Every morning Anthony W. Deering contemplates three murals of buffalo that consume almost an entire wall in his office. For him, they are a daily reminder of how his kind -- real estate developers -- were on the brink of extinction before making a comeback.
More than two decades ago, Mr. Deering didn't know if his employer could survive crushing debt. Nor did the low-level planner at Rouse Co. know that, one day, he would be elevated to chief executive of the Columbia-based real estate firm.
Neither prospect seemed a certainty, or at times, a possibility.
The country was gripped by Vietnam, snaking lines of cars searching for gasoline and the Watergate scandal.
But in those days, Rouse had its own crisis. It struggled against rising interest rates, floating-rate debt, impatient lenders and soaring inflation.
And the company was choking from its myriad of interests: subsidized housing, mortgage banking, consulting, mall, hotel and office development, and its largest undertaking -- the 14,100-acre planned community called Columbia.
"We were a small company doing big projects, and seemingly betting the ranch on each one. There was a desire to do projects beyond the company's scope. Improving the quality of life became an overwhelming priority," recalled Mr. Deering, who joined Rouse in 1972 and last Thursday became the third chief executive officer in Rouse's 55-year history.
Rouse's interest with social concerns stemmed from founder James W. Rouse, who believed confronting some of the country's deepest problems -- urban decay, poverty, integration and a lack of liveable housing for the poor -- were as important to the company, perhaps more so, than making money.
"We thought we could cure poverty; we thought we could cure everything," recalled Mathias J. DeVito, 64, who stepped down last week as chief executive officer after 16 years. "At that time, there was no notion of economic recession. We thought we had conquered all the elements contributing to recession. We were going to a new world, which never materialized."
Like the buffalo on Mr. Deering's wall, the company's future seemed in doubt. In the mid-1970s, Rouse was forced to slash 650 people from its payroll as it shed financially troubled ventures, and saw its stock price plummet from $20 a share to $2.
But Rouse learned valuable lessons about corporate planning and financial discipline from those dark times and began a slow, but certain, transformation from an agent of social change to one of the country's most focused and successful developers.
They are lessons few expect Mr. Deering to forget.
"Given the changes in the market, Tony is the kind of guy you want running a big, public real estate company today," said John A. Somers, a senior vice president of New York-based Teachers Insurance & Annuity Association, a frequent Rouse financial backer. "He understands the bottom line better than Jim [Rouse] or even Matt [DeVito]."
In many respects, Mr. Deering, 50, is in an enviable position: On the heels of record 1993 earnings, last year's results surged by more than 20 percent to $94.7 million, the company is sitting on roughly $50 million in cash reserves and is ending a nearly decade-long absence of new development by progressing with two new malls.
In an April 1994 report, New York investment house Salomon Bros. Inc. went so far as to predict that regional shopping malls would be the most stable source of cash flow among commercial properties during the rest of the 1990s and beyond.
And Rouse's $4.7 billion portfolio -- containing more than 200 properties in 24 states -- has largely withstood the industry depression that crippled some of the company's strongest competitors and is poised for growth through at least 1996, analysts say.
Most importantly, Rouse has taken steps to avoid repeating the experiences that got the company into trouble in the 1970s. In the past four years, it has either refinanced or retired $1.72 billion worth of debt and increased its percentage of nonguaranteed loans.
But Rouse's success today in large measure can be traced to steps it took in the aftermath of its financial crisis in 1973 and 1974, when the company eliminated a series of financially unsuccessful ventures that had been part of the original Rouse vision.
"A change took place in emphasis, in our goals," Mr. Deering said. "We recognized that all of our goals had to work together."
Perhaps the best examples of Rouse's transformation are illustrated by its changing attitudes and approach to four areas of its business both past and present: New community development, low-income housing, mortgage banking and retail development.
Of all of Rouse's endeavors, none better exemplifies the company's commitment to social change or shaped its public image than Columbia, the massive Howard County development mixing housing, commercial and retail.
Begun in 1967, the project was heralded for its mission of bringing together people of various ethnic, social and economic backgrounds, where they would live, work and play harmoniously.
"It is becoming increasingly clear that the building of new cities and the rebuilding of old ones is socially, politically and economically the highest demand of our civilization," Mr. Rouse said shortly after Columbia's development began. "We see the product in city building not as brick and mortar that sells or rents for a price but as a vastly improved environment creating values in excess of cost."
Rouse intended to replicate the concept several times over -- at Wye Island, on Maryland's Eastern Shore; in a suburb of Memphis, Tenn.; and in other areas around the country.
By 1974, however, Rouse disbanded plans for community development projects elsewhere. The decision was reached in part because of stiff community opposition such plans generate. But the real force was the tremendous financial commitment required to develop an entire new city.
