By Maria Saporta and Douglas Sams
Friday, July 8, 2011
Two years after leaving Cousins Properties Inc. as its CEO, Tom Bell is getting back into the real estate business — his first love.
Bell and five other partners have formed a company — Mesa Capital Partners LLC — and have raised $40 million to acquire distressed apartment properties. The partners include former Georgia-Pacific CEO Pete Correll and former Cousins Properties director John Mack, who also served as CEO of Morgan Stanley until 2009.
They are the latest big names to either invest in or consider launching new projects in multifamily real estate, including Atlanta apartment king John Williams, Novare founder Jim Borders, 12th & Midtown developers Daniel Corp. and Selig Enterprises Inc. , Buckhead Atlanta developers OliverMcMillan and Atlantic Station retail owner and operator North American Properties.
The trend reflects increasing confidence in apartment properties.
Multifamily has performed better than other types of real estate, especially office buildings, which continue to suffer from weak job growth. Apartment investors point to the decline in homeownership — a fallout of the residential foreclosure crisis — and population growth among younger Americans as two of the biggest drivers of rental demand.
For Bell, the Mesa venture has given him an opportunity to return as an active player in the real estate industry.
“I do really like the real estate business,” Bell said. “Real estate is interesting. It’s always changing. It’s demographically sensitive. And timing is very important. I probably will always be in the real estate business.”
After leaving Cousins on July 1, 2009, Bell became executive chairman of SecurAmerica LLC, a company that provides contract security services and was founded by Frank Argenbright.
As a way to focus on his real estate ventures, Bell is becoming SecurAmerica’s non-executive chairman. Bell said there was “no distance” in his relationship with Argenbright, and in fact Mesa and SecurAmerica are co-located in the same space in the Lenox building.
For the past two years, Bell also served as chairman-elect and then as chairman of the U.S. Chamber of Commerce — a time-consuming role that he has just completed.
Earlier this year, Bell teamed up with Jeff Tucker, an apartment developer from Macon. They started to look for opportunities to acquire distressed properties from lenders.
Mesa was “kicked off” in May with $40 million in capital. That can leverage up to $200 million in deals, and, eventually, the acquisition of at least 5,000 units.
So far, it has made six acquisitions — four apartment projects — two in Gwinnett, one in Marietta and one in Fairburn — for a total of 1,300 apartment units. They all were acquired at 40 percent to 50 percent below their last transaction price.
Mesa also has acquired two partially developed single-family projects that have all the necessary infrastructure but no houses. Those projects were bought for 16 cents and 19 cents on the dollar. “Our carrying costs are taxes,” Bell said, adding that the single-family acquisitions are long-term investments.
Because of the market opportunities, Mesa’s current focus is on the acquisition of class B apartment projects “where we can bring some value to the development,” Bell said. Mesa renovates and then rents out the apartments, which provide a strong cash flow.
“If you acquire them right and are willing to invest a little money in them, you get the leasing up into the 90s,” Bell said. “Our properties are 92 percent leased. When we bought them, there were in the low to mid-80s.”
Before 2008, the pace of apartment developments nationally was 350,000 to 400,000 a year. Since then, the number of apartments developed each year is about 30,000.
Supply is just one of the several fundamentals for apartments that have been improving for much of the past year.
Investors are also banking on the influence of 80 million echo boomers, or people born between 1979 and 2000, also known as Generation Y and millennials, entering the apartment rental market. The size of this generation, now aged 11 to 32, is expected to have as much impact on real estate as the baby boomers, according to the think tank Urban Land Institute.
Besides growing demand from the children of baby boomers, the residential real estate collapse and tight lending climate are also turning investor’s focus on apartments. People are still having to move out of their homes due to financial pressures. Others can’t get mortgages to buy a house.
U.S. housing demand grew by 757,000 households between first-quarter 2010 and 2011, including 455,000 in the South, according to the Census Bureau. But, also during that stretch, national homeownership fell from 67.1 percent to 66.4 percent. Correspondingly, renter households surged by at least 1 million, including by 479,000 in the South.
“With strong renter demand and limited new construction, the Atlanta apartment market has an excellent set of fundamentals for steady performance gains,” said Paul Berry, executive vice president of CB Richard Ellis Inc.’s multi-housing investment properties practice.
Rental rates have also bottomed out. They stand at 2003 levels now. Mesa anticipates at least a 10 percent increase annually over the next three years, Bell said.
All these factors have encouraged apartment developers and investors to start coming back into the fold, looking for sites to buy and in some cases build, as they try to get the development process going again.
“There’s not much supply on the market,” Bell said. “This is just a very good business opportunity. The oldest rule of economics is supply and demand. You take advantage of other people’s mistakes. It’s all about return. Our basic strategy is to buy product at a good price where we think we can get a nice cash-on-cash return. That eliminates the biggest part of the risk.”
Bell, however, acknowledged some headwinds.
Atlanta is growing in population but not jobs. And the playing field is getting more crowded, as more people begin bidding to buy distressed properties.
“Investors are figuring it out,” Bell said. “We are seeing more competition, which is why we are moving as fast as we are.”
Bell said one advantage of Mesa is that there are only six partners who all know each other. They also have the equity to be able to quickly close prospective deals.
Mesa has considered deals throughout the Southeast, but so far, all the transactions have been in metro Atlanta.
Bell said Mesa might see 10 potential deals in a week, and of those, only three might meet its parameters and the company probably will bid on only one. Mesa has won about a fourth of the bids it has made.
“We want good dirt,” Bell said, explaining one of their criteria. “If all goes well, the partners will double up [their investments] or we’ll bring in new investors.”
Mesa has an operating team of real estate professionals, including Tucker, Zack Schaumburg and Will Kilgore. They have developed thousands of apartments units and are comfortable doing the “grunge” work.
“If the market begins to inflate, you become a seller,” Bell said. “We are distressed buyers right now, but when that market goes away, we will become developers.”
Said Bell, “Developing — that’s really fun.”
For now, Mesa is not going head-to-head with his former company, Cousins, which is not in the apartment business. But Bell said Mesa will look for the best business opportunities, even if they are in markets where Cousins has a presence. “I don’t think Cousins considers me a big threat with their hundreds of millions of dollars,” Bell said.
Reflecting on his departure from Cousins, Bell said that because of the recession “there wasn’t much to do” other than getting its real estate assets leased.
“We knew we weren’t going to start new developments,” Bell said. “It did not make sense for the organization to carry both a Tom Bell and a Larry Gellerstedt (the current CEO). Part of it — it really wasn’t my thing. And at the time, I was thinking about running for governor.”
Then Bell added: “I think Larry has done a great job turning things around.”
Bell, who will turn 62 in November, has had several careers. But it was real estate that really drew him in. Bell first joined the Cousins board as vice chairman in January 2001 and was named president and CEO in January 2002. He assumed the title of chairman in 2006, and then retired from the company on July 1, 2009.
“I knew at the time I would be a real estate investor,” Bell said of when he left Cousins. “I didn’t know that I would create another real estate company.”