Insignia/HFS alliance creates all-new marketing synergies

Visionary leadership and a willingness to take chances to remain ahead of the competition are some of the keys to the success of Greenville, S.C.-based Insignia Financial Group Inc., the largest manager of multifamily residential properties in the United States and a significant manager of commercial property in just five years of existence.

The same traits have driven Parsippany, N.J.-based Hospitality Franchise Systems Inc. (HFS) to the leading position in hotel franchising, residential real estate brokerage franchising and in the business of preferred vendor relationships.

The forward-thinking approach of these two firms intersected in December with the signing of a five-year strategic alliance stipulating that HFS represent Insignia exclusively for preferred vendor services connected with the company's approximately 300,000 apartment units in the United States. Also a part of the alliance is Compleat Resource Group Inc. (CRG), a newly formed, wholly owned subsidiary of Insignia, based in Nashville, Tenn., which will act as the exclusive marketing agent for HFS preferred vendor services to the multifamily industry.

"(The alliance) was not envisioned as a service just to be offered to Insignia properties," says Jack Jacques, chairman and CEO of CRG, "but rather as a service for all owners of multifamily properties across the U.S. That is why CRG is a totally separate entity from Insignia."

CRG is the brainchild of Andrew L. Farkas, Insignia's chairman, CEO and president. The new entity is a direct sales and marketing company in the business of providing convenient, low-cost, quality products and services to residents of apartments in the United States.

Farkas' idea, along with a desire of HFS chairman Henry R. Silverman to expand into other markets, sparked initial talks on the alliance. "The more the two men talked the better the chemistry behind the idea became," says Frank Garrison, president of Insignia Financial Services.

After the series of discussions between the two had created an outline for the alliance, Farkas assigned Garrison and Jacques the task of bringing the alliance to fruition. Working with Richard Smith, an executive vice president with HFS, the details of the deal were settled in late November with a closing date which was expected in mid-January.

Things went so well, in fact, that Silverman decided HFS would purchase 500,000 shares of Insignia Financial Group stock as part of the agreement.

The basics of the alliance call for HFS and Insignia, through CRG, to share equally the fees derived from the preferred vendor services provided for Insignia and the multifamily industry.

"Both sides bring something to the table," says Jacques. "(Insignia) brings a knowledge of the markets, and HFS brings the relationships they have with the vendors."

In addition to Insignia's extensive market database, which CRG has access to, the new subsidiary also conducted focus groups that surveyed apartment dwellers on what products and services they would be interested in receiving and on what and where they currently spent their money. The results indicated residents would be interested in making discount purchases from a direct vendor contact.

The products and services HFS can offer to its clients' tenants include discounts on telecommunication services, appliances, insurance coverage programs, travel planning, car rentals and auto club memberships. "Just about any consumer product you can think of," says Stephen Holmes, executive vice president and CFO at HFS.

The vendors include many household names such as Coca-Cola, AT&T, Pizza Hut and Zenith to name but a few.

"HFS is the leader in the area of negotiating with vendors, and that is why we wanted to be associated with them," Garrison says.

Obviously, the alliance is of mutual benefit. From HFS' perspective, the partnership was an opportunity for growth. Holmes says Insignia's size gave them the opportunity to transfer their preferred vendor services business into another market on a large scale. "We had been looking at other areas where our service would be wanted and Insignia gave us an entry into the multifamily market," he says.

Jacques says a residents' association will be the vehicle used to market the preferred vendor program, with each member receiving an identification card to verify residency. This hools the collective buying power of the residents, which is attractive to the vendors, and justifies the reduced cost of the products and services offered.

"These vendors spend a lot of money on advertising trying to reach the right consumers," Jacques says. "Through this association, they will have a captive audience of renters who have already shown an interest in their products. It is a more efficient way for them to market their merchandise."

CRG will market the residents' association to apartment owners and if they join their residents will become members. "Owners today think of amenities as an attractive pool and clubhouse, but we see this association and the savings it offers as another amenity owners can use to market their properties to the public," says Jacques.

He adds that the alliance is beneficial to all parties involved. "It is a growth vehicle for both Insignia and HFS, a marketing tool for the property owner and a way to save money for the apartment residents."

While Jacques, Garrison and Holmes believe the alliance will succeed and could possibly extend beyond its current five-year limit, they say no plans for a more permanent coupling are in the works.

"Mergers or acquisitions haven't been discussed," says Garrison. But he adds that he believes similar alliances between companies will become quite common in the future. "Where two companies can help each other complete their business plans, these agreements only make sense," he says.

Jacques agrees, saying that both Farkas and Silverman are visionary business leaders that stay several years ahead of the rest of the industry.

In addition to their strategic alliance, other recent moves led by both men have assured their companies continued prominence in the real estate industry.

In December, HFS announced that it had agreed in principle to purchase Electronic Realty Associates (ERA) for $36.8 million (less certain working capital adjustments). The sale is expected to close this month.

