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Lutton paints success portrait at PM Realty

Consider PM Realty Group as an evolving work of art. Sound flowery? Not when you stop to think how radically this company has changed over the last five years. And whether he admits it or not, PM chair man and CEO Michael Lutton is the catalyst for that change. And he matter-of-factly states the PM Realty case.

"PM Realty group is a 43-year-old company that's made money every year, and that's very difficult when you stop and think about it in the real estate industry," says Lutton. "I like the analogy that we're probably a third-grader, but I think that even the best of our competition might be a fourth-grader and everybody else is a first-grader. I don't think anybody has gone to where they can go. I think we're all still infants in the business. If you look at it in terms of market share, nobody has stepped in a role and been dominant from a market share standpoint. And nobody's been able to do it with a level of quality and consistency. This is a business that everybody measures by square footage. Square footage doesn't mean a thing. Ultimately it comes down to are you profitable. It comes down to a situation where if you're growing your business right, you're growing your business through your existing customer base. The key is controlling product. If you're strictly third-party, you either have to do it through great service or you've got to find a way to control some product."

PM Realty is privately held and has major offices in Los Angeles, Denver Chicago, Miami and Houston, with subregional offices in 38 states and most major metropolitan areas.

Lutton joined PM Realty as vice chairman and CEO, and was named chairman in 1995. He had served as president of The Irvine Co.'s office and industrial subsidiaries. He saw his mission as one of repositioning the company from scratch. "I came in and took the company from a very one-dimensional stance, which was `We are a property manager and nothing more.' And quite frankly, we couldn't afford to stay in that position, not because we weren't good at it and the clients didn't recognize it, but the clients were demanding more. The client was saying, `Yeah these guys are the best managers out there, but I need somebody who's going to manage it and lease it.'"

Senior staffing priority

Lutton's priority has been putting the senior management level in place as the foundation for the future. And the level of that management experience is hard to match. Rick Kirk, PM's president and COO, spent 18 years at Prentiss Properties in Dallas, and was hired in January. Ernest Johnson, PM's Western Division president, spent 10 years at JMB Properties and has been with PM for 18 months. Martin Morgenstem, PM's new president of investment services, was a 10+ year veteran at CB Commercial and also started at PM about 18 months ago.

"I have not completed what we set out to do. The first step takes a long time to get people like this. The reality is that most of the senior people in the organization have been here less than two years. But there are people who have been working for this organization who have been working longer than I've been alive. When we went out to recruit people to be business leaders, we didn't go out and look for people who were transient by nature. We brought in people who had grown up in major real estate companies that understood how the game is played and also understood that there is a level of service that you have to provide," says Lutton.

So what Lutton has assembled is a group of real estate people, drawn from outside the pure property management rank and file. "They're real estate executives. Which means they understand value. They understand how to fill a building up. They understand the construction side of it," says Lutton.

Why would these veterans come to work for a company that was, and largely still is, seeking to redefine itself and its role in the service-provider world?

"It's not as much to come and work at PM as much to see if they can take advantage of the expertise that you know you have and do it the way you want to do it, versus the way you were being forced to do it somewhere else," says Lutton.

Morgenstern puts it this way, "If you look at the personalities that have come together, they are not one-dimensional, self-centered, `What's in this deal for me' people. We're builders."

Kirk, who runs PM Realty on a day-to-day basis from his office in downtown Houston, prefers the team approach and the ability to make his mark. "We're very team oriented. In all honesty, we were all in positions with established companies, established ownership, and we wanted more control of our own destinies than what we might have had in our other organizations. Our objective is to have the regional presidents communicating on almost a daily basis. I saw Mike Lutton's vision, which was to be able to take that whole package but meld it within the same culture."

For Johnson, it was the ability to offer clients a variety-pak of services, but stick to focusing on the core real estate assets.

