“Those were the areas of difficulty for Wallick,” said Feusse, who began working as a consultant for the 44-year-old affordable multihousing company in May 2005.
Discipline and focus, along with the strong belief that a company should stay in its core market as long as growth is still possible there, also were key to fixing the problems Feusse found when he took on the job of helping to heal the ailing real estate firm that was founded in 1966 by Jack Wallick and Sanford Goldston.
The company enjoyed 37 straight profitable years following its formation by engineer, builder, and general contractor Wallick and certified public accountant and financial advisor Goldston. But rapid expansion into new markets outside the Midwest and the simultaneous development of four assisted-living communities, followed by disastrously slow lease-up of communities with high fixed operating costs resulted in a mountain of debt and revenue plunged $50 million in just four years. By the time Feusse arrived, the company had sold the ill-fated assisted-living deals in New Jersey and the Carolinas to pay some of the bills that mounted because of them.
Ironically, the company that was in financial trouble when Feusse entered the picture was born from the ruins of the New Orleans-based, bankrupt Kesk, Inc., where Goldston and Wallick worked until that real estate development firm got into financial trouble and went under in 1966.
With the help of lenders and bonding companies with whom the partners worked at Kesk, they created The Wallick Companies in Columbus, Ohio, to provide general contracting work for completion of 10 projects Kesk left unfinished in the Buckeye State.
For the next couple of decades, Wallick flourished, with nearly 1,000 employees by 1995. Troubles began in 2000, when Goldston, who took over the CEO job in 1995, after his longtime business partner died suddenly of cancer at the age of 65, retired.
Risky development
The troubles Feusse found when he came in as a consultant in 2005 were the result of the company’s decision to break one of its founder’s long-held rules after Goldston retired. “Jack’s old rule was never to do more than one assisted living project at a time. We were OK doing more than one apartment community at a time, but not more than one assisted living community because of the level of risk,” Feusse said.
“Jack had the majority ownership though his life and, when he passed away, his ownership interest went into a trust,” Feusse said, describing the leadership system in place when he arrived. The company’s executives were overseen by a board of directors and a voting trust Wallick created before his death. The decision-makers, including top-level executives, decided the growing demographic of aging baby boomers made the assisted-living risk worth taking and “got burned in a very significant way,” Feusse said.
“The risk for assisted living is significantly higher than it is for a conventional apartment community because the level of fixed cost is so much higher and your revenue is all variable. And during the lease-up period, you’re losing money.” he said.
Frequently, potential residents make several visits to a senior community under consideration, often bringing different family members along to help with the decision, before signing a lease.
“If that lease-up period ends up being longer than you expected, then you start incurring these additional losses. So, as part of the development budget, you have to estimate what your lease-up cost is going to be and you fund that cost as part of your development. If you estimated lease-up to be six months and it takes 18, and the additional losses weren’t funded as part of your development cost, the developer’s on the hook to for that,” he explained. That’s what happened to The Wallick Companies.
Out of retirement
Feusse initially worked with Goldston, who came out of retirement in 2004 to bring the firm he co-founded back to health. “It wasn’t a long-term play,” he said of Goldston’s return to the helm in 2004. “It was to come back and stabilize it and fix the company and be here until he could hand it off to someone. So, Sandy came back and ran it for about 18 months. By that time, he was in his early to mid-70s and, unfortunately, not in good health, so they needed to find someone to come in and work with him and they found me through some networking contacts,” Feusse recalled.
It didn’t take long to see that The Wallick Companies’ situation was far from hopeless, said Feusse, who left his job with the lawn and garden specialist in 2004 to freelance as a consultant to troubled companies like Wallick and work as an adjunct professor of finance, accounting and marketing at Ohio Wesleyan University in Delaware, Ohio, just outside of Columbus.
“Often, when businesses get in trouble, the core market has changed. For example, I wouldn’t want to be a seller of fax machines today,” Feusse explained. “But, in this case, the underlying businesses were healthy and still profitable.”
In addition to selling off the ailing assisted living communities, Goldston also sold a number of apartment communities Wallick owned to reduce debt. That part of the plan continued after Goldston brought Feusse on board, reducing the company’s owned and fee-managed apartment portfolio to just north of 8,000 units in 100 communities in Ohio, Illinois, Indiana, Kentucky and Arizona over the course of the year.
Feusse takes over
Last fall, Feusse recounted events of the day in July 2006 when Goldston asked him to take over the business. “He said, ‘You know, Tom, I never intended to come back on a permanent basis and I’m ready to hand this off,’ and he asked me if I would accept the baton. It was a great opportunity,” Feusse said.
It also was a great challenge for a relative newcomer to the multifamily industry, especially its affordable sector. “But, it was exciting to me,” he said of the idea of taking charge of a strong business that had enjoyed a good reputation for many years, and, though weakened by a couple of recent bad plays, could easily be revived.
