Executive vice presidents (l-r) Jeff Adler, chief property operations officer, and Tim Beaudin, chief development officer, have worked closely with their team members (pictured here) to develop a strategy that will help the Denver-based firm through tough times.
Photo Credit: AIMCO
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For years, Denver-based Apartment Investment & Management Co. (AIMCO) topped the list of the multifamily industry's biggest owners and managers. It quietly scooped up apartment portfolios and even entire companies, maintaining a low profile all the while. CEO Terry Considine is notorious for shunning the spotlight. He isn't a quote machine, and since the REIT isn't a ground-up builder, you won't see its shiny new high-rises and communities on the cover of magazines.
But that reluctance to be in the spotlight belies the truth: AIMCO has spent the better part of the past few years crafting a plan to carry itself through both good and bad times in the market. In fact, the senior management team of Tim Beaudin, Jeff Adler, and David Robertson has honed a strategy first developed by Considine more than 40 years ago—one that its entire team embraces. The philosophy is simple: Buy upgradeable properties on valuable land near urban areas. As the area grows, the ground appreciates, and AIMCO can quickly and profitably reposition the property, adding even more density.
Recently, more and more of the industry's leading firms have realized that AIMCO's value-add strategy is a wise one. “New development is a major challenge, and getting financing to fund it is a challenge,” says Eric Bolton, chairman and CEO of Mid-America Apartment Communities, a Memphis, Tenn.-based REIT doing quite a bit of redevelopment work.
AIMCO, however, did it first and did it effectively. The companywide formula involves specializing in both the markets it's in and tightening its focus on redevelopment and customer satisfaction within those areas. Each of Considine's three top executives directs a portion of the business—Beaudin handles redevelopment; Robertson guides transactions and asset management; and Adler pilots property management. Together, this team is taking Considine's vision and developing a template by which AIMCO employees across the country can navigate a very volatile time in both residential real estate and the credit markets. Indeed, understanding AIMCO's strategies today and into the future is a clear reflection of the trends shaping the entire industry and its biggest firms.
MORE FROM LESSDriving the changes at AIMCO is a desire to get the right portfolio mix—a move that many in the industry are making. Five years ago, AIMCO owned assets in approximately 100 markets. But the company's leaders decided that was far too many. “We decided to focus on having a market-weighted portfolio that would be focused on the top 20 apartment markets by market value,” Robertson says. “Our view is that [this] will provide the higher risk-adjusted returns.”
Right now, AIMCO has whittled its portfolio geography to about 40 markets. But it has 75 percent of its assets in the top 20 markets. Unlike its public peers, it's not just focusing on the coasts. Its goal is to be in markets where apartments have the highest value. Sure, that includes coastal spots such as Boston, New York City, Philadelphia, Washington, D.C., Florida, and California. But it also includes Atlanta, Chicago, Denver, and Texas.
JPI Cos., a multifamily builder, owner, and manager based in Dallas, has a similar goal, though it's not seeking return potential alone. The company says it is focusing on high-visibility locations in major cities because banks and equity players today have difficulty underwriting deals in non-core markets.
“We're not looking at tertiary cities, and we're not even looking at secondary cities,” says Jim Butz, president and managing partner for JPI East. “We're looking at the top 15 cities in core locations.”
AIMCO recognized the need to tweak its portfolio in the major markets as well. It would like to add to its asset base in the Bay Area, Dallas, Houston, and Boston, while divesting of its assets in the struggling Florida markets. Unfortunately for the REIT, cap rates are rising in supply soaked Florida and the pool of buyers jockeying for new assets has dwindled.
Still, Robertson says he is finding buyers. The company, which routinely sells about $1 billion worth of assets a year, moved 9,068 market-rate units in 2007. Robertson says many institutional buyers have disappeared because they ran out of money and can no longer hit their targeted returns. But those who are leveraged at 65 percent instead of 75 percent or 80 percent can still secure apartments.
“The buyers in the market are a combination of independents, local and regional operations, and institutions,” Robertson says. “They all use some degree of leverage in their acquisitions.” A year ago, that leverage allowed buyers to finance at least 90 percent of a deal. Now, that number is down into the 70 percentiles.