"A lot of companies talk about synergies. But eventually when they have a tough time, they gravitate back to their roots. That's natural. Now a lot of companies are going back to development and I don't blame them. We need product out there. But what attracted me to PM ... no matter what mathematical matriculation you do, no matter how you work the numbers, it really comes down to how does your product look when your clients come in and your investors come in and when you position that product to sell. There is a cycle, but the one element throughout that cycle is the piece of real estate. We all feel confident that we can service the real estate. So now we're putting that at the center of the hub, and now we're presenting spokes to our clients that we can offer them in services and that's what we've been doing. We know our clients well enough that they can tell us what they need," says Johnson.

How do all of these personalities meld together? "We can be a pretty contentious bunch too," says Lutton. "When we have a management meeting once a month in Houston, it can go from chair-throwing to..." This group obviously has a passion for what they do.

Besides, whoever said change was easy? consider how the entire property management business is changing, as more firms seek to dominate their local markets and offer more services to their clients.

For James J. Gorman, senior vice president of business development, it's been the discovery of how much the business has really changed.

"When I joined the company two years ago, one of the questions I went around and asked our clients was what does PM Realty have to do to maintain its relationship, or better yet, expand this relationship going into the future," says Gorman. "I think almost every client told us, `Bring us transactions, bring us dears.' that's telling us that they want us to be brokers, and we've also changed our role from being a plain-vanilla service company to being a quasi-asset manager. We've really taken over the asset management responsibilities for a lot of what our clients used to do traditionally. The nature of our business I think has changed drastically in the last couple of years."

A service oriented company

That gets back to what Lutton is trying to create -- a service-oriented real estate company that can provide value-added services, but won't try to be all things to all people.

Still, the company has actively formed some major partnerships in recent years. A few little-known facts about PM Realty include:

* PM formed a 50/50 joint venture with Western National Group to manage multifamily apartment communities. The entity known as Jupiter-Western National is the nation's 10th-largest multifamily manager with in excess of 35,000 units.

* PM Realty owns Facility Maintenance Services (FMS), Amerisource and Jupiter Sports. These companies specialize in facility, hospital and sports facility cleaning and maintenance, and are run out of Houston.

* Two years ago, PM purchased BetaWest, which provides sophisticated advisory skills out of its Denver location.

* Earlier this year, PM entered a joint venture with IBEX Institutional Advisors in Miami. IBEX is a CalPERS adviser and invests on behalf of several large public and private clients. IBEX/PM has offices in Los Angeles, Miami and Denver.

"Is there a real estate team that can truly go in and look at the balance sheet, look at the real estate component of that and deal with it effectively, whether it be sale-leaseback, synthetic lease, whatever you're doing to improve the status of real estate in that organization?" says Lutton. "Guess what? The property management company that we were four years ago or the property management company that most people still are doesn't have that capability. That's why when people say, `Why do you have this kind of horsepower in there?' Because it takes that kind of horsepower collectively if you have to take 25% of somebody's balance sheet and reconfigure it. Guess what? A property manager can't do that. We have senior people that can go in there and analyze it effectively and know what team to put together to execute it. And two, there's the basic, fundamental block and tackle, and we've always been as good as anybody in that business. Now we have both sides of the fence covered."

Lutton's quest to provide more services, better, has led to the development of a proprietary software management system that PM is already using with many of its clients and is in the midst of rolling out on a national basis. It helps to create a point of differentiation from the crowd.

"I think if you walked up to the institutional owners and said what's your opinion of every large property management firm in the business, there really isn't any difference," says Gorman. "That's the key, how does a firm like PM Realty distinguish ourselves and become truly leaders in this industry, and that's a challenge that you've got to face every day."

Morgenstern sees the software development as another key client service. "An interesting question is why were we able to do that? I came from a national company where they had been trying to develop a similar system for a number of years. One of the things that differentiates PM Realty Group is we are in the real estate business. The executives of this company are in the real estate business day to day. When you get to the big national firms, the executives of those companies aren't in the real estate business. We are," says Morgenstern.

