Young blood

Pat Carroll is somewhat of a maverick. The CEO of Atlanta-based Carroll Organization didn't take the usual route to heading his own real estate company. He didn't come up through the ranks with an apartment REIT, a private developer or an investment group. Instead, he began developing, acquiring and selling real estate on his own in 2004, when he was just 23.

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Carroll acquired a diverse skill set early on. He built single-family homes, a retail shopping center, mixed-use, student and affordable housing and traditional apartments, launched two syndications and acquired a couple of his competitors to establish a national footprint that spans from the Southeast through Texas and up the West Coast.

Today, Carroll Organization is a fully integrated firm with a national platform focused entirely on multifamily, managing more than 15,000 units in multiple markets and employing more than 400 team members in corporate offices in Georgia, Texas and California, as well as five regional offices in Denver, Colorado and several Florida markets.

How does a young man with relatively little experience in the commercial real estate arena become a successful developer and investor? Obviously, business smarts and luck played roles in that success, but money was also crucial.

“I had some capital from a previous business, but most was borrowed. Those were the heydays where you could borrow just about 100 percent of acquisition and development costs. Once I got a few done, I would roll my profits to the next project or investment,” said Carroll.

His early projects included Villas in Highlands, a cabin-style, single-family community he developed in North Carolina in 2005, and several multifamily projects in Greenville, S.C., and Atlanta the following year.

In 2007, Carroll ventured into the commercial real estate and student housing arenas with a shopping center in Greenville and a couple of student deals in Boone, N. C., including a student housing community that included 20,000 sq. ft. of retail space. Business was good and Carroll was good at the business.

“I started out as a one-man-shop. I would develop a deal, build it, sell it and move on. But what I learned from doing retail and all he other food groups is that you need to specialize. So, going forward, Carroll Organization will be 100 percent multifamily. The only tweak will be that we will continue to do both affordable and student housing. We haven’t pursued any student housing deals in the past 12 months, but we are starting to look again from a development standpoint,” he said.

Some lessons Carroll learned the hard way, through mistakes that became part of his learning curve.

“I do more due diligence on the people I do business with now. I think that was the main thing that I have learned. I need to be surrounded by great people, both partners and employees,” he said.

National coverage
He also learned the importance of branding to establish a recognizable national platform. Carroll hired a marketing firm to help name the assets in Carroll’s growing portfolio and the Arium brand was born.

After selling off his early developments in 2008, Carroll recycled the proceeds into acquisition of multifamily owner/operators with the intent of growing a new portfolio and establishing an integrated operating platform. He gained economies of scale with the purchase of Affordable Realty Management and Miles Properties in Atlanta and Hediger Enterprises in Greenville, S.C.

Those acquisitions allowed the Carroll Organization to expand deeper into third-party property management and ready itself for future opportunities in multifamily real estate.

“The acquisitions expanded our footprint and infrastructure. They also produced the cash flow to run the company while we pursued other acquisitions,” said Carroll. That same year, the organization purchased another 440 unit apartment community.

Important to Carroll with the Arium brand is that it become synonymous with quality product, living experience and service.

“We want to provide all our residents a great living experience. In my opinion, it’s important to deliver a consistent high level of service at all our properties, much like staying at a higher end hotel. When Carroll Management Group takes over a property, we introduce �Carroll Concierge,’ an online service where residents can pay their bills, put in work orders, etc.

“We also put a lot of effort into training our employees. Onsite personnel is put through an intensive training program we call Carroll University. During this course, we not only teach normal policies and procedures, but also the overall living experience we are trying, as a company, to deliver to our residents,” said Carroll.

A number of the executives with the firms Carroll acquired stayed on to add their expertise to the growing company. Section 8 affordable housing, which came to the portfolio by way of the Affordable Realty Management acquisition, will continue to make up around 30 percent of the portfolio.

“We manage a decent amount of affordable housing. Suzanne Hicks, the president of our management company and one of the management companies I bought, has a long background and long track record in affordable. We have a full compliance department and 20-plus years experience managing those types of properties,” he said. Hicks joined Carroll Organization in 2011.

“I would much rather buy then develop, but I will develop when the right opportunity presents itself,” said Carroll, who prefers to build mid-rise Texas wrap style and light garden-style multifamily.

“Twenty-five percent of our business in any given year will be development. We are looking at a couple of development deals right now on the West Coast. But we have a different mentality than (merchant builders). We build to ultimately own assets, so we take a longer-term approach to our deals. If we do a total of ten deals in a year, two to three will be development deals versus acquisitions,” said Carroll. The company has nothing coming out of the ground today, but expects to close on a development parcel on the West Coast in six months.

On a tear
Business began heating up for Carroll Organization at the end of 2010 and, over the past 12 months, the company has closed on ten assets through two investment funds. The acquisitions were financed in part through two private funds, Carroll Fund I and Carroll Fund II that co-invest with equity partners to acquire Class A and B plus communities.

Meanwhile, the company continued to grow its third-party management, adding two new states to its portfolio, Arkansas and Colorado, in September 2011. The company now has a management presence in 13 states and is rapidly expanding that business.

