Gables Residential Trust

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Gables Residential Trust

2859 Paces Ferry Road, Suite 1450
Atlanta, Georgia 30339
U.S.A.
Telephone: (770) 436-4600
Fax: (770) 435-7434
Web site: http://www.gables.com

Public Company
Incorporated: 1993
Employees: 1,210
Sales: $282.5 million (2001)
Stock Exchanges: New York
Ticker Symbol: GBP
NAIC: 525930 Real Estate Investment Trusts

Based in Atlanta, Georgia, Gables Residential Trust is an umbrella partnership real estate investment trust (UPREIT). It is one of the largest owners and operators of upscale apartment complexes in select cities in the southeastern and southwestern United States, focusing on the “infill” areas that separate the suburbs from the urban center. In addition to Atlanta, the company maintains offices in Boca Raton, Houston, Dallas, and Washington, D.C., all of which essentially operate as independent enterprises. The main office provides finance, accounting, and other administrative functions. Altogether, Gables owns or has interests in approximately 27,000 apartments, and also manages some 80 properties for third parties, totaling nearly 24,000 units.

Trammell Crow: Becoming a Real Estate Legend After World War II

Gables grew out of real estate ventures launched by legendary Dallas real estate man Trammell Crow. He was born in Dallas in 1916, the fifth of eight children, and following his graduation from high school went to work for the Mercantile Bank in Dallas while studying law and accounting in evening classes at Southern Methodist University, ultimately becoming a Certified Public Accountant. In 1941, nine months before Pearl Harbor, he joined the Navy as an ensign and was assigned to finance. Through the war years he rose to the rank of Commander. Years later, he expressed the importance of his time in the service: “I think those years in the Navy were worth a couple of M.B.A. programs to me.” After being discharged he established Trammell Crow Company and soon became a major force in real estate. In 1948 he completed his first development project, a warehouse in downtown Dallas. He developed the Dallas Market Center in 1957, a structure that would influence subsequent marts around the world. Crow also was credited with originating the atrium concept for modern buildings. In the late 1960s his company opened its first offices outside of Dallas and a few years later opened its first international office. By 1971 Forbes recognized Crow as the largest private real estate operator in the United States. In the 1980s his company, which encompassed a number of industries, sought to become a truly national real estate enterprise. As part of this effort Trammell Crow Residential was established to do business in the apartment sector. It was a decentralized operation with a large number of divisions run independently by local management.

In 1993 executives from three of Trammell Crow Residential’s most profitable divisions—Atlanta, Dallas, and Houston—began to discuss among themselves ways to raise new capital to grow their businesses. Talk of selling properties to existing real estate investment trusts (REITs) was abandoned soon in favor of combining the divisions to create their own trust. REITs had been originally created by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock and were also subject to regulation by the Securities and Exchange Commission. Unlike stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that severely limited the ability of REITs to raise funds internally. During the first 25 years of existence, REITs were allowed only to own real estate, a situation that hindered their growth. Third parties had to be contracted to manage the properties. Not until the Tax Reform Act of 1986 began to change the nature of real estate investment did REITs begin to gain widespread usage. Tax shelter schemes that had drained potential investments were shut down: Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. The act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, REITs still were not fully utilized. In the latter half of the 1980s the banks, insurance companies, pension funds, and foreign investors (in particular, the Japanese) provided the lion’s share of real estate investment funds. That period also witnessed overbuilding and a glutted marketplace, leading to a shakeout in the marketplace. With real estate available at distressed prices in the early 1990s REITs finally became an attractive mainstream investment option.

