Multifamily companies often rely on rising rents and the sales and acquisition market to generate growth.
But when rent growth begins to slow and transaction activity dips, other avenues of income rise in prominence on a company's earnings statement.
The economic slowdown has spurred more multifamily owners to explore nontraditional ways of boosting revenues. And more companies are increasingly slashing expenses either by streamlining business processes or taking a hard look at utility and insurance costs to keep their balance sheets healthy.
New role: cable guy
One revenue-raising technique has given its user a new moniker: cable guy. Over the last two years, Colonial Properties Trust has rolled out its Colonial Vision Brand bulk cable program, adding 7,000 units to the program in the second quarter.
“We buy the cable in bulk and then resell it to our tenants at a premium,” said Weston Andress, chief financial officer (CFO) and president of Colonial, a publicly traded real estate investment trust (REIT) that operates more than 39,000 units throughout the Sunbelt. “It's one of the more attractive opportunities today.”
Cable companies favor such transactions because they ensure one large flat fee for a captive audience of hundreds. And multifamily companies have found the strategy particularly beneficial to their bottom line.
In all, 83 of Colonial's 140 properties now participate in the program, which is expected to produce $2.5 million of additional revenue in the second half of the year, compared to the same period in 2007. “Revenue growth is expected to be between 3 percent and 3.5 percent this year, and half of that growth is coming from other income, of which cable is the leading contributor,” said Andress.
How high can you go?
Revenue management software has also emerged as a critical tool for boosting net operating income. In fact, nine of the 10 companies interviewed for this feature are either implementing or actively evaluating the technology.
The software analyzes a variety of data—seasonal traffic rates, weighted competitor rents, and recent demand among them—to recommend pricing for a given move-in date, unit type, and lease duration, maximizing rents for each community in a firm's portfolio.
Home Properties is now rolling out Rainmaker's LRO revenue management software to each of the properties in its portfolio to boost rental and occupancy rates. The company tested the software on nine properties, using nine “sister properties” as a control group.
“In every situation we had better revenue growth and better vacancy rates than the comparison properties,” said David Gardner, CFO of Home Properties, a publicly traded REIT that owns nearly 37,000 units. “We expected about a 1 percent improvement, and in the test properties we're getting slightly over that.”
Camden Property Trust started using RealPage's YieldStar revenue management software about two years ago and reports a revenue rise of between 1 percent and 2 percent.
“It took the best processes of our most experienced managers and put it into an ongoing routine process that takes the emotion out of pricing,” said Dennis Steen, CFO of Camden, a publicly traded REIT that operates nearly 70,000 units nationwide. “The discipline of a consistent approach has been very helpful.”
Passing the utility bucks
Reducing utility costs has also become critical for many owners, especially as the price of natural gas continues to rise.
“Until five or six years ago, energy costs were not as much of an issue,” said Gardner of Home Properties. But since 2002, the cost per decatherm of natural gas has tripled to around $7.50, Gardner said. “When we started to see those spikes, we thought we needed a mechanism to pass that through to the resident.”
Most apartment communities built in the last 15 years are separately metered, meaning the tenant pays their utility bill directly to the provider.
But the average age of the communities in Home Properties' portfolio is 37 years, so most of its properties are master-metered.
The company began its energy initiative in 2005 by applying RUBS (ratio utility billing system) to heating, water, and sewage costs. RUBS is a statistical allocation of utility costs that looks at square footage and number of occupants per unit to determine the amount each unit will pay. In markets such as New York that don't allow RUBS, Home Properties installs submeters or includes a heating surcharge in the lease.
Home has also focused on energyconservation rehabs, replacing windows, beefing up insulation, upgrading boilers—and even installing temperature- limiting thermostats on properties where it pays the heating and airconditioning costs.
In 2005, when the company began this initiative, only 21 percent of Home's residents paid their own utility costs. Today, about 83 percent of Home's residents pay their utility bills, leaving the company on the hook for just 17 percent of the units in its portfolio.
More companies are turning to technology to help streamline their business processes and cut costs.
Laramar Group has centralized its accounts-payable (AP) process in the last year. In the past, paper invoices from vendors were sent to individual apartment communities, where they were approved by the manager, sent to a regional manager for further approval, and then Fed Ex'ed to the corporate AP department, which subsequently encoded the information in the general ledger.
This manually intensive process was ripe for improvement—and the cost of sending those Fed Ex packages was adding up.
Laramar now uses software from Nexis to centralize the process. Vendors send invoices directly to a central corporate location, where they are scanned into the AP system. The scanning software automatically populates many of the fields in the AP system, cutting down on keystrokes and allowing regional managers to approve the electronic invoices from their desktops.
Other functions, like financial reporting, are being streamlined as well. In the last year, Home Properties upgraded its property management software from AMSI to Intuit's MRI software. MRI has a General Ledger module that automates the process for collecting financial information from the many communities in a company's portfolio.
In the past, individual Home communities keyed in financial information to the company's property management system and then sent the information to headquarters, where some of that same information was keyed into the general ledger. But MRI automatically populates the general ledger in real time from the field, reducing redundancy.
“We think it can reduce headcount,” said Gardner. “It certainly increases the accuracy and consistency of our reporting.”
Turning around turnover
Mid-America Apartment Communities is using technology to change the way it collects delinquent rents. In the last year, the company linked its MRI property management software to its collection agents, replacing a manual process.
“Now, when accounts go past due, the data is automatically transmitted to the collection agents,” said Simon Wadsworth, CFO of Mid-America, a publicly traded REIT that operates more than 41,000 units.
The company has also made some changes to the way it manages inventory. Mid-America now schedules many lease expirations for the first half of a month, rather than the traditional end-of-the month expiration. By doing this, it can manage the “turn time” process more effectively: A few units will become vacant each week, rather than many units becoming vacant all at the same time.
Mid-America then uses a customized feature in MRI to evaluate which empty units should be worked on first, based on how many units are becoming vacant and what the demand is for those units.
“The combination of those efforts has enabled us to reduce our turn time,” said Wadsworth. “We've seen some definite improvement in our economic occupancy as a result.”
During the second quarter, the company's economic occupancy—which measures the amount of rent collected divided by the total amount of rent scheduled to be collected—improved by 64 basis points. And the technology helped Mid-America to reduce the number of days vacant in its turnover units to 24 days, down from 29 days in the second quarter last year.
Over the last two years, multifamily developer Dominium became much more proactive in managing insurance costs by taking on more risk, using more self-insurance and paying higher deductibles.
“If we take risk away from the insurance company, they're willing to lower their premiums,” said Tom McAllister, CFO for Dominium, a Minneapolis-based operator of 17,000 units.
By taking on more of the risk, Dominium has more control over the insurance claims process, and the corresponding rise in premiums.
For instance, if an apartment's roof were damaged, many multifamily companies wouldn't think twice about replacing the entire roof, as long as it was on the insurance company's dime. “But once we take on more of the risk, we control that process,” McAllister said. “We can make a much more objective analysis: Do we really need to replace the whole roof, or can we just do some repairs?”