And although Columbia is unique in many ways, today it is treated in a more businesslike fashion by Rouse. That's because the developer bought out its majority partner's interest in the planned city in 1985, paying Cigna Corp. $120 million. As a result, Columbia's land sales have become an important part of Rouse's overall earnings, and with it, pressure from shareholders to perform.
In recent years, the company has been criticized by some for failing to maintain the project's utopian nature, especially in regard to the development of marginally profitable low-income housing.
"I'm disappointed that we haven't put in more of the moderate-income housing that was part of the original plan, but it hasn't been possible because of a lack of federal support, the cost of land and other factors," Mr. Deering said. "One of tasks going forward will be to marshal our resources. But on balance, I think Columbia has achieved its original objectives."
Rouse's financial discipline also contributed to the sacrifice of another largely social concern, a joint venture with a British home manufacturer created to supply housing to the nation's poor.
Rouse-Wates Inc.'s demise in 1974 came in the wake of the Nixon administration's decision to eliminate government-subsidized housing programs. Although laudable in its goals, Rouse realized it would be unable to stem multimillion-dollar losses by the subsidiary if the venture continued without critical federal support.
Faced with that dilemma, Rouse made a decision based upon what made business sense.
But its biggest departure from its past came in 1984, the year James Rouse retired as the company's chairman and when the firm sold Rouse Real Estate Finance Inc., then the nation's 14th-largest mortgage banking and insurance operation with a loan portfolio in excess of $2.1 billion, to the PaineWebber Group Inc.
Sale with significance
The $50.5 million sale, brought about by increased industry competition, was especially significant because mortgage banking had represented the company's core, dating back to its founding in 1939.
"The company's focus has narrowed considerably with each decade, which has been a huge advantage," Mr. Deering said. "When we were widely diversified, others thought the diversities were sympathetic, but they turned out not to be."
Even Rouse's approach to retail development -- its best performing segment -- has evolved over the years, from the Harundale Mall, which James Rouse pioneered in 1957, to the five-story Gallery at Harborplace, a 1.7 million-square-foot complex opened in 1987.
Much of the change was geographic: After years of building enclosed malls in the suburbs, Rouse moved into urban areas in the mid-1970s with its Faneuil Hall marketplace in Boston, a three-building office and retail complex that laid the foundation for Harborplace and similar projects from Seattle to Miami.
In Rouse's downtown projects, however, the company employed stylish designs and creativity in redevelopment that have been largely absent from even the best suburban shopping malls.
The upscale urban projects, including its $110 million Arizona Center complex in downtown Phoenix and its Pioneer Place project in Portland, Ore., are some of the shining stars in Rouse's portfolio, appealing to shoppers, workers and travelers with greater disposable income.
Still, changing demographics and a drop in key federal support since the late 1980s have caused the company to defer similarly ambitious projects.
Arizona Center, completed in 1989, marked Rouse's final foray into urban redevelopment, although company officials insist Rouse continues to be committed to the nation's urban centers and will progress with future development when market conditions warrant it.
"They were very astute to get out of the development business when they did, and concentrate on strengthening their existing portfolio," said Franklin L. Morton, director of research for Ariel Capital Management Inc., a Chicago-based firm and Rouse's largest institutional holder controlling roughly $70 million worth of its common stock. "It seemed crazy at the time, but it proved to be the right thing to do."
Goals still in place
Although Rouse's actions with its low-income housing and mortgage banking subsidiaries in particular seemed to reflect a vast philosophical change, company executives insist that the corporate goals laid down by its founder remain in place today.
"The goals are still there because they work," said Mr. DeVito. "Unlike a lot of people in this business, we're not just bottom-line oriented. But in today's world, where a lot of businesses don't make it, the financial side becomes vitally important."
One can see links to the past even with the transformed company.
For instance, although Rouse in 1985 jettisoned its American City Corp., an in-house consulting arm, the company is working with Atlantic City officials on a plan to revitalize that city's downtown, connecting existing hotels and casinos to a new convention center.
And while the company isn't embarking on new communities like Columbia, it has been retained by three families in Prince George's County to develop a 1,058-acre project there.
The development, known as Fairwood Farm, is a planned $100 million project that will be Rouse's largest community venture since Columbia. Unlike Columbia, though, Rouse's financial exposure to the project is expected to be limited.
But most significant is Rouse's continued effort in building suburban malls, which was put on hold in the late 1980s because of overbuilding and frozen in the early 1990s when recession hit, causing debt-ridden department store chains such R. H. Macy & Co. to fall victim to bankruptcy and lenders to eschew new real estate projects.
"In the midst of that dark environment, when real estate was considered a disease and not an industry, we decided it was the perfect time to begin new initiatives," Mr. Deering said.
