Western National Group, one of Orange County’s biggest real estate companies, is on an expansion drive that has it snapping up properties in several western states.
In 1998, Western National acquired 1,825 apartment units valued at more than $119 million. Last year, it purchased another 600 units valued at $39 million, numbers the company expects to exceed this year.
“We’re currently looking at communities in Colorado Springs, Las Vegas, California and Seattle, and I guess Oregon also,” Western National Chief Executive Mike Hayde said.
Irvine-based Western National is a 37-year-old apartment owner, manager and development firm. It employees roughly 1,000 people and manages a portfolio of a little over 40,000 units, including about 12,000 that it owns, generating annual revenue (rents and fees) that the Business Journal estimates to be in the ballpark of $160 million for the apartment business alone.
As an Orange County apartment owner, Western National ranks behind only The Irvine Company, with which it has a joint venture.
Western National also is known as an intensely private company that prefers to conduct its business away from the public spotlight. But the company is in the middle of a major expansion and is preparing to enter new markets. In a recent interview, Hayde and his top lieutenants talked in detail about the company’s plans, its goals, its operating philosophy and its past successes and failures. But they declined to discuss finances in any detail.
Network of Investors
In addition to bank lines and cash flow, Western National has used a network of roughly 450 investors to fund its growth. Historically, investor returns have been in excess of 20%, said Jeff Scott, the company’s chief financial officer.
The returns are impressive, given the cyclical nature of the market and the brutal recessions of the early 1970s and early 1990s.
But Hayde, (rhymes with made) said he is most satisfied with the company’s reputation for integrity in a rough-and-tumble business.
“Today, we’re sitting here and we’ve never had to default on a loan, we’ve never lost any investor’s money and we’ve always paid our bills,” Hayde said. “We’re proud of where we are. If you look at our list of customers, it’s a pretty good list.”
Hayde continued: “It’s not that the company has never lost a lawsuit to an investor, we’ve never had one,” he said. “We borrow money the old-fashioned way, we pay it back. It’s kind of a unique concept today.”
Western National Group has three main operating entities: Western National Properties, Western National Property Management and Western National Construction.
Western National’s construction arm, in addition to building for its own account, develops and builds multi-family properties for third-party clients.
For itself and clients, the entity will build roughly 2,000 units this year, at an average cost of $120,000 per unit.
About 16,000, or 40%, of the apartments it manages are part of Irvine Apartment Management Co., a joint venture between Western National and Irvine Co. unit Irvine Apartment Communities. Formed in 1997, the venture was initially a 51%-49% split, with IAC owning the majority. Recently, Western National’s stake was reduced to 25%.
“IAC wanted greater control in the operation of its real estate,” Hayde said.
According to Hayde, Western National is owned by himself, Chairman Jerrold Glass and David Stone, a director and former chairman.
While declining to give the ownership breakdown, Hayde said, “It hasn’t changed in a long time and the partners are happy with it. We’re one of those partnerships that have hung together and we support each other.”
Economy Drives Expansion
Like most real estate companies, Western National has taken advantage of the strong economy to expand its holdings. Underpinning this expansion has been a search for properties that have been poorly managed.
Typically, Western National will buy a property and invest anywhere from $3,000 to $5,000 per unit in a “cosmetic rehabilitation,” Hayde said. The company is not interested in acquiring properties in need of structural work, believing those investments are too risky, he explained.
But Hayde can’t help but look back with a what-if attitude. In hindsight, he said, the company should have been even more aggressive in its growth.
A missed opportunity: Not buying everything Western could have two years ago.
“We should’ve stretched more,” he said. “We bought 1,800 (units in 1998). We should have bought 2,800. We were pretty tight in our underwriting.”
Indeed, OC apartment occupancy rates through the first quarter of 2000 rose for the fourth straight year, reaching the 98% plateau, the highest level since 1985, according to Research Network Ltd., a Rancho Santa Margarita-based research and consulting firm. Taking advantage of this heightened demand for apartment space, owners have continued to drive up rents, with asking rental rates now averaging $1,086, the highest ever. Average rents are up 9.7% from 1999 levels and 35.4% from 1996, when the spike in rental rates began.
Further, analysts don’t see occupancy levels declining any time soon. Strong population growth and job creation, a dwindling supply of developable land and higher interest rates mean rents “will continue escalating upwards,” said Pam Wooldridge of Research Network Ltd.
“There’s nothing to stop them,” she said. “Basically, as long as we keep not building enough houses to satisfy the housing needs of the jobs we’re generating, rents will continue to rise.”
John Burns, senior managing director with real estate consulting firm The Meyers Group, predicts rental-rate growth of 8% to 10% in the next two years.