1993 Meeting Leading to the Creation of Gables

On July 3, 1993, four of the principle executives of the three Trammell Crow Residential divisions met in Atlanta, with two others participating by conference call from Texas. They were Marcus Bromley, Atlanta divisional partner; John Rippel, Houston divisional partner; Peter Parrott, Dallas divisional partner; Bill Hammond, COO of Residential Services Group, south central region; Marvin Banks, CFO, Atlanta and Dallas division; and Jordan Clark, Atlanta divisional partner of development and acquisitions. The six men that day agreed to form an umbrella partnership REIT, which would be called Gables Residential Trust. Some of the divisions’ properties already bore the Gables brand, making the name worth exploiting. Bromley and Rippel took lead positions in the new organization, with Bromley slated to assume the role of CEO and chairman of the board and Rippel as president and COO. Both men had been with Trammell Crow since 1982. Because two of the divisional partners had to relinquish some authority to Bromley in the new structure, the founders of the REIT felt it was important to retain as much as possible the corporate structure that allowed the divisions to thrive under Trammell Crow. As a result the three chief field offices were given a major degree of autonomy, and only certain administrative functions, such as accounting, investor relations, and human resources, were slated to be centralized in a headquarters operation that would share space with the Atlanta office. There was some reduction in headcount, but each location retained its staff for property development, acquisition, construction, and property management.

To make these plans a reality and launch an initial public offering (IPO) of shares the founders agreed that a timetable had to be set. According to Bromley, “We had learned from the past that if you put a timetable on a project, you have a better chance of getting it done efficiently. If you put a year-end timetable on it, you have an even better chance of getting it done, so we said: ‘Year end!’” Given that they had only allowed themselves six months to accomplish a diverse number of complicated tasks it was a highly ambitious schedule. They quickly decided to retain Arthur Andersen and Company, which was already familiar with the Trammell Crow Residential operations, to do the REIT’s audits and due diligence work. Despite already having much of the necessary paperwork in their files, the founders knew that Wall Street would want a thorough review of the properties that would form the basis of Gables. It proved to be a difficult, time-consuming task.

Gables then chose the Boston firm of Goodwin, Procter & Hoar to serve as its “issuer counsel” and help structure the IPO and negotiate with investment bankers. Goodwin had just completed the creation of the Avalon REIT, which was comprised of Trammell Crow entities in the Northeast. In August, negotiations were initiated to buy or transfer assets that would be part of the new REIT. It was a complicated endeavor to determine the interests of the various investors. Almost every property involved a joint venture with an institution and required a separate negotiation. This work would actually continue until the day the REIT made its offering. Gables next chose an investment banker, interviewing six of the country’s top firms before settling on Merrill Lynch & Company in mid-September. Of less importance, but still crucial, was the hiring of a reliable printer to produce the voluminous amount of paperwork that would have to be generated, including a prospectus and various other legal and financial documents. Printing costs alone in creating the REIT totaled some $450,000.

Gables filed its registration statement in late October in order to meet its self-imposed deadline, but because the market was soft in the days following Thanksgiving, management elected to move back its offering from December to January. In the meantime, a credit line of $175 million was established and a week before Christmas several of the REIT’s top executives launched a month-long road show to promote the upcoming offering. They even took the Concorde to London for a day trip, but found little support from European investors. Enthusiasm was much greater in the United States, and when the IPO was completed on January 26, 1994, it was oversubscribed. The company sold some 9.4 million common shares at a price to the public of $22.50 per share, netting Gables approximately $190 million, much of which was earmarked to retire debt.

Day-to-day operations continued on much as before, but now executives became more concerned with meeting the 8 percent dividend projected during the offering, creating pressure to make the quarterly numbers. Gables also felt the need to maintain a strong image for both prospective investors and residents. The company created a training program for the property management group, dubbed “The Gables University.” With some of the money raised from the IPO, Gables launched a $200 million development plan for six cities: Dallas, Houston, Austin, Atlanta, Memphis, and Nashville. The first part of the effort was a $35 million investment in the Dallas area that featured three new projects totaling some 900 apartments.

Company Perspectives

Gables … Taking Care of the Way People Live.

