Rouse Company Building
The Rouse Company has grown over the past 65 years to become a leader in community development and retail centers. Committed to quality and dedicated to creating projects that have timeless appeal because they consistently capture the human element, the company's past successes and experience keep it poised for future growth.
One of the largest publicly held real estate development and management firms in the United States, The Rouse Company has a reputation for innovation. Under the direction of founder and "industry prophet" James W. Rouse, the company was in the vanguard of suburban enclosed-mall construction in the 1950s, the planned community movement in the 1960s, and the proliferation of urban "festival marketplaces" in the 1970s and early 1980s. The saturation of the retail development market in the early 1990s led the company into the construction and management of more office and mixed-use projects. By the early 21st century, The Rouse Company--now operating as a Real Estate Investment Trust (REIT)--owned and/or operated more than 150 retail, residential, and office properties nationwide.
Leading the Postwar Exodus to the Suburbs: 1939-69
The Rouse Company traces its roots to the Moss-Rouse Company, a Baltimore mortgage banking firm owned by James W. Rouse and Hunter Moss in 1939. The partners, who had borrowed $20,000 to start their business, originated Federal Housing Administration loans for several years. When World War II drew Rouse and other key employees into military service the firm lapsed. But the company flourished in the postwar era when there was a boom in government-funded veterans' housing.
Hunter Moss left the partnership in 1954, when it was renamed James W. Rouse & Company, Inc. Rouse expanded the scope of his financing activities to commercial real estate projects, including the new strip shopping centers that were springing up on the outskirts of cities. After conducting pre-construction market research, arranging financing, leasing space to merchants, and directing construction for the owners of the Mondawmin Shopping Center in Baltimore, Rouse decided to enter the real estate development business. To conduct these endeavors, he created Community Research and Development (CRD), a real estate development subsidiary, in 1956. CRD opened Rouse's first enclosed large shopping center, Harundale Mall, two years later. By the early 1960s, James Rouse was one of the United States' busiest and most prosperous mortgage bankers and shopping center executives. His company acted as a mortgage correspondent for 50 lenders, had a loan portfolio of over $500 million, and was famous for uniting esthetics and profitability in retail centers.
The Rouse Company, as it finally became known, experimented with community development through the creation of The Village of Cross Keys, a Baltimore townhouse development. Then, in 1963, Rouse formed a partnership with Connecticut General Life Insurance Company to create Howard Research and Development Corporation. The lofty goal of this new venture was to plan and create the entire city of Columbia, Maryland. Rouse set his "total city concept" in motion by anonymously accumulating more than 14,000 acres in Howard County, Maryland, between Baltimore and Washington, D.C. The 165 separate parcels cost less than $1,500 per acre, in compliance with a stipulation of Connecticut General, which provided the majority of the funding for the project. Rouse surprised Howard County's commissioners when he revealed in a meeting that he owned 10 percent of the region they governed and requested rezoning of the area. Although the commissioners had a mandate to keep the county rural, Rouse's ensuing public relations campaign convinced them and their electorate that they would be better off planning for (and exercising some control over) the inevitable urbanization of the strategic corridor between two of the East Coast's most vital cities.
Rouse assembled a coterie of planners, sociologists, educators, religious groups, and cultural and medical institutions to advise and support the creation of the new city. When it was launched in 1967, Columbia featured 11,000 residences (including low-cost housing jointly sponsored by the three primary religious denominations); schools within walking distance of elementary and junior high students; Howard County's first hospital; public transportation; and a shopping center. By 1975, when the city boasted 38,000 residents, it had become "suburban Baltimore," and within a decade it would be, according to Financial World (1986), "one of the hottest developing territories in the country."
