1. Make a Public Offering
“The word is out on multifamily regarding the strong growth that this asset sector is going to have over the next three to five years,” says David Lynd, president of San Antonio–based multifamily owner/operator Lynd Cos. “So you’d think an IPO backed by solid apartment assets and management would get some attention in the market.”
Yeah, you’d think. What with fundamentals nearing all-time highs, and the potential to raise a lot of cash to fuel acquisitions and development, you’d think we would have seen more multifamily REIT IPOs since the Great Recession. But the privatization of Archstone in 2007 was the last in any major changes on the REIT ticker.
In 2010, several notable apartment firms—including King of Prussia, Pa.–based Morgan Properties and Denver-based Archstone—dipped their toe into the IPO waters without any substantial bell ringing. While Archstone’s owners continue to mull disposition strategies (see “Stat That” on this page), Morgan Properties has registered with the SEC, but so far neither firm has yet to announce an offering date.
That hesitancy permeates companies outside the gossip circuit as well. “I’m not sure an IPO is a fit for us,” says Ryan Dearborn, CEO of Atlanta-based Wood Partners, which looked at the public option back in 2008 and 2009 but ultimately decided to stay private. “One of the biggest impediments we had is that we project-finance every deal that we do, and it was very difficult for us to roll that up into a complete structure [suitable for IPO underwriting]. We’ll continue to keep an eye on it as a viable strategy, but I don’t see that happening in the near future.”
Market volatility will likely keep most companies considering a public debut on the sidelines in 2012, particularly as pricing swings affecting net asset value (NAV) impede firms’ ability to hit the market without taking a discount on the value of their portfolio. “That is the challenge to IPOs getting done next year,” says Tom Toomey, president and CEO of Highlands Ranch, Colo.–based REIT UDR. “I think there is capital there, there is an appetite on the investor side, but there is a potential pricing disconnect when you can already buy existing REIT stocks that are already trading at low NAV. Why take that haircut on the first day? There has to be a big upside in terms of future growth to earn that back.”
Which is exactly what Lynd means when he says there’s always a chance that the markets will turn and embrace a multifamily IPO sooner than later. “I admit that the public markets are dicey,” he says. “However, I think the public would look at a multifamily REIT IPO a little differently because it is backed on a sector of the market that is growing. You can’t beat apartments if you are looking for an investment that has good demographics and a good story behind it.”
[Case in Point]
King of Prussia, Pa.–based Morgan Properties could be the next multifamily apartment REIT. In July 2011, the firm filed for an $800 million initial public offering with the Securities and Exchange Commission but has yet to set a date for its initial offering or determine how many shares it will make available for sale. In January 2011, Morgan completed a buy-out of its institutional investor partner interests in the firm’s apartment portfolio, comprising 15,000 units across 99 properties with a stated value of more than $1.5 billion. The firm plans to list itself on the New York Stock Exchange and trade under the symbol MPT.
2. Prime the Pipeline
If you’ve got development sites ready to roll and have somewhat rational expectations on future rent growth, you better start breaking ground, like, yesterday. While labor and materials costs remain low, fundamentals stay positive, and supply lingers at all-time lows, the environment for apartment development over the next several years is optimal.
Indeed, Dallas-based multifamily research firm Axiometrics is projecting that an estimated 225,000 units will break ground in 2012. Yet those numbers, up from several years ago, won’t make the needed dent in supply. “The number of apartments needed for demand over the next five to 10 years is probably in the range of 225,000 to 300,000 thousand [annually],” says Mark Obrinsky, vice president and chief economist for the National Multi Housing Council. “Compare that with the average for the 2000s decade, which saw 190,000 annually. Obviously, this depends on things like the economy, the level of immigration, and also what happens with the homeownership rate. I’ve seen reasonable homeownership analysts forecast everything from a rebound to 66 percent to a continued decline, all the way to 60 percent.”
However, land pricing and yield compression is likely to begin putting pressure on 2012 pro formas. “Broadly, the opportunity is really there on the development side, particularly if you are ready to go right now,” says Greg Willett, vice president of research for Carrollton, Texas–based RealPage’s MPF Research division. “Given the run-up in land prices that we’re starting to see, the window for opportunity is probably going to close rather quickly in terms of site acquisition. But that’s only as long as you have reasonable future rent growth assumptions—if they’re around 4 percent over the next year, great, but if you have to go up to 6 percent rent growth to get the pro forma to work, then I think that’s a questionable deal.”
