Developer Kettler May Have Found the Magic Formula

The first was to move, in a big way, into rental apartments that would provide a steady stream of income when the new-home market softened. That included a big push into "affordable" housing financed and subsidized through a federal tax-credit program, which Kettler developed with Clark Enterprises. Today, Kettler owns and manages a portfolio of 10,000 apartments, more than half of them "affordable."

The second lesson Kettler learned was not to have too many eggs in any one basket, be it one project or one segment of the real estate industry. In addition to rental apartments, Kettler started getting into retail, offices, condos and hotels, while continuing to be the largest supplier of land to many of the region's home builders, including NVR and M/I Homes. Building scale and staff expertise in all those areas has sometimes been a challenge. But the advantage is that Kettler can now quickly and easily move with the changes in the various product markets.

Perhaps the most important facet of Kettler's business model is a capital structure that relies more heavily on equity and less on debt. Once construction on a project is completed, Kettler has usually arranged to sell much of it to an insurance company like AIG or MassMutual, wealthy private investors like L.M. Sandler & Sons of Virginia Beach, or even private-equity firms like the Carlyle Group. The investment allows the company to pay down most of the debt.

Kettler is also teaming up with other big developers, such as Boston Properties at GW Hospital, the Staubach Co. in Leesburg, the Lerner family in Reston and the old Charles E. Smith Co. (now Vornado) in Pentagon City.

Because of those various arrangements, Kettler said, he has "given up some upside," as they say in the deal business, but is now better able to keep his costs under control, his cash flow positive, his debt light and his financial exposure to a minimum. More important, he said, it is a capital structure that allows him the luxury of patience, moving ahead with projects when the market is hot but slowing things down when it is not.

Time will tell whether he's really found the magic formula. During the past decade, just about anyone could have made money in real estate, and Kettler made lots of it, amassing a sizable paper fortune. The company now has 475 employees -- big for a development shop confined largely to one market -- with annual revenue of more than $820 million.

Bob Kettler himself is also beginning to assume a higher profile. He recently changed the name of the company from its old name of KSI Services to just plain Kettler. And the company became the named sponsor of a new hockey rink in Arlington, which the Washington Capitals share with the skating public. When the Potomac School in McLean arranged for Bill Clinton to attend the dedication of a new building, Kettler was there to welcome him as the co-head of the committee that raised more than $40 million for a building fund. Among the other parents contributing to the effort were Kettler pals Steve Case and Ted Leonsis, two founding fathers at AOL, and Capital One chief executive Richard Fairbank.

If Kettler has a weakness, according to some in the industry, it is that he rarely runs into a deal these days that he doesn't like or a grand project he doesn't think he can pull off. That is the curse of the visionary. But it is also the legacy of a real estate boom that has gone on so long, with so much money chasing after it, that it has become easy to believe that if you build it, they will come.

Steven Pearlstein can be reached atpearlsteins@washpost.com.