HFS also has agreed in principle to purchase ERA'S home warranty insurance subsidiaries for $9.2 million (less certain working capital adjustments). This transaction will require the approval of certain state insurance departments and is expected to take three months to close.

The ERA acquisition comes on the heels of HFS' August purchase of Century 21 Real Estate Corp. from MetLife. The Century 21 transaction made HFS the world's largest residential real estate franchisee, and the addition of ERA (the nation's fourth-largest residential real estate franchisee) solidifies its hold on this position.

The Century 21 and ERA acquisitions give HFS a total of 8,500 franchised, residential real estate offices located in 15 countries and territories worldwide.

HFS has not been idle in the hospitality industry either. In late 1995, the company announced plans to purchase the Travelodge franchise system in North America, which includes 450 hotels and motels encompassing approximately 36,000 rooms.

In addition, last April HFS created the first new-construction-only national hotel chain in nearly 10 years, Wingate Inns. The chain's first two locations are already under construction in Georgia and Tennessee. Plans call for more than 300 to be in operation by the year 2000.

"The Wingate chain was developed to meet a demand from our franchisees for a product in the mid-market range that was totally new construction with no conversions of other hotels," explains Holmes.

Each Wingate Inn will feature a new standardized design (although 17% larger than typical mid-market hotel rooms) with between 80 and 150 rooms commanding between $50 and $70 per night. Demand for the new concept was brought about primarily due to changes in the spending patterns of business travelers. However, the inns will also cater to the leisure traveler to allow for greater occupancy.

At Insignia, Farkas and company have been in a growth mode since their inception five years ago, and the pace has not slackened. The company was scheduled to close in january on a $105 million acquisition of 104 multifamily residential properties, including 30,000 apartment units, from National Properties Investors Inc. (NPI), Long Island, N.Y. Insignia assumes all management rights in connection with the portfolio, as well as 5,000 multifamily units NPI managed for third-party owners.

"We are acquiring both management rights and limited partnership rights in the deal," says Garrison. The overall acquisition consists of service operations and partnership interests with approximately $17 million in annualized EBITDA/FFO (Earnings Before Interest, Taxes, Depreciation and Amortization/funds From Operations).

Last August, Insignia acquired the management rights to 50 multifamily properties in Maine and Pennsylvania from Gleichman & Co., Portland, Maine. And in October, Insignia added 23 additional Maine properties to its multifamily management portfolio from PropSys Real Estate Management Inc., Lewiston, Maine.

These transactions follow up last year's Insignia acquisition of the property management subsidiary of Balcor Co., Allegiance Realty Group Inc. The Allegiance purchase added approximately 55,000 multifamily units and approximately 18 million sq. ft. of commercial and retail space in 37 states.

"Insignia has grown during the past five years both internally and with mergers and acquisitions," says Garrison. "That is the way we have always done business, and I expect it to continue."

Insignia's acquisition capability has been augmented in recent months after the company secured a $200 million credit line with a syndicate of 13 national and international financial institutions. In addition, Insignia raised $57 million from a public offering of 1.925 million shares of Class-A common stock and another $14 million from the stock sale to HFS Inc., which was part of their strategic alliance agreement.

As Insignia continues to grow, management sees more opportunities on the horizon. "Our size and capital base allows us access to more markets which in turn provides more opportunities to benefit from economies of scale," says Jacques. "Geographically, we are filling in gaps in strategic markets to improve our efficiency."

Greystone, Starwood Capital form strategic alliance

Starwood Asset Management L.L.C. is the new name given to a strategic alliance just announced by Starwood Capital Group and Greystone Realty Corp, both of Greenwich, Conn. The new entity of Starwood Capital Group will be overseen by Greystone.

The bottom line is the new entity assumes management responsibilities for real estate assets valued at over $600 million, held in various ventures assembled by Starwood Capital. Starwood Asset Management will utilize resources of both Greystone and Starwood Capital to enhance the control, management and reporting practices on Starwood Capital's existing investments and to build a state-of-the-art platform for growth.

Greystone will also provide services, including market research, investment due diligence, assistance in transaction underwriting, property management, leasing and construction management.

"The partnership with Greystone will help support our continual quest to deliver superior returns to our investment partners going forward," says Barry Sternlicht, president and CEO of Starwood Capital. "Greystone has developed an excellent asset management approach and team, and will be a valued partner in support of Starwood's expanding investment activities."

"This is a dramatic step forward for our organization," says Donald Connover, Greystone's chairman and CEO. "Starwood is an entrepreneurial organization that will continue to create innovative vehicles for its elite and growing investor base."

An affiliate of Starwood Capital Group L.P. co-controls the Westin Hotel Co., which it acquired in a joint venture with associates of Goldman, Sachs & Co. in May 1995. Also, affiliates of Starwood Capital constitute the largest equity ownership group in Starwood Lodging Trust, a $650 million REIT.

Greystone Realty Corp. is an independently operated subsidiary of New York Life Insurance Co., managing a $1.3 billion portfolio of income-producing property and development projects for New York Life and other institutional clients.

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