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The twin towers of Home Properties

Norman and Nelson Leenhouts:
The twin towers of Home Properties

When many business executives near their 60th birthdays, retirement is foremost on their minds.
Norman and Nelson Leenhouts had other thoughts five years ago when they launched Home Properties of New York Inc., the first publicly traded real estate investment trust in Upstate New York. The 64-year-old twins–who had built Home Leasing Corp. over a 20-year period–saw an opportunity to catapult the apartment side of their business to a much higher level.
Today, Home Properties employs more than 2,000 people and operates nearly 300 communities containing 45,081 apartment units, with 33,375 of the units owned directly by the company. In the third quarter ended Sept. 30, the company posted a 54 percent increase in funds from operations, the chief measure of a REIT’s performance.
The company acquired more apartment units in the last three months than in any previous quarter, adding 25 apartment communities with 9,023 apartment units. A deal to buy another complex is expected to be completed today.
In full-year results for 1998, Home Properties posted FFO of $56.3 million on revenues of $137.6 million, up from FFO of $24.4 million on revenues of $64 million the year before. For the first nine months of this year, revenues were $163.5 million and FFO topped $61 million.
Despite its rapid growth and healthy bottom line, Home Properties’ share price has trailed the Standard & Poor’s 500-stock index. However, it has outperformed a composite of equity REITs and industry benchmarks such as the Morgan Stanley Dean Witter REIT Index.
Home Properties is one of the smaller REITs nationwide, yet it is growing faster than any other, says Amy Tait, executive vice president. Three years ago there were 32 apartment-based REITs across the country; now, consolidations have reduced that number to slightly more than 20, she says.
Some of the larger national apartment-based REITs include Equity Residential Properties Trust and United Dominion Realty Trust. REITs with properties concentrated on the East Coast include Charles E. Smith Residential Realty Inc. and Avalon Bay Communities Inc.
In its REIT category, Home Properties ranks 10th in market capitalization and eighth in number of units owned, Tait says.
One reason REITs in general have struggled is overbuilding in the hotel, retail and office space segments, says Norman Leenhouts, chairman and co-CEO.
The brothers say a belief in servant leadership and dedication to doing business in a family culture–more than savvy decisions and deal making–are the key factors in their success.
“We put our lives into it,” says Nelson, president and co-CEO. “Many other REITs start as a group of assets.”
To qualify for the REIT designation, a trust must derive 75 percent of its income from real estate and pay out 95 percent of taxable income as dividends to shareholders. Equity REITs such as Home Properties directly own and manage properties and typically specialize in a type of property such as shopping centers or apartment complexes.
The philosophy of Home Properties’ founders is not the only thing that sets the company apart from other apartment-based REITs nationwide. It distinguishes itself by using stock for acquisitions and buying a certain type of property in a well-defined geographic region. The Leenhouts brothers also credit good management and paying close attention to tenants’ wants and needs.
Using operating partnership units similar to stock for acquisitions is critical to growth because the company can make acquisitions below the market price, Norman explains. Sellers pay no capital-gains tax on OPUs unless they are converted to stock and sold. This is significant because otherwise the seller could give up half or more of the sale price in taxes.
“(The seller) actually gets more income for our stock than taking cash,” he notes, adding that Home Properties is the only New York REIT using that strategy.
“We don’t grow for growth’s sake,” Norman adds. “If we buy a property, we want it to increase per-share results.”
Paul Smith, a former Eastman Kodak Co. chief financial officer who sits on the Home Properties board, says the Leenhouts brothers work closely together and are “very conservative, open and forthright when working with people.” He also praises their integrity and describes the brothers as sensitive to employees, customers and shareholders.
“Their style is laid back yet very thorough, with great attention to detail,” says Roger Kober, retired chairman and CEO of Rochester Gas and Electric Corp. who has known Norman since they first served together on a corporate board 25 years ago.
Home Properties buys apartment communities located in suburbs of major Northeast metropolitan markets. The company used to look at properties in metro areas with at least 1 million people; today, it targets metropolitan areas with several million people to have a more secure market. Home Properties complexes are found in areas surrounding cities such as Philadelphia, New York, Chicago, Detroit, Baltimore and Washington.
The company is likely to enter the Boston market by the end of the year, Norman says. It probably will buy one or two properties initially; when the total reaches four or five, the firm plans to open a regional office.
Home Properties has regional offices in markets where it has 3,000 to 5,000 apartment units. The firm expects to have 12 regional offices by 2005, compared with 10 today.
The average apartment community Home Properties buys consists of 250 units. The brothers are considering acquisition of two 700-plus unit complexes in Chicago, a market the firm entered in the past year. Queens and Brooklyn are targeted for next year and Manhattan within five years.
Home Properties has ample room to grow in these markets, the Leenhouts brothers say. In Detroit, for example, the market totals 300,000 apartment units; Home Properties currently has 5,000 units there. Chicago has approximately 500,000 units and Boston 400,000 units.
One of Home Properties’ strategies is to buy in markets where the barriers to entry are high–for example, desirable real estate is in short supply or expensive. Often this means job growth is slower in these regions, Norman acknowledges, but so far the strategy has proven successful.
Focusing on a specific type of property also gives Home Properties a competitive advantage. Typically, the firm acquires 20-year-old brick apartment complexes.
In 20 or 30 years, class B properties made of brick will look better than wood-construction class A properties, Norman says. Class A properties–which most other apartment-based REITs own–generally were built within the last decade.
The brothers also have learned that tenants who rent apartments in class B properties tend to stay longer. They have found that tenants of class A properties usually rent until they buy a home.
These strategies would be difficult to implement without a strong management team, the Leenhouts brothers say.