Carroll seeks to acquire properties where the company can add value through renovations or management or both. “We recently bought newer properties, but on the West Coast we are looking at 1985 or newer. I’d say the age doesn’t mean as much as the location. We are only buying in A or B-plus locations. I’ll buy older product if it’s in a really good location or newer if it has issues with management,” said Carroll.

Last year, Carroll formed a partnership with Reliance Capital Partners, owned and operated by Brian Massie and Andre Koren, to source, acquire and operate multifamily properties on the West Coast.

The two industry veterans, headquartered in Los Angeles, brought a wealth of experience to Carroll Organization. The partnership, which operates as Carroll Reliance LLC, leverages Carroll Organization’s growing national platform with Reliance Capital’s knowledge of the West Coast markets.

“About a year ago we launched the Los Angeles office. We started in the Southeast and moved on to Texas and then the West Coast where we now have several deals under contract to buy-one in Portland, one in Seattle and one in San Diego.

“I now have this partnership in place and our top markets over the next ten years will be Houston, Austin, Seattle, Portland, San Diego and Atlanta. We want to be where there is job growth and where people want to live. But the best market right now is Houston. Occupancy is 93 percent or better and rents are rising. There is less turnover in the market, people are optimistic and job growth is vibrant. It’s almost scary how good it is, “said Carroll.

Houston is one of only two major metros in the nation that has returned to pre-recessionary employment levels, recouping 157,000 jobs, or 134.5 percent of jobs, lost during the recession, according to the U.S. Bureau of Labor Statistics.

During the 12 months ending March 2012, Houston added 82,300 jobs, a 3.2 percent year-over-year increase. The addition of those Houston jobs was the second largest number behind that of New York, a metro with three times Houston’s population, which added 112,500 jobs.

The company’s most recent purchase (fourth in the thriving Houston market) was the 476-unit Arium Briar Forest in Houston’s high-growth Energy Corridor submarket, an area that is home to a broad range of international and local companies, from energy to healthcare, engineering and financial services, providing a diversified economic base that strengthens the marketplace.

On April 26, Carroll closed on its seventh asset in 12 months and third in the Houston market since February 2012-the 264-Waterford Place Apartments on the Sam Houston Tollway. The community was rebranded Arium Fall Creek, named for its location in Houston’s affluent Fall Creek master-planned community.

“We purchased this property from the developer and will do an interior upgrade program. We closed quickly with Starwood Capital Partners, an institutional partner of ours,” said Carroll. Renovations will include the addition of wood flooring as units turn and immediate upgrades to the clubhouse and landscaping. The property was 95 percent occupied at COE.

Carroll also used Starwood Capital to enter the Houston market in February 2012 with the purchase of the 360-unit Carrington Place at Shadow Creek Ranch, a two-year-old, Class A asset located eight miles south of the Texas Medical Center in a master-planned community that features 900 acres of lakes and community parks. The property consists of one-, two- and three-bedroom garden-style units. Community amenities include a high-tech cardio strength training facility, a 1,100 sq. ft. playground for children, a billiard room and a resort-style pool.

Starwood, which had invested in 22 apartment communities in 24 months and owned a total of 8,760 multifamily units, looks forward to working with the Carroll Organization to expand its presence further in the Houston markets.

Meanwhile, Carroll closed in April 2012 on the 302-unit Green Trails apartments in Houston through a joint venture with the Praedium Group. The three-year-old, Class A Green Trails is located in a desirable submarket five miles from Houston’s Energy Corridor in the prestigious Katy Independent School District, which has consistently ranked among the top-rated school districts in Texas. The property consists of one-, two-, and three-bedroom units that offer direct access to one- and two-car garages, offers convenient access to the I-10 and Beltway 8 and is surrounded by walking trails. Interior features include crown molding, custom wood cabinetry, large walk-in closets and full size washers and dryers.

Business is good, but Carroll adds a few caveats. “We are careful about overbuilding, and that’s why we are targeting coastal markets where it is more difficult to build. In the future, overbuilding could be an issue, and also a substantial increase in interest rates could hurt, but we don’t see that happening in the next 24 months,” said Carroll.

Carroll believes there is a firm place in the multifamily arena for a company with young blood and new ideas. “When I launched Carroll Organization, I saw there was a void where some of these legacy platform entities were getting older or had legacy issues they were dealing with. I saw there was a void for this next younger new platform and that is where we have had a lot of success. Our equity partners have previously invested with these other groups and they like that we are a new young entity that will be around for awhile,” said Carroll.

In today’s heated acquisitions environment, Carroll has relied heavily on broker relationships to source off-market deals. “Right now we are getting push back because we don’t own anything on the West Coast, but we do have an office out there and we are under contract out there with our brand name. The REITs are hard to compete with because they have a lower cost of capital. It’s pretty tough and we haven’t had a ton of success doing the mass bids. We try to use our network of owners and developers to try and buy off market. “But, as our brand becomes more wellknown, especially in the West Coast markets, we will have more success on brokered deals. One thing we have done to get ourselves to the front of the pack on some brokered deals is our ability to close quickly. Since we have discretionary capital, we do a short due diligence and we close quickly and there is our recent track record-we’ve closed ten deals in 12 months-so we can point to that and say we can perform,” said Carroll.