“From a pure financial standpoint for existing product, cash is king,” says Ric Campo, chairman and CEO of Camden Property Trust, a Houston-based apartment REIT. “There's a lot more cash needed to play in the multifamily market. The high-leverage buyer is basically out of business.”
Still, there hasn't been a major repricing of apartments, at least on a national basis—athough in markets such as South Florida, that's a different story. “We haven't seen substantial discounting of existing deals,” David R. Picerne, CEO of Picerne Real Estate Group, an apartment owner and builder based in Phoenix. “But deals are undergoing a lot more scrutiny.”
AIMCO is investing $8.8 million in the rehab of the Greenspoint Apartments in Phoenix. The renovation began in December 2006 and should be completed this summer.
Photo Credit: AIMCO
Indeed, at the height of the boom, apartment buyers could make easy money with other people's capital. They would buy highly leveraged properties, sit back, and wait for the appreciation to kick in. flat strategy isn't working anymore, though.
“The owner that relied on market lift or cap rate compression is in trouble,” says Jeffrey Goldberg, managing partner of The Milestone Group, a Dallas-based apartment owner. “We are going back to the fundamentals of apartment ownership and basic blocking and tackling.”
That's a market trend that suits AIMCO. It doesn't just juice returns by buying in top markets and forming joint ventures. It buys and upgrades properties.
AIMCO relies on non-recourse property debt to buy properties and it actually finances 90 percent to 95 percent of the redevelopment. At the end of 2007, it had 40 projects in its redevelopment pipeline at an estimated cost of $756 million. “By rehabbing these assets and refinancing these assets, I don't have a lot of money left on the table,” Beaudin says. “Our return on equity is outstanding.”
The problem, of course, is that lenders have become stingier with debt, even for power players such as AIMCO and the other MFE Top 50 list leaders. Although he hasn't yet seen a tightening in the availability of credit, Beaudin is monitoring the situation closely. “If the markets continue to be challenging, that number [percentage of equity] gets ratcheted back,” Beaudin says. “When you're trying to be conservative in these markets, you don't assume it will change to more [leverage]. You assume it will change to less.”
Even with these challenges on the horizon, lenders still see redevelopment as a safer bet than starting new units. Redevelopment creates more certainty than new development. And that's why it's valued in rocky economic times.
It's not just lenders pushing for redevelopment; so are investors. “In general, the investment community is going to be more prone to want to buy existing inventory as opposed to building new inventory,” says Picerne, who has two new projects in the works in Las Vegas right now.
Builders have noticed these trends and are adjusting. JPI in Dallas had a new development pipeline of $900 million five years ago. Last year, it split almost evenly between new development and acquisitions, and this year, Butz expects to have $600 million in new development and $400 million in acquisitions.
Even though AIMCO and its peers see the value in redevelopment, the public markets still don't. Redevelopment produces net asset value, but the public markets covet funds from operations (FFO). “We wouldn't be in redevelopment if we wanted to maximize FFO,” Adler says. “Redevelopment punishes FFO. The unit numbers are down and not earning rents. Redevelopment is the dumbest thing you could do [for the market], but it's the smartest thing for creating wealth.”
Eventually, creating wealth benefits every member of a real estate team, AIMCO says. The company spent $320 million redeveloping 64 projects—the equivalent of 16 ground-up developments. The redevelopments resulted in $100 million of value, which is a dollar a share for company investors.
“One way we keep the market happy is to focus on keeping the customer happy, which does create FFO,” Adler says. “It creates profitability and value over a long period of time.”
AIMCO's upgrades often include amenities such as the library in The Riverside Park project in Alexandria, Va.
Photo Credit: AIMCO
Keeping the customer happy is easier said than done, especially at companies with huge portfolios that stretch across the country.
At AIMCO, Adler is focused on customer satisfaction, surveying residents, and looking at why they leave. Through this research, he's discovered the importance of the community. “It is the duty of the management company to select the neighbor,” Adler says. “That's the fundamental underpinning of whatever else goes on. If you get that part right, a lot of good things flow from it.”
That attitude means AIMCO and other large companies are holding firm with their credit standards in a time when a lot of foreclosed-upon homeowners are coming back into the rental market. “We have a fixed residential quality standard [that] we don't change,” Adler says.