Rouse's stock soared from $2 per share in the early 1960s to $30 by 1972. But during the 1974-75 real estate slowdown, the company lost Housing and Urban Development funding for a major low-income housing project. This, in turn, effected a $7 million loss and compelled Rouse to pull out of two engineered communities in Tennessee and Maryland, resulting in additional losses of $4.2 million. Connecticut General even had to purchase most of Rouse's share of the Columbia project during this difficult time. Short-term debt stood at $80 million, while equity was at $6 million. From 1974 to 1976, the company retrenched by selling 50 percent stakes in 7 of 24 retail centers, reaping a total of $24 million cash. It also eliminated half the headquarters staff and wrote off $30 million in bad investments.
During the company's difficult years, Rouse invented his own method of accounting. He pioneered a new accounting figure dubbed "current value." During this decade of economic uncertainty, Rouse claimed that current value gave a fairer, more accurate estimation of the company's assets than depreciation under generally accepted accounting standards. At the time, both Business Week and the Securities and Exchange Commission praised the outside-auditor-certified figures as "more realistic." The use of such estimates would come under fire in the early 1990s, however.
Urban Development Projects: 1970s and Early 1980s
Rouse did not rely on number-crunching alone to improve his company's financial prospects. After leading the postwar exodus to suburbia in the 1940s and 1950s, Rouse defied conventional wisdom by starting urban development projects in the late 1970s and early 1980s. His first, and definitive, undertaking transformed three virtually abandoned 150-year-old, block-long Greek revival buildings in Boston's warehouse district into an enticing complex of food markets, restaurants, offices, and retail shops. Rouse was approached by architect Benjamin Thompson with his idea for the project. After overcoming his own initial skepticism, the developer convinced the city of Boston to join him in a 99-year partnership wherein the city received 25 percent of the project's gross rentals. Rouse added funding from local and regional financiers to the municipal contributions.
Named for Mayor Josiah Quincy and opened August 26, 1976 (150 years after its namesake had originally dedicated it), the retail center hosted 100,000 shoppers on its first day. By the end of its first year, Quincy Market had attracted as many consumers as Disneyland had attracted tourists, and its average per-square-foot sales more than doubled comparable department store figures. In 1978, it won an Honor Award from the American Institute of Architects. Rouse hoped that his revival of the "spirit of festival" embodied in this project would satisfy the "yearning for life at the heart of the city," according to Fortune.
The developer applied his festival marketplace concept, with appropriate adaptations, in Philadelphia, Santa Monica, New York City, Milwaukee, St. Louis, and San Francisco. By the end of the decade, Rouse managed about 30 shopping centers in ten states and two Canadian provinces, claiming $479 million in assets. The company's mortgage banking subsidiary ranked among the largest in the United States, with a $1.4 billion loan portfolio. Columbia's population had risen to 50,000 and had rebounded from recession-related indebtedness. With his company back on track, Rouse retired the presidency and chief executive office in 1979 (but retained the chairmanship) to devote himself more fully to the social welfare activities he had long espoused.
Unlike other real estate mavens who had trouble engineering the transfer of power, Rouse had groomed a successor. He convinced Mathias DeVito to relinquish his partnership in the prestigious Baltimore law firm of Piper & Marbury and create an in-house legal department for Rouse in 1968. DeVito advanced from general counsel to vice-president and chief operations officer later that year. He also played a vital role in the company's survival of the 1974-75 recession, and gradually assumed Rouse's responsibilities over the ensuing five years.
Change of Leadership and Focus: Mid- to Late 1980s
With many traditional suburban markets saturated with malls by the 1980s, DeVito took a more conservative tack than his intrepid predecessor. He eschewed the middle markets that many developers targeted to concentrate on what he described as "expensive, high-amenity urban projects," according to Forbes. He continued to pursue Rouse's one-of-a-kind renovations, however, leveraging the company's talent and reputation with relatively small capital investments. In Milwaukee, for example, municipal and federal governments combined with two major department stores, local businesses, and a large insurance company to invest $70 million in the Grand Avenue Mall, while Rouse's cash contribution was only $500,000. In spite of its comparatively small cash outlay, Rouse was able to command half the excess cash flow and a share of residual values as its share of the profits. The new CEO also made strategic alliances with investment groups to renovate and manage older malls. Institutional investors contributed the capital necessary to purchase 21 malls from 1979 to 1983, while Rouse brought its esthetic and managerial expertise to the joint ventures.
