critical issue at the firm. In fact, fundraising activities for Fund 11 acquainted Waterton executives with foreign investors, who could trump an IPO depending on future market conditions. “The next future expansion could be foreign capital,” Vilim says. “We made numerous trips abroad to understand foreign investor demand and structure issues with Fund 11 and that would be the much more logical next step [compared to an IPO].”
Still, Schwartz and Vilim are of the mind that you never say never, and Waterton’s efforts at honing internal property management capabilities and fine-tuning systems to meet intuitional investor expectations would serve the firm well should they ever decide to take to the street. “Periodically there are windows of opportunity to take your assets and sell them as a public company, and your investors would make out better than they would as a private company,” Schwartz says. “Everything here is already set up to public company standards, if not higher, so if the window opens up, we should be pretty turnkey.”
“Over the course of 10 funds, we have continually moved up the equity food chain from high-net-worth, high-octane investors like the Pritzkers all the way up to our last four funds with CalSTRS,” Vilim says. “The demands on our ability to leverage technology, deliver information, and provide bottom-line transparency have increased with each fund and have consequently necessitated the development of a best-in-class management platform.”
Waterton used fee managers for the first three years of its existence, but soon wanted portfolio-sized attention from third-party managers even though it was only wielding one-off property contracts. “We were always one of the smaller [accounts], and we felt like we never got the ‘A Team’ on our properties,” Schwartz recalls. “I admit we were a tough, demanding client, but we never got the attention that we wanted. Between our own internal desire to have greater quality control at the asset level and the Pritzkers’ needs from an informational standpoint, we were forced to become quasi-institutional almost immediately.”
In 2007, Waterton moved to permanently shore up its operations unit with the hiring of Greg Lozinak as executive vice president and chief operating officer. A former ING Clarion senior vice president and asset director of multifamily properties (as well as an Archstone executive and retired U.S. Army Captain), Lozinak has spent the past three years increasing resident survey frequency via Lutherville, Md.-based SatisFacts Research, deploying LRO revenue management technology across the Waterton portfolio, and establishing a procurement platform with Carrollton, Texas-based RealPage’s OpsTechnology.
All of his efforts are ironically designed to alleviate on-site staff of the intricacies of property management. “My focus since I have been here is to create infrastructure,” Lozinak says. “To establish the people, systems, and processes that allow us to focus on the core business and wrap all of these other things around the core business as an infrastructure resource for property managers and service managers to do their jobs. We’re not good at sourcing and collating data. Taking action is what we are good at.”
