- The right
business at the right time
Three members of the Class of '76 find success in real estate investment trustsBy Leslie Virostek
Matthew Dominiski '76 Jeffrey Kelter '76
John Gates '76
Congress created publicly traded real estate companies in 1960. The intent was to make real estate investment affordable to the small shareholder, whose capital could now be pooled with that of others into a single economic enterprise. But it wasn't until 1986, when tax laws changed, that real estate investment trusts or REITs really began to take off. In the years that followed, Matthew Dominski, John Gates, and Jeffrey Kelter—three Trinity graduates who were all in private real estate businesses and were coincidentally all from the Class of 1976—perceived the new advantages of going public and jumped into a rapidly evolving sector of the economy. Says Gates, “In 1992, the total market capitalization of publicly traded real estate companies was about $10 million. Today it's approximately $200 billion. This sector has exploded in the last decade, and we were all there, present at the creation and very instrumental in its growth.”
Today there are about 200 REITs, which own, develop, and manage a wide range of properties, from apartments and office buildings to warehouses, hotels, shopping malls, and nursing homes. Being public companies, REITs are free of the heavy tax burden that private companies bear and have access to lower-cost financing. An additional competitive advantage, says Kelter, is access to entity-level financing. When you are a private company, he says, you spend all your time running around trying to finance each project individually. A REIT's capital is pooled together and can be used to finance a variety of projects.
Matt Dominski, whose REIT specializes in building and developing shopping malls, says that one of the challenges for REITs historically has been that analysts have not understood “the rhythms of the business.” Public companies must comply with extensive and exacting quarterly disclosure requirements. But, says Dominski, “In our business—where malls are big, slow-moving vehicles in terms of development or acquisitions—things don't tend to change quarter to quarter all that much. It takes a while for the analysts to understand that. Until you get very close to opening it's hard to really give them the definitive numbers that they always like to have.”
But REITs are gaining acceptance and being appreciated by the broader securities market, says Dominski, noting that there are a couple of REITs in the S&P 500. What's more, says Gates, REITs as a group have dramatically outperformed not only the S&P 500, but also the NASDAQ and the Dow Jones in recent years. The industry, he says, “has certainly proven its mettle in this downturn.”
While the three classmates share an enthusiastic view of the potential for REITs to continue their upward trajectory, they are at a loss to explain the coincidence that places three graduates from the Class of 1976 in three of the top 50 REITs in the country, or even how they all came to be in real estate. “It's very odd,” remarks Jeff Kelter. Says John Gates,“Obviously, there was no real estate curriculum at Trinity.”
But the three do agree that a Trinity education is a handy asset in the dynamic environment of REITs. “The liberal arts background is very helpful, because you're not only building the economics of a business and an industry, but you're building the culture as well in both the business and the industry,” says Gates. “There is no paradigm out there. There is no pre-existing model for the publicly traded, fully integrated property company. You need to be somewhat intellectually flexible because we're making this up as
we go.”Kelter—Getting to `perfect'
Could Trinity's location in a city—a built environment—have affected the classmates' career decisions? Perhaps. Jeff Kelter was an urban studies major who decided to try banking after graduation. He found Trinity to be “a great environment, with lots of interesting ideas and lots of interesting people and lots of interesting things to do.” But studying business wasn't one of them. Says Kelter, “When I went to work in the training program at Bankers Trust Company I had never worked a calculator.” After five years of learning the ropes of banking, Kelter went to work for a real estate developer and proceeded to experience another “vertical learning curve.”
At the age of 29 in 1982, he started a real estate business and also applied to the Wharton School of Business. “My first building was adaptive reuse of a hundred-thousand-foot, four-story loft building, which I turned into an office building,” says Kelter. The project was very successful. Says Kelter, “I thought, `Boy, this is going to be fun,' and I dove head first into it.” He never got around to Wharton.
In 1997, Kelter took his private real estate company and merged it with an existing REIT to create Keystone Property Trust, of which he is now CEO. Based in Pennsylvania, Keystone has a billion dollars in assets and is traded on the New York Stock Exchange. Says Kelter, “It was really great fun—learning how to be public and building this billion-dollar enterprise.” Now the challenge is to make it better. “We constantly work on selling what we call noncore assets and recycling the capital into core assets—or into the things that we want to own. Getting to `perfect' is a challenge and is sort of interesting.”
Dominski—Creativity in action
For Matt Dominski, going into business was an obvious choice. An economics major at Trinity, he earned his business degree at the University of Chicago in 1978. But real estate didn't present itself as an option until he did an internship that made him realize that he wasn't going to be happy in a corporate situation. Says Dominski, “I decided that I wanted to get into something that was more entrepreneurial.”
In 1979, he joined a mid-sized real estate firm in Chicago, which in 1993 formed the public company called Urban Shopping Centers, with Dominski as its CEO. In November of 2000, Urban was sold to a Dutch public company to form Rodamco North America, with Dominski as its president. Rodamco owns about three dozen regional malls around the country, including Copley Center in Boston, and is one of the country's largest managers of retail space for third parties.
The company retains some 2,200 employees. Says Dominski, “The most challenging thing is just running a company with that many people.” What he enjoys the most is the creativity involved in developing a mall from scratch. “You can find a piece of property that's out in a cornfield, and when you're done five or six years later it's a major $150–$200 million regional mall that has really changed that community in a lot of ways and that is going to be there for the foreseeable generations. That's always a lot of fun—the creativity that goes into how you design it and how you merchandise it and those kinds of things.”
Gates—Value of liberal arts
John Gates was an economics and philosophy major. After Trinity, he went into the field of politics, working for Governor James Thompson of Illinois for several years. Then he entered a training program for a commercial property brokerage company. In 1981, he opened the Chicago office of a London-based real estate investment company. That company went public in London in 1984 and then in the United States in 1993. Known as CenterPoint Properties, Gates's company focuses on industrial properties in the metropolitan Chicago area, which is the largest industrial market in the nation.
“Having an economics background has been enormously useful,” notes Gates. Having a broad liberal arts background and good communication skills has been important, too. Says Gates, “The breadth of problems you deal with in a business like this is huge. We're dealing literally with every type of business there is in America and all sorts of different problems.”
CenterPoint also does a lot of public-private partnerships, often coordinating with the EPA and many levels of government to clean up and redevelop environmentally tainted industrial sites.
Gates's advice for those who want to learn more about REITs is to start by forgetting what you think you know about real estate. “Real estate in general has a horrible track record and a horrible reputation, so these publicly traded real estate companies will be best appreciated when we've come out of a downturn and people realize that they didn't go nuclear,” he says. “We are building more credibility day by day, which I think will bring us more into the mainstream.”