Western National plans to continue to grow its business, both in California and other markets. But it won’t stray too far from home.
“We want to be able to get anyone of these guys on an airplane and get them home for dinner,” said Hayde, pointing to his top executives seated around a conference table at the company’s Irvine headquarters. “In my mind, there’s actually enough apartments right here in California for us to be involved in.”
Three-Market Emphasis
The bulk of the company’s holdings are concentrated in three markets: Southern California, the Seattle area and Colorado Springs.
“We believe strongly in Southern California,” Hayde said. “It’s a strong market, and it will continue to be a strong market. We will be here quite likely the rest of our lives. But it would be prudent as part of an asset portfolio play to have a broader base of assets than just in Southern California.”
Western National officials emphasized that they won’t grow just to grow.
“We’ve looked at acquiring product in Oregon, we just haven’t found anything that fits our investment criteria,” said Rex DeLong, president and chief operating officer of Western National Properties. “We’ve looked at Northern California. Until we do find something, we’re going to stay out of those markets.”
Growth on the management side will be just as measured, suggested G. Stephen Donohue, president and chief operating officer of Western National Property Management.
“As I look at third-party opportunities, (it has to be) a place that I wouldn’t be embarrassed to have our flag or our sign,” he said. “We’re not going to go manage something that we’re going to be embarrassed about.”
Western National is not looking to merge or be acquired, Hayde said
“We’re opportunistic. The company is attractive to a lot of people, but it’s not for sale,” he said. “I suppose we haven’t heard a price yet that makes us interested.”
Western National, like many real estate companies, has in the past looked toward Wall Street. It seriously investigated forming a real estate investment trust in 1994. But unlike Donald Bren, who took his Irvine Apartment Communities public in 1993, Western National never took the plunge,company officials said they concluded that Wall Street would not properly value the company’s holdings.
“We thought about it then and decided against it,” said CFO Scott. “We considered going out with our limited partnerships in a public offering, and in retrospect we’re quite glad that we didn’t. It was not the right structure for what we wanted to do and eventually we found that out.”
It’s something, some would say, Bren found out the hard way: He ended up taking IAC private again last year.
But while Western National guessed correctly about Wall Street’s treatment of real estate investment trusts, it had been less prescient when it entered the homebuilding market in the late 1980s.
In what Hayde thought at the time “was a great diversification plan,” but now acknowledges to have been a major mistake, Western National began building homes just before the recession hit.
“I’m the guy who got us in it, and I’m the guy who was in charge,” Hayde said. “We lost a lot of money. I will hold the all-time record for losing money in this company. It was substantial.”
Still, on balance, Hayde indicated there aren’t too many regrets:
“Maybe we haven’t done as many of the good ones as we could have, but in hindsight you’re looking at bankers and accountants who run a real estate firm with a heavy fiduciary hand,” he said.n
Mystery Remains About Big Deal That Never Was
In 1995, Western National Group agreed to take its 10,000 or so apartments and combine them with Santa Margarita Company’s extensive land holdings in South Orange County.
It was the biggest Orange County real estate deal of the year. It combined Western National’s cash-producing rental properties with Tony Moiso’s Santa Margarita Co. and its vast potential development opportunities. It was a wonderful combination and a marriage made in heaven, analysts said. Unfortunately, the nuptials were never completed.
Several months later, the merger was called off. At that time and since, there have been carefully worded public comments pointing to a weak real estate market as the main reason. But as to what specifically derailed that deal, no one has ever spoken.
Western National Chief Executive Mike Hayde is determined not to be the first. During a recent interview, Hayde repeatedly declined to go into details. Asked about the failed merger, he said, “It was kind of a dream of both Tony and I at the time. Tony is by far and away the most honest, finest guy I know. I think that timing is everything. It was the wrong timing. We parted friends. Don Vodra, who (was) our CFO, remained there. Sometimes timing is everything and it just doesn’t work.”
Pressed as to what exactly what happened, Hayde replied:
“The best answer I can give is Tony is a dear friend. I believe we’ll be doing some apartments with him, so I will say whatever we did turned out OK for both sides. I have personally the highest respect for him. I find him to be unbelievably honest. He’s a man of his word.
However, both Hayde and Moiso have denied reports since the breakup that it was due to a difference in management styles between them.
“(He) and Mike Hayde are good friends,” said Moiso spokeswoman Diane Gaynor. “The merger was a good idea. After going through the process, it just was not in the best interest of both companies to merge.”
That friendship may again lead the two into business together. Moiso’s latest venture is developing the masterplanned community of Ladera, where there are a couple of apartment development opportunities. Hayde made it clear during the interview his firm would be interested in those opportunities.
“I would hope maybe we’d get called sometime or allowed to go down there,” he said.