“Our key to success is excellent, high-performance teams,” says Nelson, who also serves as the company’s property manager. “Most of the value we create is delivered by (these teams) to our customers.”
Home Properties invests a great deal of time in recruiting, training and motivating employees who are right for the job. The brothers listen to and respect their employees, and let them help set goals.
The company also gives the community managers–whom the Leenhoutses liken to small-business managers–great freedom to make decisions.
This approach makes the company highly decentralized or bottom-up, “not driven by big egos in the front office,” Nelson says.
Norman and Nelson seek first to serve the regional offices, which are responsible for serving the community-based teams that, in turn, concentrate on serving the apartment residents. This approach, Nelson says, is unique in real estate.
Nelson, who notes the biblical roots of servant leadership, says “employees have such a role to affect the quality of life for so many, to enhance the quality of life for the residents.”
Most of Home Properties’ tenants are gained by referral; the company does little advertising. And tenants tend to stay, the Leenhouts brothers believe, because the company tries to constantly maintain and upgrade its properties, from windows to appliances to landscaping.
“At the end of the year, we can point out why this property is better this year than last year,” Norman says.
The company’s policy for improvements is to exceed the industry standard. Similarly, Home Properties strives to provide tenants with the amenities and services found at higher-end properties, such as community centers, exercise facilities, pools, computer rooms and first-rate tenant assistance.
The company offers tenants a money-back guarantee. If Home Properties does not fix a problem such as a broken water heater, the tenant can live there rent-free until it is fixed.
Clifford Smith, professor at the University of Rochester’s William E. Simon Graduate School of Business Administration, describes the brothers as a genuine pair.
Norman blends a mind for corporate strategy with an accountant’s attention to detail. By contrast, Nelson is most comfortable rolling up his sleeves and working directly with the front-line staffers. He is as likely to sit down for lunch with a maintenance staffer as with anyone.
“You’ve heard the expression, ‘Do well by doing good.’ These guys do a lot of good,” Smith says. “I’m a big fan.”
One of the biggest challenges the company faces is getting its new properties online with Home Properties’ information systems. Some of the acquired properties still use manual information systems.
“We could not do what we do without the technology of today,” Norman says, noting that technology makes it possible to readily share information among markets.
The Leenhouts twins first saw the potential of owning real estate when they were enrolled at the University of Rochester.
They made their first acquisition in Wayne County, not far from their hometown of Ontario. They bought land and leased to the government under the Soil Bank Program.
Norman, who graduated with a degree in business administration and a concentration in accounting, was attracted to real estate because of the tax advantages it offered. The brothers also were drawn to it as a profitable business that provides a service to people.
Nelson received a degree in business administration with a focus on marketing. He worked in marketing for IBM Corp. and later was assistant to the president of General Railway Signal Co.
Norman worked as an accountant at the predecessor of Deloitte & Touche LLP and at Schlegel Corp.
The brothers founded Home Leasing Corp. in the late 1960s to acquire single-family homes that allowed a family the option to buy; in many cases, the rent would apply to the down payment, Norman says. Gradually, their business moved into apartment complexes.
Even with the challenges of running a fast-growing, publicly traded company, the twins do not live for work alone. In addition to golfing and fishing, they enjoy vacationing all over the country. Florida is a favorite spot, especially for Norman and his family, wife Arlene and daughters Amy Tait and Laurie Leenhouts.
Nelson and his wife, Nancy, have two daughters, Catherine Struzzi and Deborah Shumway, and a son, Jeffrey Leenhouts.
Norman also is involved in a number of community activities. He serves as Gananda Community Church treasurer, board member of Roberts Wesleyan College and an honorary trustee at UR. He also is a member of Blue Heron Hills Country Club.
Nelson also belongs to Blue Heron Hills and to Oak Hill Country Club.
Over the next five years, the brothers plan to reduce their areas of responsibilities, letting some family members take on more of the work load.
Among those increasing their roles in the business are Tait, who, along with serving as executive vice president, is the firm’s capital marketing investor relations manager; Nelson’s stepdaughters Jodi Falk, who heads up information systems, and Marci Hart, who manages computer training; Richard Struzzi, Nelson’s son-in-law, who runs community development; and Laurie Leenhouts, who oversees sales of single-family homes and building design work.
The brothers continue to operate Home Leasing as an arm for their non-apartment properties.
Gananda–a planned community they started in the late 1970s in Wayne County, east of Penfield–today has 1,700 homes and families. Totaling 1,500 acres, Gananda has a school and a golf course, and 60 percent of the land will remain forever wild, Nelson says. It includes 150 acres of wetlands hiking trails.
The Leenhoutses are set to begin construction of an 80-unit apartment facility in Gananda. Two-thirds of the property has been developed and more retail and housing is expected to be built in the next couple of years. The community could grow as more available land comes onto the market, Nelson says, adding that “the infrastructure is already in place.”
Other Leenhouts developments include:
Old Brookside, land in Canandaigua earmarked for future development; College
Green, senior housing in Churchville, including apartments and homes; Clinton Square, a downtown office building; the Piano Works Mall, an East Rochester mixed-use retail/office complex; and Southview Commons, a mixed-use retail/office complex by Monroe Community College. These developments average a higher than 90 percent occupancy rate, Nelson says.
One of the company’s latest ventures is Chevy Place, a 77-unit housing complex on East Avenue that includes the chrome-filled, 88-year-old former Hallman’s Chevrolet showroom, which will become a restaurant and coffee house.
Over the past three decades, the brothers have tried their hand at many types of real estate ventures, but in the future they plan to concentrate on what they do best: buy and renovate apartment complexes.



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