In the midst of some of the most dramatic market volatility Wall Street has seen, Highlands Ranch, Colo.–based real estate investment trust (REIT) UDR announced this week the $325 million acquisition of Dwell95, a 507-unit apartment tower on Wall Street between Water and Front. Purchased from New York City–based Monian Group (which accepted $50 million in UDR-issued operating units at a floor price of $25 per unit), Dwell95 is the fourth in a recent string of deals to create a $1.2 billion Manhattan portfolio across 1,916 units. No stranger to development, UDR also recently announced the addition of $375 million worth of deals in its development pipeline. Fresh off the heels of raising $496.3 million in a common stock offering and raising same-store and funds from operations guidance, UDR president and CEO Tom Toomey checked in with Multifamily Executive to discuss the impact of the credit rating adjustment and economic volatility on short- and long-term strategy for the apartment REIT.
MFE: Tom, what’s your take on the markets right now? I just read an SNL Financial report that says all U.S. REIT classes fell from a premium to a discount to NAV over the past week. How do you react to short-term economic volatility when it becomes so dramatic and topical?
Toomey: There's a broad range of REITs and, consequently, a broad range of how they're all being impacted by what's going on, but apartment REITs own hard assets, and hard assets did not drop in value yesterday. The real estate is there, the residents are still there, the cash flow is still there. Quite often in life, there’s a disconnect between real estate values and stock values, and yesterday was one of those days. We’re going to be in this period until people come back from vacation and decide to go to work. We didn’t take a vacation at UDR this year, and we’re finding a lot of opportunity, and that’s the way you have to look at it: Volatility can be your enemy, or it can really be an opportunity. We’re of the mind-set that it is an opportunity. We think it’s a great time to be buying assets, and we’re continuing to see our operating trends improve. When you think of all of the businesses out there, how many do you really find, over the next five to 10 years, where you can say that there are going to just be more people who need shelter? And those guys are in the shelter business.
MFE: What effect are recent economic events having—if any—on UDR’s long-term investment strategy?
Toomey: There are a couple of things that people miss, and we often get caught up in our own stories about demographics, but the truth is that the decline in homeownership combined with the demographics, combined even with uneasiness about the economy, all play toward people staying as renters for longer periods of time and absorbing the rent increases that are coming their way. It’s like oil prices [as a macroeconomic indicator]: We've seen time and time again that when it spikes, it hurts us; when it falls, it helps us. There are a lot of things that you can look at as a negative or a positive. I’m a glass-is-half-full person: There's always an opportunity tomorrow, and you have to be in a positive frame of mind to seek out those opportunities. Over the past 12 months, we’ve done better than $1.5 billion in acquisitions, doubled our development pipeline, and created nearly $1 billion in equity. We think it's a great time to grow an enterprise in a business that looks like it's going to grow.
MFE: To that end, UDR announced this week that it had acquired Dwell95, bringing the firm’s Manhattan apartment portfolio to $1.2 billion across 1,916 units. What can you tell us about the deal?
Toomey: The seller completed a renovation under the 441(g) program for office-to-apartment conversions, and he did a fine job of it—one of the best we’ve seen. The property has great frontage on Wall Street, and that helps. We've been talking to a lot of different families in New York over the past year. Some have moved into negotiating, and others have held back, I think, to see how we conduct ourselves. Dwell95 is the fourth acquisition from four different families, and I think that’s an important element of our strategy as well as our acceptance into New York. Believe it or not, those families talk amongst themselves very often, and clearly they understand the marketplace. This deal came together very quickly from the initial meeting to the closing table in the past 90 days. I think that's a testament to both the buyer and seller knowing the business. We’re pretty happy with it: The seller is taking back $50 million of our stock at an above-market price. That’s a pretty sophisticated investor.
MFE: The jealous money would say you just bought apartments in the core U.S. financial district where the market is crashing. While that’s dramatic, do you have any intermediate concerns about job loss in the financial sector affecting your acquisitions in Manhattan?
Toomey: There are a couple of things about the financial district in Manhattan. All of the activity over the past decade has been since 9-11, and it’s not just that there was a big hole in the ground, that there were no jobs in the area, or that there were layoffs. The real story is that that entire area is coming back. When all of the buildings get built, people are going to want to move into them. There is a great new subway system coming through, and I think that it is going to be the place to move and the place for jobs. You can see that already in office occupancies. We have no problem buying early in the cycle with a long-term view that Manhattan over the past decade never really dropped below 95 percent occupancy. It always reloads, and it draws from a massive pool of people where 75 percent of the population is renting. It is a long-term hold but a great entry point.
MFE: I don’t know who came up with the term "euthanizing" the portfolio, but core-plus Manhattan acquisitions funded in part by dispositions of assets that no longer fit company strategy kind of explains UDR's strategy right now.
Toomey: Well, I think of our current deal activity and development as another stepping stone in the evolution of our company. The way I think of it moving forward is that, first, we’re going to sell $200 million to $400 million in assets per year. Primarily, that money will fund our development pipeline and pay off high coupon debt. That puts us more in the category of a mature match funding program. We’ll sell one to fund one that we just built, but I wouldn’t call it a repositioning of the company. The development pipeline today stretches to about $800 million. We might add a little bit more to that, and that matches with about $1 billion to $1.2 billion in identified assets to sell over the next three to five years to match fund those developments.
On the acquisition side, I really do like the strategy of buying things and then coming to the market and raising the capital. People can see what they're investing in: hard asset entities and the next deal that's coming in. That’s a good discipline that limits us from overpaying. We think right now assets have been priced very well, and it’s a great time to grow in a handful of markets. That’s really a different strategy than repositioning. I think the repositioning of the company is done and the maturity of match funding its growth has now arrived.
MFE: An example of that is the recent announcement of $375 million in new development projects, mostly in Southern California. Are you seeing that traditional 150 basis point cost-to-replacement spread between existing and new development starting to critically narrow?
Toomey: I don’t want to lead us down a path that will look very similar to the last two-plus decades that I’ve been at it, where you go out to the suburbs and build and then someone builds right next to you, offers three months in free rent, and you just got wiped out. The focus of our development pipeline is unique sites next to malls, next to water, next to parks, next to transportation and all other unique lifestyle points for residents. I’m not interested in building things out in the suburbs just to say I have a lot of things under development. Yes, those unique sites cost more and are more complicated to build and all average about a $100 million investment, but we like that those factors guard against a lot of competition down the road.
MFE: Lastly, if we could jump back into the drama of the economy: From an internal standpoint, is there anything you do as a business leader to help your team stay the course, keep people motivated, and mitigate some of that immediate anxiety?
Toomey: I think the first thing you always have to do as a leader is communicate. You should communicate the facts and then your view of where you are headed and how you are going to get there. We have an all-associate call every quarter to talk about the macro view, and that’s an opportunity to reinforce that we have a great business model and a growing enterprise. When I look at the posture of the 1,800 people who work here, they're tuned into our strategy and feel comfortable about what UDR is doing. As a leader, you have to set that tone and reinforce it. There are a lot of things on the side of the table that annoy us and frustrate us, but you can only control what you're doing. If you deliver on that, I think the results will speak for themselves.