"Swimming Upstream, ContraVest's Philosophy Spawns Opportunities."

Multifamily Executive Magazine, May 2002
By Miriam Lupkin, Editor

Gerald Ogier has found that in every business cycle there is a development cycle, and within that there is a boom and bust period in which companies stop and start building new product.

That type of investment theory has continued the stop and start cycle which has been seen throughout every economic recession. Ogier, however, discovered that "if you could develop counter to that cycle - basically build new product and acquire land when the cycle was down... you could enjoy the benefits of that reverse cycle," says Ogier, president of ContraVest Inc., a multifamily developer, owner and manager. So, Ogier and his original partner, John McClintock, formed the company under the contrarian investment philosophy - in other words they would invest counter cyclically.

"We felt that there was a tremendous herd mentality that existed within our industry, primarily on the part of our institutional investors," he explains. "But, we found that if we could convince the investors to invest counter cyclically, there were great opportunities when things were out of favor."

While some in the real estate industry might call this philosophy risky, the company, which was formed in 1986 and is based in Heathrow, Fla., has successfully developed more than 18,000 units in six states - Arizona, Colorado, Florida, Georgia, North Carolina and South Carolina - for its own account and for third-party clients.

Stay in the Game
ContraVest's philosophy stems from the belief that by purchasing land during a down cycle, the company will be able to get cheaper prices. But the real key to being successful in the real estate business is to continue to be an active player, says Ogier. The company plans to continue to be a consistent participant. Waiting for the perfect time to participate is a good excuse and perfect rationalization to remain stuck where you are. ContraVest won't do that, says Ogier.

To succeed with this strategy, it's crucial that developers believe in the long-term viability of the U.S. economy and the housing market, explains David McDaniel, executive vice president in charge of development and construction at ContraVest.

Trying to do a deal as the real estate cycle is changing is as hard as trying to time the stock market, explains McDaniel. "It's extremely difficult to be successful [that way]. If a market is struggling and you believe the market will turn, the question is when. If you get in and stay in over a steady period of time you will be successful. You may not hit a home run every time, but you will hit a lot of singles, doubles and triples, and, eventually, you will hit a couple of home runs," he says.

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Study Markets
But sticking out a real estate cycle isn't enough to be successful. It's important that, before entering a market, a company does extensive due diligence. "You can't go into a market blindly," McDaniel says. "We make an internal decision based on the viability of a market coming back."

To figure that out, the company looks for demographics that address a decline in construction or supply in available units, or an increase in demand for rental units.

However, the risk still exists that you will incorrectly evaluate the market. "We study an enormous amount of demographics and statistics," says Ogier. To reduce that risk, "we hope to [combine] that information with our boldness and commitment to stay in the game."

With a philosophy that recognizes and takes advantage of down markets, the current recession is not as bad for the multifamily industry as some would think, according to Ogier. The U.S. economy is on the road to recovery and the multifamily housing industry is healthier today than it's ever been because of prudent lending, explains Ogier.

So, while some companies are concentrating on the fact that there is an oversupply, a reduction in apartment demand and an increase in job loss in some markets, Ogier would rather focus on the positive signs of recovery. For instance, nationally there is a 20 percent reduction in completions of apartments in 2002. In addition, ContraVest's lenders are predicting a 50 percent reduction in construction loans in 2002. On top of that, the supply of apartments is being diminished and interest rates are at an all time low, which he sees as advantages to developers.

"I have tremendous faith in the American economy," he says. "I believe there will be a positive cycle in 2003 and 2004. So, we're positioning ourselves to participate in the up cycle."

The risk involved in this type of real estate transaction isn't for the weak at heart. "Pessimists don't develop real estate. [Ogier] is obviously very optimistic, very upbeat and he's got great instincts," points out Douglas W. McNeill, president of Case Pomeroy Properties, which has joint venture deals with ContraVest.

Joint Ventures
For example, ContraVest mitigates risk by having the proper financial structure. "Our properties aren't overleveraged. We have very strong financial partners who also underwrite our deals," says Ogier. The company also avoids risk by working in large metro areas that have a diversified economic base, with a strong employment base and an influx of new residents.

When developing properties for its own account, ContraVest uses a joint venture structure, not only to alleviate the risk but also to provide capital for the project. Typically, joint venture deals consist of ContraVest providing the development expertise and securing the construction financing, and the joint venture partner providing the equity financing. "We guarantee the cost and on-time construction, and we have a management obligation for the property," explains Ogier. "Our main role is to bring the project to reality and to create the highest possible return for our investors."

Case Pomeroy continues to do deals with ContraVest because they continue to make money, but money is not the only determining factor. Relationship and communication also are important to the company. "[ContraVest] tells us the good news and the bad news when it happens," says McNeill. "If youÕre in the real estate development business, you always have problems. The key is how you manage those problems. A lot of partners will hold back and try to solve [the problems] themselves. ContraVest is very good at bringing up the issues and resolving them on a timely basis."

And it does so for both its joint venture partners and its third-party clients. For example, if there is faulty workmanship at a property that ContraVest developed, the company will go back and fix the problem at its own expense, regardless of whether it was ContraVest's fault or a subcontractor's mistake, says McDaniel.

In addition, the company is known for sticking to its original deals and not adding more expenses to the final bill. "Ogier is not a fast buck artist," explains William Ingraham, vice president and CIO at GDC Properties Inc., a third-party development client of ContraVest. "We've always found that heÕs a man we can count on to do the right things under difficult circumstances."

For example, ContraVest put a bid on a construction project that it thought needed a mechanical system which required a 10 SEER system. When Contra-Vest got the job, its team realized that the plan needed a 12 SEER system, explains McDaniel. "We took our lumps, recognized we missed it and paid what we had to," he says.

Friendly Competition
While ContraVest has garnered a reputation for developing quality product on time and on budget, there are only so many ways to develop multifamily communities. In fact, itÕs not uncommon for its third-party projects to compete with the projects that it owns or with other third-party projects it develops.

"There is similar product in everyone's production line," explains McDaniel. "What makes the difference is the location of the property, some amenities within the property and the on-site staff. The ability to sell and manage your product is what really counts. Crown molding is not the determining factor on why people rent."

While ContraVest's projects are often competing for the same renter as its third-party clients like Colonial Properties Trust, there is respectful competition between the two companies, says Ed Wright, senior vice president at Colonial. "We're glad to have them as competition," he says. "They are fair in their business dealings with us and, we don't feel like they use anything in the market to their advantage that would be unfair."

Ingraham says that competition can be a problem, but at the end of the day he realizes he can't control who ContraVest works for. And, Ingraham continues to work with ContraVest because he gets what he's looking for: "people of high integrity, that play fair and are efficient producers and good builders."

However, Ogier doesn't see building product for other companies as competition to the properties ContraVest owns. "The projects are going to be built whether we build them or someone else does," he explains. "Why not take advantage of the opportunity?"

By the end of 2002, ContraVest hopes to complete six development deals and six general contracting deals which will be worth about $150 million. "Right now, we're experiencing a negative real estate market, which in our philosophy bodes well for a positive market," says Ogier. "I am going to make sure we take every advantage of the downside in 2002 so that we're prepared when the market turns. I believe 2003 and 2004 are going to be very good markets. Now is not the time to sit back and wait for the economy to figure itself out."