After selling assets to reduce debt, the next step was to close the development offices in South Carolina and Arizona that were opened in 2001, returning the company’s sole focus to the Midwest. Fixing the financial reporting process was a simple matter of bringing accounting procedures into the 21st century. The process in place when Feusse arrived didn’t provide enough useable information and what was usable was chronically late. “Now we close our books pretty promptly, typically in five business days. We have much improved the quality of information, so that heavy lifting is done,” he said.
Feusse often talks about how important it is to “get the right people on the bus,” which started with the leadership team, where he called upon company veterans Bob Daines and Bill Lepper to lead the property management and construction businesses, respectively, and he went outside of the company to find Phil Brown to run the development business a couple of years ago.
Strategy for success
“And we follow a process that I learned at Scotts Miracle-Gro. We write a five-year strategic plan and revisit it every year,” said Feusse last fall, just a couple of days after returning to the Ohio office from one of the annual strategy meetings that always are conducted off-site.
“It’s a very healthy process. At this point, the plan is pretty well-defined and we’re tweaking it, not re-writing it,” he said of the strategic planning document for 2010 to 2014 that includes the company’s mission to provide safe, quality rental housing for fixed-income seniors and low- to moderate-income families and company values, like respecting the dignity of others, and behaving professionally and with strong character.
“The Number One initiative we have in our strategic plan is all around customer service. When we think about customer service, we think about servicing three populations—one being our residents, another being the owners of the properties we manage and our business partners, and the third one being our employees,” he said.
To enhance employee retention, the company is revamping its training program and introducing recognition and wellness programs, all the while making sure those who work outside the corporate office feel like part of the corporate family.
In addition to accomplishing those goals, Howard and Julie Wallick, Jack Wallick’s children by his first wife, bought out their stepmother’s ownership interest in the company and the trust was dissolved in 2006, making the firm a truly family-owned company, again.
Other strategies include the pursuit of internal and external development opportunities, mostly focused on preservation of existing apartments, using nine-percent tax credit and other programs in the Midwest, which will fuel development fees, construction revenues and property management contracts. Identification of companies seeking transition or exit strategies for roll-up/consolidation opportunities, and enhancing economic performance of existing properties round out the key opportunities list created since Feusse stepped in.
Partnering for growth
Most of the strategic plan he orchestrated was well underway by the end of 2008 and the time had come to grow, again. Two partnerships with other multifamily real estate companies were forged last summer to jump-start the new growth cycle. Last July, Wallick took advantage of relationships formed during the aborted effort to move into warmer climes in the early 2000s to form a partnership with Columbus-based Miles-McClellan Construction that leveraged both firms’ presence and competitive positions in the construction of affordable multifamily housing in North and South Carolina.
The partnership currently has two affordable apartment communities underway—the 162-unit Brookside Commons in Columbia, S.C., and the 80-unit Evergreen Landings in Gastonia, N.C.
Since entering the Carolinas in 2001, Wallick had built and rehabilitated more than 1,800 multifamily units in the Carolinas. Miles-McClellan entered the Carolina market last year and has a satellite office in Greensboro, N.C., but some projects the company opened the office to build were delayed, freeing up the firm, which was established in 1978 by Lonnie L. Miles and Terry McClellan to provide general contracting, construction management, design/ builder and pre-construction and value engineering services, for the two projects Carolina-based Greenway Development asked Wallick to build.
Major merger
But that relationship pales by comparison to the merger with Stern-Hendy, another affordable multifamily specialist founded 30 years ago in Cincinnati by Bob Stern and David Hendy, inked in January 2009, creating the largest affordable housing company in Ohio, while greatly expanding both companies’ abilities to serve their customers. When the deal was signed a year ago, Stern-Hendy had 3,300 units under management in southwest Ohio and northern Kentucky and Wallick managed an 8,300-unit portfolio of affordable units in Ohio, Illinois, Indiana, Kentucky and Wisconsin.
Today, the company is made up of three divisions—Wallick Construction, the original foundation of the company’s business, and Wallick-Hendy Development and Wallick-Hendy Properties, two divisions that were rechristened adding the Hendy name when the marriage between Wallick and Stern-Hendy kicked off the new growth phase, increasing Wallick’s managed portfolio by 42 percent.
The merger of the two companies that share the same values and have similar cultures—focused on family, quality and customer service—was a virtual slam-dunk. Their portfolios were very similar, both consisting of properties financed by a combination of funding from the U.S. Department of Housing and Urban Development (HUD) and a blend of tax-credit programs aimed at low- to moderate-income families and seniors.
“In rough terms, we ended up getting half of their management firm and they got 25 percent of the joint development business and our staffs joined together,” Feusse said. The merger resulted in just shy of 12,000 units managed by Wallick-Hendy Properties, 56 percent of which are owned by the company and 44 percent fee-managed.