More sophisticated owners

Much of the change in the property management industry can be attributed to the changing nature of the property ownership base. It become more sophisticated as institutions have taken on more real estate assets.

"We're seeing a much higher sophistication in the owners, and people are finally saying you get what you pay for. People (property management companies) who dive to the bottom and buy work end up going out of business anyway," says Lutton.

With that higher level of sophistication comes a greater demand on the services that traditional property management companies should provide.

"As the wave of foreclosures hit the industry, we've had a lot of owners that are looking at a short-term hold," says Johnson. "They take on these assignments for anywhere from nine months to two years, whereas traditionally property management firms held on much longer. The nice thing about this short-term mentality is that the owners now want to correct a lot of the previous problems, like deferred maintenance and taking care of the tenants. So from a challenging point of view these are great properties to work with because you have an owner that has a clear goal, that is motivated to move this property for the best price and they really work with you as a team. You get good answers, you get good direction, they listen to you, they take your advice as professionals."

In other words, owners and their asset managers are becoming more involved in their properties, right down to more frequent on-site inspection trips to see them firsthand. "In my view, whereas before you were directed by the asset manager, there is a lot more team now in what you need on a regular basis. We used to not see the asset manager on the property. Now you do," says Johnson.

"They are much more hands-on managers today than they ever have been, which makes our jobs a lot more challenging," says Morgenstern.

Another trend has plan sponsors hiring more real estate professionals to run the real estate department, and as they get more sophisticated and confident, they will want to be larger and dominant, says Gorman.

All of which leads to a higher profile for the property management firm.

"For the first time we're in vogue again. As an operating company, the money loves us," says Lutton. "Now it's not `Find us a deal,' it's `How can we work together.' The next stage after that is everybody and their mom wants to buy you because you now have something in place that if they wanted to go start it tomorrow, they couldn't. These factors along with everything else point to very favorable market growth for people that are just pure service providers. The basic underlying premise is as an operating company you should be able to go and make a lot of money as an operating company and forget about everything else if you're good at what you do and you're running it correctly."

As for the other services PM Realty offers in its basket, including brokerage, Lutton realizes he has to be prepared to move with the needs of his clients, but on a rational and selective basis rather than as a gunslinger.

"We are not anywhere near as strong on the brokerage side of the business as some of our competitors are. And we'll argue with you that we probably won't be either, because where we'll go make money is we'll find the right people to market product if we need to do that, or we'll do it ourselves if in fact it's an assignment we can handle correctly. But to go out there and hire a broker to go lease a building on the landlord rep side is crazy unless you can execute it the right way. Our time is better spent taking care of the customers that we've got," says Lutton.

Plans for future growth of the business will focus on high-profile office assignments where PM can perform the leasing, management and sale services. And there will be an emphasis on serving Corporate America.

"There is the capability on-staff of construction, and PM is doing some major build-to-suits for corporate clients," says Johnson. The company now has 13 build-to-suits in progress, from 50,000 sq. ft. warehouses up to a 500,000 sq. ft. warehouse and even a retail/entertainment complex in Orlando. "They can come to us turnkey, and in most major markets in the United States, we can handle everything from soup to nuts for them," says Johnson.

It all comes down to Lutton's continued strong belief in his vision of where he wants PM Realty to go.

"When you look at any organization out there that's still standing and back doing it again, it has nothing to do with the fact other than they recruited a good solid core group of people that understand the business. That's all we've got. We're not hiring clerks. We hire people who can think, who are grounded in the basics and understand the business. I'm betting that long-term, that's a stronger foundation than anybody else is putting in place. We think that will be the key to success going forward," says Lutton.

"The key to being successful from my standpoint as a national company is to have the regional people have the same hunger and the same focus as the regional players. When you can do that on a regional basis, and understand how your successful competition is marketing against you, then match it, you have something much greater to offer (clients) because you have the national capability of bringing more resources to the table."

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