Executive Q&A: Michael Schall, Essex Property Trust
Almost 25 years after going public, the REIT is still growing aggressively and impressing Wall Street analysts with its performance. The company’s president & CEO looks back and ahead.
Michael Schall joined Essex Property Trust 32 years ago at the age of 28 and considers it one of the best decisions of his life.
“Ultimately, it was the interview process led by Keith Guericke that made the decision to join an easy one. It was clear from the beginning that they had big dreams and high expectations,” he said.
Today, as the company’s president & CEO, he has helped lead Essex to tremendous success.
Since its IPO in 1994, Essex has generated the best return of all REITs in existence at that time ($100 invested in Essex at the time of the IPO would be worth over $4,000 today, including dividend reinvestment). In addition, the company has a strong record of environmental and community stewardship, demonstrated by its 3rd consecutive “Green Star” award from GRESB, their highest possible designation.
The REIT acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained coastal submarkets along the West Coast, including those in Southern California, Northern California and the Seattle metropolitan area.
In November, Essex sold a 125-unit Class A residential community in Chino Hills, Calif. for $34.8 million to Davlyn Investments, and in a separate deal, sold a 124-unit multifamily community in Chino, Calif. for $30.5 million to Klingbeil Capital Management of Columbus, Ohio.
How do the responsibilities of your job pilot the strategic direction of the company?
Schall: My job is to lead a results-oriented and highly ethical company. That ultimately comes down to setting Essex’s strategic direction and serving our primary constituencies—shareholders, the Essex team, and our residents. Leading the Essex team is a key responsibility, which means keeping us all focused on the strategic vision while providing quality housing solutions and appealing communities to our residents. Essex and the REIT industry consume large amounts of capital, and so being good stewards of our shareholders’ investment is a key responsibility. To accomplish that, we spend considerable time on investor relations, meeting with hundreds of investors each year.
How did your past experiences prepare you for this role?
Schall: Without question, the important and impactful preparation for this role was the example provided by my two key mentors: Keith Guericke and George Marcus. They established high standards for performance and ethical behavior, while relentlessly pursuing organizational excellence and improvement. As they often point out, opportunities and problems are everywhere—so it’s essential to have a framework for a systematic and appropriate response to changing conditions. Consistent with their influence, we are never satisfied with current conditions, and we never stop pushing for better solutions.
What was behind the company’s decision to go public?
Schall: We had a great team and wanted to grow the company. After studying a variety of capital alternatives, we went public in 1994 at $19.50 per share. We had a small portfolio of older apartment communities and a few shopping centers that were not immediately appreciated by Wall Street. That changed quickly as the advantages of owning property on the West Coast became more apparent. In looking back, going public turned out to be a great decision.
What is the company’s strategy for 2019?
Schall: In 2019, Essex remains focused on generating industry leading growth in FFO and NAV per share through thoughtful capital allocation, the lease up of over $1B billion of apartment development, and disciplined expense management. We have continued to improve the balance sheet and have over $1 billion in liquidity.
Market conditions have changed very quickly in 2019. We entered 2019 with a preference for allocating capital to repurchase Essex shares, resulting in $108 million repurchased in December 2018 through January 2019. With lower interest rates and a recent recovery in stock price, we are aggressively pursuing preferred equity investments related to apartment development opportunities and are bidding more aggressively on apartment acquisitions.
How would you characterize 2018 and the growth the company experienced?
Schall: 2018 was another successful year for the company as we grew FFO per share by 5.5 percent and our dividend by 6.4 percent. Although our FFO per share growth was below the 8.4 percent compounded annual FFO per share growth Essex has generated since our IPO 25 years ago, it is consistent with later phases of the economic cycle. We recently announced our 25th consecutive increase in the Essex dividend, a significant accomplishment that positions us to be a Dividend Aristocrat going forward.
Describe the dynamics of your target markets. Why these areas?
Schall: Essex looks to invest in markets with the greatest long-term rent growth. Each year, our research group looks more broadly at the housing supply/demand dynamics for many major U.S. metros, essentially to continually challenge our market selection criteria and portfolio allocations. At this point, on-going housing shortages, expensive housing alternatives and the exceptional growth in the technology industries continue to reaffirm our west coast footprint. While it is challenging to build and acquire apartments in these markets, we believe that it is worth the effort.
What makes a location a strong one? What do you look for and where do you think you might spread out?
Schall: In order to identify strong locations, we to seek understand the communities in which we invest. Our research and due-diligence activities focus on where jobs are being created and how infrastructure and traffic patterns influence where people choose to live. Local supply levels for competing housing are then considered, leading to rent growth estimates. Our development and acquisitions teams bring decades of transaction experience in identifying and pricing potential investments. The best locations and opportunities are identified through experience and hard work, both of which Essex employees bring to the table every day.
What other growth do you foresee in the years ahead?
Schall: Essex has compounded 8.4 percent FFO per share growth since its IPO 25 years ago due to prudent allocation decisions and the great economic growth generated in our core West Coast markets. We think the West Coast tech and knowledge-based economies are well positioned to continue outgrowing the rest of the country and thus expect Essex will continue growing earnings and dividends at a faster rate than portfolios located in less-dynamic markets.
What defines an Essex property?
Schall: With over 250 properties in our portfolio no two communities are alike. Market selection and property desirability are the key drivers to investment selection. Within a market, we seek to invest in properties at a variety of rental price points, improving diversity as to resident profile while focusing on areas with the highest rent growth. In addition, residents should expect an Essex community to have well-maintained facilities, excellent customer service and responsive management teams.