Tax credit bonanza
In 2009, despite the tough economic climate, the Wallick-Hendy Development team received five tax credit awards from Ohio and Indiana. On May 7, the Indiana Housing and Community Development Authority (IHCDA) granted Wallick-Hendy Development a tax credit award that will allow a complete rehabilitation of the 60-unit, 32-year-old Skybird Manor in Greensburg and another award on June 26 for the rehabilitation of the 48-unit, 31-year-old Rushville Commons in Rushville.
On July 2, the Ohio Housing Finance Agency (OHFA) approved applications submitted for the 60-unit, 33-year-old Almond Village in Dayton and the 48-unit Berwick Apartments in Cambridge, for the complete rehabilitation of both properties. The rehabs will include updated unit interiors and common areas, provision of supportive services that will enable the senior residents to age in place, along with other building upgrades that include enlarging some of the units.
The company received a fifth tax credit award last year from the IHCDA for a project that was moved up to the top of Indiana’s waiting list at the end of October. Based on the amount of rehab planned for the three in Indiana and two in Ohio, the nine percent tax credits will help fund rehabs ranging from $40,000 to $70,000 per unit.
“It’s a combination of tax credits and soft money, which could be HOME funds or, in this case now, TCAP or TCE (tax credit assistance or tax credit exchange programs) funds and you typically have a small amount of debt,” Feusse said, explaining that the tax-credit assistance and exchange programs were created as part of the Obama administration’s stimulus package to fill the void left by Fannie Mae and Freddie Mac after those agencies abruptly stopped buying tax credits around 18 months ago.
“We have all three of those sources in play. There’s tax credit equity in play, there’s debt in play and the soft money could be in the form of any of those three. Within the five projects we’ll probably be using all three, the tax credit exchange, TCAP and HOME funds,” he said of the work that will address some major systems like electrical, plumbing and HVAC at the aging units. In a couple of instances, Wallick-Hendy plans to build out the front of the units, adding a little more than 100 square feet, enabling expansion of the kitchen and bathroom areas in the back.
Going green
The company now is underway on the rehab of 14 communities financed through a variety of funding programs. The second most common funding source, after the tax-credit programs, is the mark-to-market program. Two of Wallick’s mark-to-market funded rehabs represent the second and third such makeovers in the country developed under HUD’s new green program.
“And we’re going to close another one, probably in the second quarter of 2010 that will be the largest HUD green project in the country,” said Feusse of the 893-unit, 50-year-old Fay Apartments in Cincinnati that will be reduced to 703 units, as part of the rehab. “Because it’s such a large and complicated project, it’s been worked on for several years and we’re coming down to the final few months before we go to closing,” he said, adding that Stern-Hendy originated the deal.
The construction part of the rejuvenation of Fay Apartments will take around 30 months and, since Wallick downsized its construction arm, with auspicious timing just before the economy went sour, Wallick-Hendy has partnered with another Cincinnati firm, general contractor and construction manager Reece-Campbell, Inc., a 27-year-old regional leader in commercial construction, to do the work.
“Fay is almost like a little city to itself. And, because of the size of it, we weren’t comfortable doing that all on our own,” said Feusse of the JV that will spend between $30,000 and $35,000 per unit on rehab of everything from roofs to asphalt, with almost all of the components of the project impacted by the green focus.
Low-flush toilets and other water-saving plumbing devices, low-VOC emitting carpet and cabinets, asphalt composed of recycled material, Energy Star-rated appliances, low-E glass in the windows, and compact fluorescent light bulbs are among the numerous green elements to be included in mega-rehab.
Looking to the future
Looking forward, the company is focused mostly on rehab of affordable rental housing in the Midwest, with very little new construction expected in the foreseeable future, Feusse said.
Because the Midwest is experiencing flat to declining population and is home to myriad multifamily projects built in the 1970s and 1980s, the area doesn’t need additional units coming on-stream, he said. “What we’re in need of, in terms of an industry in this part of the country, is for our existing units to be rehabilitated and repositioned,” he said, explaining that the development side of the company identifies the projects and finds the funding sources, often applying for federal funds, doing the design work for the remodeling and then turning the deals over to the construction business, which actually executes the physical work.
“The main customer for Bill Lepper, who runs the construction company, is Phil Brown, who runs our development business, and they happen to sit right next to each other,” said Feusse.
But it’s the property management side of the business that is his main focus of growth in the near term, said Feusse, who would like to see that division grow by about 10 percent a year over the next five years to 20,000 units under management. “If we add roughly 1,000 units per year, that would get us to 17,000 units and, if we can do one or two more Stern-Hendy type deals that would get us over 20,000,” he said.
He has no plans to move into any new markets in that expansion. “We’re the largest manager of affordable housing in Ohio and our market share is five percent, which is almost shocking to have a leading market share at five percent. Our market share in the Midwest is approximately one percent, which means that 99 percent of the market’s available.
“So, we don’t feel like we have to go to other markets. We have plenty of room to grow right where we are,” said Feusse, who believes the Midwest, which generally lags most of the rest of the country, finally has seen the bottom and is starting to see very early signs of economic recovery.
Author Peggy Shaw