David Lynd’s not so sure that Willett’s warning is going to hold anyone back from the development arena and expects speculative building to return in short order, despite his firm’s particular aversion to number-stretching. “There are too many developers out there that, because they can get a loan, they will develop,” Lynd says. “I am always a proponent of building something that the market wants, not building something that a banker will finance. We pick only opportunities where there is a demographic driver behind the demand.”
Lenders seem to agree with Lynd’s sentiments right now, attests Richard Schecter, president and CEO of the Wellington, Fla.–based Bainbridge Cos., which has three properties under development and another handful in its pipeline (see “Case in Point” on this page). “It is wise that lenders aren’t interested in new faces, because this is a period where experience is going to be important,” Schecter says. “It’s not going to be like the ’80s, when you just grabbed sites, slapped them up, and made money. This is not a market that a lot of inexperienced people should run into hoping they can make some money in the development business.”
But if you have experience, market fortitude, and a ready-to-go platform, you need look no further than Atlanta for inspiration, where Wood Partners expects to have its development engine back to full throttle in 2012. “We are in 15 offices across the country and seeing a little bit of everything out there, and we are still seeing very good spreads and yields on development in the vast majority of markets we’re operating in,” says Ryan Dearborn. “We started 2,000 units in 2010; we’ll do 3,500 to 4,000 units in 2011; and by 2012, we are pretty much back to full production with an estimated 6,500 units under construction.”
[Case in Point]
The Wellington, Fla.–based Bainbridge Cos. began construction in October 2011 on Bainbridge River Oaks, a 294-unit luxury apartment community in Woodbridge, Va., where the population is expected to grow 12 percent over the next 15 years. A joint venture between Bainbridge and Starwood Capital, Bainbridge River Oaks will boast amenities such as a pool and sun deck, clubhouse, fitness center, and cyber café. Occupancy is expected to begin in 2012. Bainbridge also started construction in 2011 on Bainbridge Bethesda, a new high-rise community in Bethesda, Md., and Campus Circle Tallahassee, a luxury student housing community in Tallahassee, Fla.
3. Issue a Call for Cash
If you’re hanging your hopes on landing a fat, fully discretionary, super-leveraged apartment equity fund in 2012, keep dreaming. While blue-blood private equity firms remain hungry for real estate investments—private equity invested $17.37 billion in apartments in 2011, according to New York–based Real Capital Analytics—2012’s money puts cautious optimism front and center and is seeking comparably higher levels of sponsor experience and lower levels of risk.
“There isn’t much on the ‘here’s your fund; now go shop’ front. Those days are in the rearview mirror, and I don’t see them coming back anytime soon,” says UDR’s Tom Toomey. “But the domestic funds are all increasing their real estate allocations, and first on the shopping list are core assets in coastal 24/7 cities, followed by development opportunities, and then rehabs. A strong sponsor with a strong track record who has opportunities already in hand in those three buckets will see more capital.”
While the volume of distressed real estate acquisitions never quite matured to the pace of 2009 and 2010 equity fund-raising, multifamily dealmakers still see distress opportunities piquing investor interest, even as core, value-add, and development deals begin to take a more prominent role in the equity provider mind-set. “I’m not so sure distress is over,” says Ed Wolff, COO of Dallas-based Pinnacle, an American Management Services Co. “I think there remains some opportunity in distress that we may not even know about yet, and there’s money acquired to do deals that had been identified that just could not be brought across the finish line. A lot of the capital will be deployed, and to the investor, it’s ground up; it’s acquisition; it’s value-add.”
Bainbridge Cos.’ Richard Schecter notes that while there have been very few new funds hitting the multifamily space in the past six months, established players are still raising significant amounts of institutional equity and looking for places to put their money. “All of the really major players in the private equity arena have been able to raise large amounts of equity, while a lot of the small- to mid-sized fund managers have had a much more difficult time, so it’s not an easy road for a new fund right now.”
Bainbridge has nonetheless been successful in forming joint ventures with institutional equity sources, closing approximately $800 million in acquisition and development deals in 2011, but will probably stick to project-specific JVs in 2012 rather than going the full fund route. “We’ve been internally discussing the potential of raising a fund, and we think at some point we’ll do something in that direction, but for next year, we’re probably more likely to establish one or more single accounts with sources of capital as nondiscretionary single account transactions, and we’re already having discussions with major sources of capital to do just that in the acquisition arena. We’re definitely exploring those things into 2012.”
