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No Marathon feat: funding new firm

By Kevin Kenyon

In an era dominated by giant corporations, REITs and megamergers, two former marketing directors are proving there is still room for new entrepreneurs with big ideas.

How else would Michael E. Rulli and Robert D. Lee, former executives with the now defunct Marathon Group, end up as mall landlords, as they did late last year following the formation of one of the shopping center industry's newest players -- Dallas-based Coyote Management L.P.

Faced with the impending dissolution of Marathon, Messrs. Lee and Rulli decided that this was as good a time as ever to take the leap, and venture out on their own as mall developers.

However, with little equity to speak of, they were forced to rely on a less tangible asset to obtain financing -- their hard-earned reputations and vast experience in the shopping center industry. That was their ticket when it came time to convince New York-based Lehman Brothers to provide them with the needed capital.

That process involved an incredibly detailed due-diligence process, including countless meetings with financial underwriters, experts in financial analysis, and attorneys, said Ted Meylar, Lehman's senior vice president.

"It's very difficult to meet all of our criteria," he explained. "We see many more deals than we actually do. Most commercial transactions across the country come across our desk, and we close maybe one in 100."

With financing in place, Coyote was able to get its foot in the door with the acquisition of three centers in Mississippi: Metrocenter Mall, a 1.2-million square-foot center in Jackson, anchored by Dillard's, Gayfers, McRae's and Sears, Roebuck and Co.; Greenville Mall, a 304,000-square foot center in Greenville anchored by JC Penney, McRae's and Sears; and Leigh Mall, a 309,000-square-foot center in Columbus, anchored by JC Penney, Sears and Stage.

In analyzing the portfolio, officials at Lehman Brothers, (Lehman specializes in financing operators who have limited equity but plenty of skill) decided that Messrs. Rulli's and Lee's experience in secondary markets would be invaluable.

"This particular portfolio required some skills in marketing and lease-up, and some creativity, which we felt they had a unique fit to. We relied heavily on their past experiences and skill," Mr. Meylar said.

According to Mr. Rulli, the new company intends to acquire dominant regional shopping malls in secondary markets, a strategy he and Mr. Lee learned working for M.G. (Buddy) Herring Jr., former CEO of The Herring Group -- which later was bought by Marathon.

While some might see their ascent to ownership as a romantic shopping center industry rags-to-riches story, in reality it is the culmination of years of perseverance.

Both executives joined The Herring Group, a regional developer with properties in Texas, New Mexico, Oklahoma, St. Louis, Arkansas and Mississippi, one month apart in 1985. Mr. Lee, who got his start in a dual marketing/management role at a small mall, came over from CBL & Associates, Chattanooga. Mr. Rulli was recruited from the Hahn Co. (Now TrizecHahn, San Diego) after starting out as a marketing director for May Centers in 1979.

"The Herring Group, as well as a lot of other developers in the '80s, began to see that there was potential for developing major malls in these secondary markets," Mr. Rulli explained.

Mr. Herring, whom Mr. Rulli considers his mentor, was one of the first to do so. "He started developing these properties when a lot of people were saying 'there's no business out there,' and he went out and built these gorgeous three- to four-department-store-malls," Mr. Rulli said.

Mr. Herring, now retail partner for the Dallas office of Charlotte, N.C.-based Faison, expressed confidence that Messrs. Rulli's and Lee's experience in reviving centers in secondary markets would help immensely.

"Anyone can do metropolitan markets. But not everyone knows how to market and lease centers in these sized markets," said Mr. Herring, a past ICSC Chairman. "I'll be honest with you, if these two guys can't get it done in these markets, I'm not sure anybody can get it done."

In 1989, Mr. Herring sold his interests to Marathon Group, where Messrs. Lee and Rulli continued to rise through the ranks.

It was here that both executives were taken under the wings of Doug Aitken and John Beals, respectively the company's CEO and executive vice president at the time.

While Mr. Herring supplied the "entrepreneurial spirit" needed to inspire the pair, Mr. Rulli said that Messrs. Aitken and Beals taught them the skills of financial analysis and planning so vital for the dramatic step they have taken.

"It was an ideal hybrid of inspiration," Mr. Rulli explained. "You've got the entrepreneurial work ethic and then you've got the real financial analyst's ethic. Those two kinds of influences and inspiration I would consider the most important influence on me personally and this group as a company."

Marathon's portfolio was sold in September to Marathon U.S. Realties Inc. In the period leading up to that sale, both Mr. Lee, then the company's vice president of operations, and Mr. Rulli, head of its U.S. retail group, gained some especially valuable financial experience.

"Marathon had been for sale, in some form or another, for four years, so we had gone through an unbelievable number of disposition scenarios -- everything from possibly going into a REIT to just full, total disposition," Mr. Rulli explained.

Those lessons, which included numerous meetings with underwriters and Wall Street analysts, were invaluable when the time came to secure the necessary financing for the new company.

"We had to learn to understand the capital markets -- and that educational process really allowed us to sit down with a financial institution as large as Lehman and talk their language, instead of sitting around talking about improving property performance," Mr. Rulli said.

Although they had attempted to buy the existing Marathon U.S. portfolio for some time, the two entrepreneurs were precluded from doing so because of a Canadian business taboo forbidding a management buyout of a company that is attempting to sell its portfolio to outside parties.

Not discouraged, they continued studying the feasibility of starting a new company.

"On the one hand it was very exciting. There's a certain entrepreneurial spirit in everyone, but on the other hand, you're talking an unbelievable challenge, an unbelievable set of obstacles -- unless you win the lottery," Mr. Rulli said.

The two did not waste precious time dreaming about winning lotteries, however. Key contacts at Marathon's former broker, Cushman and Wakefield, called with some potential mall properties. Cushman was representing Equitable Real Estate (Now ERE Yarmouth) as asset managers for the California Public Employee Retirement System (CALPERS), in an attempt to sell off several properties.

That call set into motion a series of events which eventually led to the the purchase of the three malls and the beginning of Messrs. Lee's and Rulli's careers as mall owners.

It was a moment that Mr. Rulli admits he was not totally prepared for.

"Being an owner, on one hand you say 'this is great.' But when you sign that document that says 'this loan is in your name,' it's a whole different feeling. It's exciting, but it's also frightening," he said.

Looking back, Mr. Rulli said he believes the most important obstacle was convincing a lender to come in with the balance of a 75%-80% conventional loan with little equity from the principals.

"We had no equity. But what we brought to the table was the fact that we knew how to handle our business, we knew the essentials of market share and retail sales, tenant relationships -- all of those things we've been popping off about for the last 10 years," Mr. Rulli said.

Suddenly, they were about to put into practice what they had preached for years, he said. "All of the soap boxes, all the panels, all of that actually had to come to work for us."

Now that he is calling the shots, the former marketing director, not surprisingly, said he will put a major emphasis on marketing, an area he said has been neglected throughout the years.

"I'm not convinced that we've taken the steps necessary over the past 10 years to position marketing in a way that truly shows its value," Mr. Rulli said. "Otherwise you wouldn't be hearing conversations about whether or not it should be abandoned."

Despite the recent spate of consolidations and mergers which have dominated the shopping center landscape over the past several years, Mr. Rulli said there will always be room for owners with a hands-on approach, especially ones who were once in the trenches themselves.

With a staff of 40 full-time and 50 seasonal employees, the company may not be ready to take the industry by storm. But few would have expected that the one-time marketing directors would be where they are today. The next step, Mr. Rulli said, is to continue to acquire malls in the same secondary markets where it all began years ago. "It's only three malls, about 1.9 million square feet, but what a start."