The company plans to develop malls in the suburbs of Orlando, Fla., and Spartanburg, S.C., containing a combined 2.2 million square feet at a cost of $157 million. And Rouse has options on five other sites, Mr. Deering said, at a time when new mall development nationwide has all but stagnated, according to data compiled by the International Council of Shopping Centers Inc., an industry trade group.
"As a return on investment, urban projects pale in comparison to opportunities in the suburbs," said Robert A. Frank, an Alex. Brown & Sons Inc. managing partner. "So I see the new projects as displaying a clear direction for the company."
An aid to earnings
Besides representing a clear direction, Rouse's new suburban projects in growing population centers are expected to help the company's earnings. By their fifth year of operation, Rouse projects the new Oviedo Crossing and Spartansburg Center malls will have combined annual sales of $700 million and generate rents of $67 million a year, both ahead of industry averages.
The company also intends to continue expanding and repositioning its existing centers, adding department stores, food courts and other entertainment-oriented venues. In the past five years, Rouse has added space and renovated six of its malls in an effort to increase tenant sales. Plans also call for eventual additions and renovations to the Mall in Columbia and shopping hubs in Ohio, New Jersey, Florida, New Jersey and Pennsylvania.
But retailing shifts and other challenges lay on the horizon.
For starters, Rouse may have difficulty maintaining sales and revenue growth in its retail centers, after years of producing industry-leading numbers thanks to rents tied to merchants' sales. Rouse's retail properties account for about 80 percent of its overall income.
"Tony has a big challenge ahead of him," Mr. DeVito said. "As I look out, I see a world of slow growth, less opportunity and overcapacity in virtually every business. In the next half decade, he'll have to figure out new thrusts for the company. It's going to be harder to produce increased numbers than in any time when I ran the company."
To produce the numbers, Mr. Deering will have to contend with an onslaught of new competition from catalogues, home shopping television networks, discount stores and interactive concepts all vying for consumer's attention, as well as contracting mall shopping.
"As consumers become more selective, we believe merchants are focused on being in the strongest possible properties," said Douglas A. McGregor, Rouse's executive vice president for development and operations. "And for that, they're willing to pay more rent and a greater percentage of operating costs."
Shorter shopping trips
Between 1982 and 1993, by example, the average time spent shopping in traditional outlets fell from 90 minutes to 74 minutes, while visits per month dropped by 14 percent, according to statistics compiled by Stillerman, Jones & Co., an Indianapolis retail consultant. The average dollar expenditure between 1988 and 1993 has risen 28 percent to $54.28, however.
"Our answer to that is to make the shopping trip more efficient," said Bruce D. Alexander, a Rouse senior vice president and its director of new business development. "A mall has great adaptability. When merchants or concepts change, we have the flexibility to change our presentation to the public as well."
Rouse also will have to contend with increased competition from retail development stalwarts such as the Simon Property Group, DeBartolo Realty Corp. and Taubman Centers Inc. They were dragged down by heavy debt levels and imprudent investments in the late 1980s, but have recapitalized by turning to Wall Street and converting to real estate investment trusts.
In one important respect, the REIT phenomenon has already affected Rouse, preventing the company from carrying out an acquisition strategy begun in 1992 to take advantage of the weakened competition. Mr. Deering estimates that despite the rebound of both the industry and the competition, Rouse will complete at least one purchase of a retail project before the end of the year.
In recent months, Rouse has eyed the retail portfolios of both troubled Canadian developer Cadillac Fairview Inc. and Homart Development, the real estate arm of retailer Sears, Roebuck & Co.
Acquiring projects developed by others is nothing new to Rouse: Between 1978 and 1989, it folded 25 malls into its portfolio through either purchases or management contracts, and in 1988 acquired the portfolio of McCormick & Co. Inc.'s real estate arm through a $506 million deal with Teachers Insurance.
And Mr. Deering said Rouse also will dispose of some smaller, older assets that don't fit its portfolio.
A first step
The new chief executive noted that Rouse already has taken the first step in that direction, agreeing to sell Talbottown, the company's first and smallest retail project in its 75-property retail portfolio.
While the 38-year-old shopping center in Easton won't generate a lot of income for Rouse, it signals that Mr. Deering has already begun to take steps to further focus Rouse and prepare the company for the 21st century.
And as it rushes into the future, one thing is certain: With Rouse's past triumphs and mistakes imbedded deeply in his mind, Mr. Deering won't act without first applying the same disciplined financial approach that he helped instill 20 years earlier.
"What drives the company today, and what will drive the company, is a desire to protect the assets we have, solidify our base and add projects that don't require us to bet the ranch," Mr. Deering said. "Our strategy is to build on our major projects in major markets. We've survived so many tests over the years, and now we have a number of elements that will provide steady growth.