Bainbridge won’t be alone in its fund-raising efforts: Greensboro, N.C.–based Bell Partners is raising a fund even as it has invested $120 million to acquire four apartment properties toward the end of the third quarter. While Bell couldn’t comment on the status of its current raise, other operators have been successful in closing big deals, including Chicago-based Waterton Residential, which announced in March 2010 that it had closed on Waterton Residential Property Venture XI, a $500 million multifamily investment fund from a group of institutional investors that will specialize in seeking value-add multifamily opportunities through repositioning and recapitalization properties.
[Case in Point]
Hoping to tap into institutional investor clients, San Diego–based owner and operator Fairfield Residential recruited Alan Bear to the firm’s executive team as a senior vice president overseeing equity fund-raising. Fairfield laid the foundation for Bear’s role in early 2010 when the company secured a $115 million commitment from the California State Teachers Retirement System (CalSTRS). During a reorganization that same year, Fairfield also obtained $69 million in recapitalization funds from Toronto-based Brookfield Asset Management, which pledged an extra $150 million in equity for operations and acquisitions. Bear will be bringing his experience as managing director for Alvarez & Marsal’s private equity real estate investment platform to Fairfield, where he is charged with raising institutional funds.
4. Renovate and Operate
Even if development and large-scale apartment acquisitions aren’t on your radar for 2012, fret not, as the opportunity to gain incremental revenue from operational and physical value-add is ever-present in the apartment industry. This year, approximately 44,659 units were expected to be renovated by the MFE Top 50 Builders, up nearly 24 percent from the 36,115 units renovated in 2010; the number is expected to grow yet again in 2012.
And with solid rent growth projected across 2012 and even into 2013, there couldn’t be a better time to invest in operational and asset quality improvements, especially if you spent the recession streamlining ops and cutting costs already. “We’ve seen a lot of attention focused on operations over the past few years, and we indeed have a lot of strong operators out there as a result,” says RealPage MPF Research’s Greg Willett. “Will we see anything dramatically new there? Probably not, but moving ahead we’ll probably see some premiums for the really good operators who are well-positioned with their use of technology versus the ones who are just OK.”
The spectrum of renovation activity available to operators is broad—right now, the most typical turnaround is in taking a Class B urban core product and moving it to a Class A. However, there’s also been some traction in rehab work focused on repairing damage from deferred maintenance at distressed properties, as well as on enhancing a community’s carbon footprint to achieve ongoing operational and overhead costs. While the ROI on rehab investments varies widely depending on return expectations and asset class, consider that Memphis, Tenn.–based REIT MAA typically sees rent gains of $78 on average for light renovations, while UDR reports that heavier, $10,000-plus-per-door renovations can gain some communities up to $700,000 in annual rent lifts.
At Lynd Cos., asset managers will be spending 2012 engrossed in an energy-improvement initiative—looking for leak protection at old properties, ensuring all properties have energy-efficient showerheads and toilets, and completing electrical surveys to counter overbilling. “Operations is ever-evolving, and as boring as it is to the outside world, it’s the lifeblood of your ability to generate returns,” says David Lynd. “You have to constantly be evolving and improving your operational platform.”
Tom Toomey couldn’t agree more, and even after spending the past three years revolutionizing UDR’s technology platform and improving the average age and quality of the firm’s portfolio through strategic acquisitions and dispositions, the REIT CEO signals that his team isn’t done yet (see “Stat That” on this page) and that any player in the multifamily sector can get onboard with technology and operational improvements now without being left behind. “I don’t think you’re behind if you haven’t been focused on operations,” Toomey says. “There are so many successful companies in this space that it’s not hard to replicate what others are doing. Simply asking how we can improve our operating platform helps us in good times and bad, because improving operations has the best ROI of anything you can do.”
[Case in Point]
A six-month roll-out of an electronic invoicing system in 2011 yielded an annualized savings of $100,000 for Bell Partners. Utilizing an OpsTechnology system from Carrollton, Texas–based RealPage, Bell required all vendors to submit invoices electronically and was surprised by the positive response. “The number of vendors that moved to paperless invoicing grew more than 90 percent in the first six months,” says Bell Partners vice president of purchasing Mark Vernon. “We currently receive close to 75 percent of all invoices online, and that number continues to rise.” The results are even more palpable: Since going paperless, Bell has seen a reduction in processing costs from an average of $13 to only $2 per invoice.