Adding the South Florida Operation in 1990

To reach its goal of becoming a “super regional owner,” Gables shifted its emphasis from growth by development to growth through acquisition starting in 1996. The company was especially active in 1998. In February of that year Gables acquired the Greystone Communities in the Houston area, adding some 913 units. A month later Gables acquired an Austin property with 308 units. A much larger transaction, however, was completed in April 1998 when Trammell Crow Residential’s South Florida Division was brought into the fold, firmly establishing a presence in the highly desirable South Florida markets for Gables while immediately adding 4,200 upscale apartments. Gables paid $155 million in cash and assumed debt of more than $135 million. Altogether the REIT now owned 81 apartment communities with nearly 24,000 units located in nine southeastern cities, and an additional 1,800 units were either under development or lease-up. The company’s holdings grew to $1.5 billion. As a result of these developments, revenues grew and the price of Gables stock kept pace. In June the REIT placed 3.3 million common shares with five institutional investors, its market capitalization now totaling $1.8 billion.

After the South Florida acquisition, Gables’s management elected to return its focus to the development of its own apartment complexes. It moved forward, however, without one of its principle founders, John Rippel, who in March 1999 announced he was resigning as president and COO. He explained that because he continued to live in Houston and did not wish to relocate his family to Atlanta, he was simply weary of the constant travel required of his position. A short time later Bromley relinquished the CEO position to become executive chairman, leading some in the media to suspect a “palace coup,” a notion dispelled by all the parties involved. Rippel was replaced by Michael Hefley and Bromley, by Chris D. Wheeler, who had joined the REIT as part of the Trammell Crow Residential’s South Florida transaction. In the meantime, the company raised funds for development, drawing $56 million from Fleet Financial Group for three projects located in Atlanta; Weston, Florida; and West Palm Beach, Florida. Gables also entered into a joint venture with J.P. Morgan Investment to develop and manage seven apartment communities located in four of the REIT’s nine markets, budgeted at more than $200 million. Moreover, in 1999 Gables tested a new sector, offering single-family units, aimed at an older demographic, people who might sell their homes for investment purposes but wanted to rent something more substantial than an apartment. The venture was called Palma Vista, a 189-unit development located in Palm Beach County.

At the same time that Gables was spending money on new projects in 1999 it was selling off properties. Although a large portion of the money raised was earmarked for development, almost as much was used to buy back company stock in an effort to reduce the availability of shares. The plan continued into 2000, with Gables beginning to exit some of its previous markets: San Antonio, Memphis, and Nashville. In addition to raising money to buy back stock, management adopted a strategy of concentrating the REIT’s portfolio on six to eight economically diversified markets. Although the company would enjoy less geographic diversity, it still hoped to find a blend of markets that would provide some protection from the vagaries of real estate values. Moreover, it elected to concentrate even more of its resources on infill areas.

In 2000 Bromley resigned as executive chairman and Wheeler assumed the additional post of chairman of the board. He instituted a novel bonus plan that year, one that attempted to link executive compensation with the performance of Gables compared with other REITs. Only if the company outperformed 75 percent of its rivals would executives receive 100 percent of their bonuses. On the other hand, if 75 percent outperformed Gables, then executives received no bonus at all. Although management was confident that Gables would enjoy a strong year, in the end the REIT finished in the middle of the pack, slightly below the sector average. As a result, managers received only half of their bonus. Nevertheless, management believed the plan was worth keeping.

In 2001 Gables continued to sell off properties while acquiring others in order to reposition the portfolio for what it hoped would be optimal performance. All told, the company sold $94 million in real estate assets while spending $117 million to acquire others. Of major importance was Gables’s entry into a new and promising market for its operation, that of Washington, D.C. In September 2001 the company paid $24.2 million for an 82-unit high-rise in the Dupont Circle neighborhood, which was then renamed Gables Dupont Circle. Wheeler’s attempts to reshape the REIT continued in 2002 when he initiated a major shakeup, resulting in the resignation of several top executives. Instead of three regions, the company was now divided into two, East and West.