James Rouse retired as the company's chair in 1984 to give his full attention to the Enterprise Foundation, a nonprofit organization he began in 1981 to improve housing, healthcare, and job programs in the nation's poorest neighborhoods. Rouse's social sensitivity was evidenced early in his career. In the late 1940s, he led an attempt to rehabilitate Baltimore slums without gentrifying them. In 1953 Rouse was appointed to President Eisenhower's Task Force on Housing, which crafted the Urban Renewal Administration. But as the developer began to believe that "government programs ... tend to be costly in relation to their benefits," he increasingly employed his own resources for societal improvement.
A subsidiary of the Foundation, Enterprise Development Company, was formed to build festival marketplaces for smaller cities. Its profits were intended to fuel the charity's endeavors, a tangible product of Rouse's belief that "the free enterprise system should have the capability to produce profits for the poor as well as for the rich." The nonprofit also accepted donations from corporations, foundations, and individuals, with $1 million donated from Rouse. By the time he fully retired, the Enterprise Foundation had formed relationships with 22 neighborhood groups in 12 cities.
In the meantime, DeVito sold the company's founding business, Rouse Real Estate Finance, to PaineWebber for $50.5 million in 1984. The 45-year-old, mid-sized mortgage company was getting squeezed out in an industry increasingly dominated by giants. The following year, however, Rouse regained one of its most celebrated projects. After a decade of minority ownership, Rouse re-acquired the planned community of Columbia, Maryland, by adding CIGNA's 80 percent stake of Howard Research and Development Corporation to its 20 percent. The purchase increased Rouse's debt to $120 million, but DeVito hoped that income from mixed-use projects, combining hotel, office, and retail spaces, would provide new sources of cash flow. By 1986, the company's holdings were valued at $1.6 billion.
Facing Uncertainty in the Early 1990s
But in the absence of headline-grabbing new development projects that had characterized James Rouse's tenure, Mathias DeVito's term came under increasing scrutiny. In October 1989, Forbes reporter Tatiana Pouschine characterized Rouse's future as "cloudy" and its $29 per share stock as "overvalued." She also criticized the company's current value statistics (used virtually unchallenged since 1976) as particularly high when compared to traditional valuations. In addition, she noted that Rouse had negative cash flows that were not improving.
In the early 1990s, Rouse became embroiled in a debate pitting its "current value" asset estimates against generally accepted accounting principles (GAAP). In 1991, for example, GAAP figures set its assets at $2.4 billion, compared to the company's current value calculation of $4 billion. It was not merely an academic dispute, however. Based on conventional data, Rouse's stock was trading around $14 per share, but based on its own figures, the company thought it should be selling closer to $26 per share. That year, DeVito commissioned the highly respected firm of Landauer Associates Real Estate Counselors to corroborate its current valuation. As a result, Rouse acknowledged the early 1990s real estate slump by lowering its current value in 1990, 1991, and 1992.
From 1990 to 1993, Rouse recorded a cumulative net loss of $11.56 million (according to GAAP). The company's only year of profitability during the period was 1991. Rouse contended that, since it was not valid to depreciate its earnings in a conventional way, it was more telling to examine the company's earnings before depreciation and deferred taxes from operations (EBDT). Rouse reported that its EBDT rose from $50.29 million in 1990 to $78.28 million in 1993. Rouse also increased its current value in 1993.
Even Adrienne Linsenmeyer-Hardman, an analyst with Financial World who was critical of Rouse's accounting methods, conceded that Rouse was "a powerhouse in its industry" in 1992. She cautioned, however, that as retail sales shifted from department stores and regional malls to discounters, specialty shops, and strip malls, Rouse would be forced to adapt its holdings and construction plans. James Rouse had met such a challenge in the 1970s with his pioneering festival marketplaces. Whether DeVito could meet the challenges of the 1990s in the same way would determine the company's future.
