Most Culture Matters
At Top-Performing REIT

By DEAN STARKMAN
Special to RealEstateJournal.com

In a business where every company does more or less the same thing -- buying buildings and leasing space -- how much does a company's culture matter?

Plenty, apparently.

Parkway Properties Inc., for instance, doesn't seem to have any inherent advantages. In fact, it has plenty of seeming disadvantages.

It's small, some would say undersized. The real-estate-investment trust owns about nine million square feet of office buildings, valued at about $900 million, compared with, say, Equity Office Properties Trust, Chicago, which owns 125 million square feet valued at about $25 billion -- with a "b."

And Parkway's markets aren't what you'd call glamorous, depending on what you think of a night out in Knoxville, Tenn., Richmond, Va., Columbia, S.C., Memphis, Tenn., or Jackson, Miss., where Parkway is based.

The company also has no special niche strategy, unlike Alexandria Real Estate Equities Inc., Pasadena, Calif., which specializes in providing space for biotech tenants.

And yet, according to a recent Smith Barney report, Parkway provided the highest compounded annual return to shareholders of any REIT the Citigroup Inc. unit covers. In a period measuring the companies' lives in the public market, mostly dating to 1994, Parkway has returned 23.5% annually. That is higher than other well-regarded REITs, including Alexandria (19.4%), Chelsea Property Group Inc. (19%), the Roseland, N.J., outlet company featured here two weeks ago, and CBL & Associates Properties Inc. (18%), the mid-market mall company based in Chattanooga, Tenn. None of those scores are bad, by any stretch, by the way.

More remarkable is that Parkway led the pack in a property type - office - that has been far weaker generally than others, especially retail.

Paul E. Adornato, a principal at research firm Mercury Partners LLC, Greenwich, Conn., says the company's secret isn't much of a secret. "There's an incredible attention to detail," he says. "One of their hallmarks has been tenant retention."

In an interview at last week's National Association of Real Estate Investment Trusts' convention in New York, Parkway's president and chief executive, Steven G. Rogers, wasn't shy about sounding off about the company's performance and its culture.

A former Army infantry captain and Harvard M.B.A., the 48-year-old Mr. Rogers says he was attracted to the then-tiny diversified REIT in 1983 by the company's longtime chairman, Leland R. Speed, and the egalitarian spirit he was trying to create. After deciding to focus on office property in the early 1990s, the company embarked on one of the industry's most explicit attempts to create a corporate culture, as opposed to a place where people go to work.

He says management emphasizes, above all, producing total returns to shareholders. That sounds obvious, but you'd be surprised how much some office companies would rather discuss almost anything else -- size, sexy markets or some other gimmickery, like high-tech office buildings. "The focus sometimes get lost," Mr. Rogers says.

And Parkway does it through tenant retention -- nothing particularly flashy there. But Mr. Rogers says it costs six times as much to move in a new tenant than to keep one. And the company - through stock participation and other incentives that go deep into the organization - has developed a laundry list of very simple do's and don'ts geared to keeping tenants happy. Many of them are corny.

·         The company defines itself as a "service provider," not a landlord, and its tenants sign not leases, but "service agreements" that are usually 10 pages long, not the usual 50.

·         Its four "F's" of service -- flags, flowers, fixtures and fellowship (being helpful) -- requires intensive involvement by building managers, who are usually young, trained at a company "boot camp" program and given commissions if tenants decide to renew their leases.

·         Outside brokers are given a "bill of rights" that promises, among other things, payment within 48 hours of a deal. Such bills of rights are becoming common practice in the industry.

·         The company employs two senior-level "customer advocates" to provide tenants with what Mr. Rogers calls a "nonthreatening" channel to complain. Mr. Rogers says tenants often don't want to hurt the manager's feelings -- as strange as this may sound to us New Yorkers. This practice is also being copied.

The list goes on, but the idea is clear. Parkway's year-end vacancy, by the way, was 7.7%, compared to an average of 16% in its markets.

Some in the market find Parkway's story a little good to be true, and Mr. Rogers's presentation a bit pat.

But the numbers are what they are. Mr. Adornato, who has tracked the company for more than five years, gives credit to management.

So when Mr. Rogers says, "culture matters," maybe he's right.

-- Mr. Starkman is a staff reporter for The Wall Street Journal. His "Bricks & Mortar" column appears each Wednesday exclusively on RealEstateJournal.com.