JPI agrees. The firm hasn't changed its screening policies in nine years and says it would be “a challenge” for foreclosed-upon homeowners to live in its apartments today. But that could change. “flat [screening policy] is something that we may have to look at if there are that many folks who will get into [a foreclosure] situation,” Butz says.
Still, other companies already have opted to tweak their policies on foreclosed-upon homeowners. “We have modified our tenant credit check policies to accommodate former owners who may have had some difficulties,” Goldberg says.
Even without loosening its credit standards to tap into a larger pool of renters, Adler says business is strong. Same-store occupancy rates across the market-rate portfolio in the fourth quarter of 2007 were at 94.7 percent. “I was cautious going into the year wondering if we were seeing a recession,” Adler says. “There is a reduction in job creation. Yet that really hasn't translated into reduced apartment demand.”
Others see this as well. Campo says most of his peers believe that growth will ratchet from 5 percent in 2007 to about 2.5 percent in 2008. “That doesn't include a recession scenario,” Campo says. “It's more of a slow job growth scenario.”
There are pockets of uncertainty around the country, though. Florida, faced with major supply issues, has struggled. So has Southern California, which was hurt by the fall of the mortgage industry and the writers' strike. But this is another area where AIMCO thinks it's recession-proof.
“We have a diverse portfolio; it's a plus for us,” Adler says. “Regardless of which particular price point is having difficulty, or which geography is having problems, we are always going to have enough diversication that our fundamentals will be sound and in good shape.”
Unfortunately, the reality is that the next couple of years will likely be tough. “If the economy goes into a prolonged recession, demand for multifamily will be lower,” Butz says.
Adler, however, is optimistic about the near future, with immigrants, Echo Boomers, even Baby Boomers moving into apartments. “Our overall demographic conditions are pretty good and getting better,” he says. “For the next five years, apartment demand is going to be very good.”
If AIMCO's portfolio management, redevelopment, and property management teams continue to build upon Considine's template, he may just be right.
SITTING TIGHTDespite the tumultuous environment of the past year, the MFE Top 50 list leaders have remained largely unchanged.
MFE TOP 50 BUILDERSNew to the Builders list this year were Lane Co. (No. 7) and Rampart Construction (No. 9). Once again, Trammell Crow Residential nabbed the No. 1 spot. And no public companies, which can be downgraded by Wall Street because of the size of their development pipelines, appeared in the top ten (AvalonBay fell to No. 11). This is little surprise to Jim Butz, president and managing partner of JPI East, a division of JPI Cos. (No. 33), a multifamily builder, manager, and owner based in Dallas. “The private builders, such as Lane, Spanos, Lincoln, and Trammell Crow, are the bigger builders and will continue to grow,” Butz says. “It's somewhat a reflection of the entrepreneurial side of the business.”
MFE TOP 50 OWNERSDominating the Owners list were financial institutions and REITs. Companies with large affordable portfolios, including The Richman Group Affordable Housing Corp. (No. 7) and newcomer Boston Capital (No. 2) anchored the top 10 spots. With debt harder to find, it's little surprise that private entities find it tough to compete with the leading owners. But Ric Campo, chairman and CEO of Camden Property Trust (No. 11), a Houston-based apartment REIT, doesn't expect the REITs or institutions to grow much larger.
“You don't need to be 300,000 units,” Campo says. “Once you're big enough [to] do national contracts and have scale, then there are diminished marginal returns.”
MFE TOP 50 MANAGERSPublic companies figured heavily on the Managers list, but there were also a growing number of private firms that have joined their ranks. Companies such as Pinnacle (No. 2), Lincoln Property Co. (No. 5), and Greystar (No. 6) remain stalwarts, but Riverstone Residential Group (No. 4), which built its portfolio off of Trammell Crow's, is rapidly expanding. Some of these companies also show up on the Builders list, since they specialize in serving institutional owners.
“Almost all of our third-party property management is for institutional ownership,” says JPI East's Butz of his firm JPI Cos. (No. 17). “The people we build for and sell to are the same ones that hire us for other parts of our portfolio.”