"Real estate is a dangerous business. It's high risk, high return, has high stress and requires high leverage. It requires discipline. We've seen first-hand what can happen when you don't," he added.
ROUSE CO. HISTORY
1939: The Moss-Rouse Co. founded by Hunter Moss and James W. Rouse.
1954: Name changed to James W. Rouse & Co. Inc. after Mr. Moss' departure.
1957: James Rouse forms Community Research & Development Corp. to develop shopping centers; company goes public with $3 million debenture offering.
* CRD's first project, Talbottown, a 90,000-square-foot shopping center in Easton, is completed.
1958: Harundale Mall, one of nation's first enclosed malls, opens in Glen Burnie.
1962: Development of the Village of Cross Keys in Baltimore begins.
1963: Howard Research & Development Corp., a joint venture between CRD and Connecticut General Life Insurance, created to acquire and develop Columbia, a new city of 14,100 acres.
1966: The Rouse Co. formed by merger of James W. Rouse & Co. and CRD.
1968: Mathias J. DeVito joins Rouse as vice president and general counsel.
* Rouse launches American City Corp. to advise cities on how to redevelop and revitalize older areas.
1971: Rouse Investing Co. and Rouse-Wates Inc. formed to lend money to third-party developers and manufacture low-income housing, respectively. Urban development division also created.
1972: Anthony W. Deering joins Rouse's planning department.
1973: President Nixon eliminates government sponsorship of low-income housing program, a major blow to Rouse-Wates Inc.
* Rouse agrees to purchase 2,500 acres of Wye Island on Maryland's Eastern Shore for Columbia-like community.
* Rouse begins work on Faneuil Hall in Boston, its first urban venture.
* Rouse appoints Mr. DeVito president and chief operations officer.
1974: Rouse-Wates and new community development plans terminated in wake of rising interest rates and inflation. Liquidation of Rouse Investing Co. also begins.
1975: Rouse refinances Columbia debt with $155 million in new capital commitments.
1976: First phase of Faneuil Hall opens.
1978: Rouse opens seven new malls. Mr. Deering elevated to senior vice president and chief financial officer.
1979: James Rouse retires from active management, remains as chairman. Mr. DeVito promoted to chief executive officer.
1980: Harborplace opens in July to national acclaim, including Time cover story. By October, more than 8 million people will have visited.
1981: Trizec Corp. Ltd., controlled by Canada's powerful Bronfman family, completes purchase of 20 percent of Rouse's outstanding common stock, raising fears of possible takeover or merger with the Hahn Co., another Trizec-dominated mall and retail developer.
1982: Rouse's assets on a current value basis top $1 billion.
1983: South Street Seaport opens in Manhattan. Similar urban projects in Miami, Seattle, Portland, Ore., St. Louis and New Orleans also progressing.
1984: James W. Rouse retires as chairman, Mr. DeVito promoted.
* Company sells Rouse Real Estate Finance Inc. to PaineWebber Group for $50.5 million, ending Rouse's long association with mortgage banking.
1985: Rouse acquires Cigna Corp.'s majority interest in Columbia for $120 million.
* American City Corp. disbanded.
1986: Michael D. Spear, Rouse's executive vice president of development, promoted to president.
1987: Rouse and Cigna Corp. commit $600 million to purchase land for new development and to upgrade Rouse malls.
* Gallery at Harborplace, including 28-story Legg Mason Tower and 622-room Stouffer hotel, opens on Pratt Street. Construction commences on similarly ambitious projects in Phoenix and Portland, Ore.
1988: Rouse and Teachers Insurance & Annuity Association acquire McCormick Properties Inc.'s 91-building real estate portfolio for $506 million, doubling Rouse's office holdings.
1989: Rouse's assets on current value basis top $4 billion.
1990: Nation's commercial real estate industry collapses, the result of economic recession combined with overbuilding.
* President Michael Spear killed in plane crash. Mr. Deering promoted to executive vice president.
* Pioneer Place in Portland, Ore., and Arizona Center completed. Virtually all other new development halted.
1992: Rouse and seven institutional partners purchase nearly 10 million shares held by troubled Trizec Corp. for $114 million.
1993: Mr. Deering promoted to president and chief operating officer.
* Rouse selected as master developer for sex-block Atlantic City entertainment center.
* Rouse reports record earnings before noncash charges of $78.3 million. Rouse merchants' sales top $4 billion.
1994: Rouse studies troubled Canadian developer Cadillac Fairview Inc. for possible acquisition.
* Rouse announces plans for two new malls in South Carolina and Florida, first new suburban malls since Owings Mills opened in 1986.
* Rouse selected as master developer of Fairwood Farm, a 1,058-acre new mixed-use community in Prince George's County.
* Mr. DeVito announces plan to retire in early 1995 at age 64.
1995: Mr. Deering becomes chief executive officer.