Surviving the Collapse: New Opportunities in the 21st Century
Although the early 1990s was a rough period for the real estate sector, Rouse emerged from the prolonged downturn relatively intact. True, the company suffered some heavy losses, with its revenues in consistent decline, and its stock price hitting a low of roughly $10 a share during the slump. However, in spite of the temporary loss of profitability, and the absence of any real growth over a seven-year period, Rouse did manage to remain solvent, without losing any of its holdings to foreclosure or takeover. Much of the credit for the company's survival belonged to its business model, widely acknowledged as one of the most professional in the industry. Rather than risking its future by pouring money into new acquisitions, Rouse instead devoted its resources to maintaining and improving its existing properties, doing everything it could to ensure that income from leases remained constant. As a result, while many of the company's competitor's did not survive, Rouse appeared to be in good shape heading into the next upswing in the real estate market.
The turnaround began in May 1994, when Rouse announced plans to construct two new shopping centers, in Spartanburg, South Carolina, and Orlando, Florida, the company's first new projects since 1987. The move sparked a flurry of new building projects and acquisitions for the company over the next several years. In the spring of 1996, Rouse embarked on one of the most ambitious projects in the company's history when it purchased the Las Vegas-based Howard Hughes Corporation for $520 million. With the merger, Rouse acquired more than three million square feet of office space, predominantly in Las Vegas, as well as the Fashion Show Mall on the famed Las Vegas Strip, which boasted some of the highest sales figures among nationwide shopping centers. The centerpiece of the acquisition was the Summerlin development, a "master-planned" community covering 22,500 acres in suburban Las Vegas. Although only 20 percent completed at the time of the merger, Summerlin had consistently proven to be the top selling master-planned community in the nation over the previous five years. Upon its completion, Summerlin was projected to have a population of well over 100,000 people.
In January 1998, Rouse officially became a Real Estate Investment Trust, or REIT. Since REITs were exempt from federal income tax if they funneled all their profits into stockholder dividends, they proved exceptionally popular among investors, and generally enjoyed share values roughly double those of standard companies. Although Rouse had initially resisted becoming a REIT, primarily because of restrictions imposed on REITs by tax regulations, in the end the company determined that raising its market value was the key to long-term growth. Ultimately, the strategy did result in a major boost to the company's stock. By April 1998, its share price rose to $32; in February 2004, the value exceed $50 a share.
Meanwhile, the company's aggressive growth campaign continued. In April 1998, Rouse purchased $1.1 billion worth of shopping centers from Toronto-based TrizecHahn Corp. The acquisition gave Rouse new upscale shopping malls in several states, including New Jersey, Nevada, Colorado, and Iowa. In July 1998 Rouse purchased more than 4.5 million square feet of office space in the Washington and Baltimore area from Teachers Properties Inc., a deal worth $375 million. In 2003, Rouse acquired controlling interests in two major master-planned communities: The Woodlands, a community on the outskirts of Houston, Texas, and Mizner Park in Boca Raton, Florida. Overall, master-planned communities accounted for $123 million in revenues that year.
The company did weather some sad news during this period of unprecedented growth, when its philanthropic founder, James Rouse, died in April 1996, at the age of 81. In his last years Rouse devoted his energy to helping run the Enterprise Foundation, which had developed more than 60,000 low-income homes in its 14-year existence. In the fall of 1995 President Bill Clinton presented Rouse with the Presidential Medal of Freedom, while a biography of Rouse, Better Places, Better Lives, was published by Maryland native Joshua Olson in 2004. The biography appeared at a time when The Rouse Company was enjoying record earnings on sales exceeding $1.1 billion in 2003. Although Rouse did not live to witness this unprecedented prosperity, it was clear that his legacy was well in place as his company forged ahead in the 21st century.
Principal Competitors: General Growth Properties, Inc.; JMB Realty Corporation; Simon Property Group, Inc.