For years, Phoenix-based Alliance Residential was a fixture on the list of Top 50 Multifamily Builders. But like many of its competitors, it fell off the list after the economy crashed in 2008. Today, it looks like the company's development arm is back: Alliance started almost 2,000 units in 2010 and has even more in the pipeline for 2011.
CEO Bruce Ward took some time to talk with Multifamily Executive senior editor Les Shaver about his construction pipeline, outlook for acquisitions, and the potential of going public.
MFE: How were you able to get projects off the ground in 2010?
WARD: We had a number of opportunities where we could buy entitled sites in great locations at prices that were rolled back 10 years. We picked up several that were half built or had existing parking garages constructed. Since 2009, we’ve also purchased $600 million worth of existing assets. That excludes the development business. We’ve always been much more of a buyer than some of our competitors. We’ve traditionally bought 40 percent and built 60 percent.
MFE: Were you in the same situation as other troubled builders?
WARD: Our portfolio was in good shape. We were 59 percent leveraged and owned $3 billion in assets. Keeping our leverage low enabled us to navigate through the recession. We were able to extend and refinance our debt through the agencies, and our contingent liabilities are less than $5 million. For a company with $3 billion in assets, it's very comfortable.
MFE: Did you pull back on buying during the recession?
WARD: In 2006 and 2007, asset prices became so high that there were no interesting buying opportunities; however, by 2009, the assets had been re-priced to very attractive levels.
MFE: Going forward, where is there more opportunity? Buying or developing?
WARD: Our business plan for 2011 is weighted towards development, with a projection of 5,000 starts this year. Our acquisition budget is 2,000 units. We are increasing our mix with additional development this year.
MFE: Is that because the construction debt markets have opened up?
WARD: I think it's moving quickly. It's surprising to see the changes in the loan terms of 2010 versus what we’re hearing today. In the last half of 2010, we were looking at loans in the 50 percent to 60 percent range with conservative underwriting. Today, we’re seeing and hearing of construction loans at 65 percent to 70 percent leverage with tighter spreads.
MFE: Do you fear oversupply in the market?
WARD: It will be more a function of the equity being more careful than the banks. I feel the banks are under some pressure to make loans, while the equity will be fairly conservative getting back into development.
MFE: Are you looking at any new markets?
WARD: We didn't open any new offices in 2010, and I don’t see us adding any offices this year—I think we’re in good shape with our footprint right now. We’ve been in D.C. for a number of years, and we’ve expanded resources in San Diego, Seattle, Orlando, and Tampa during the past 12 months.
MFE: I know in the past you’ve considered an IPO. Is it something you’l look at in the future?
WARD: We periodically review the market. In mid-2010, we concluded that the private valuation of Alliance was higher than the public market valuation. In the past nine to 10 months, the public markets have moved up meaningfully. We will continue to conduct market reviews and assess whether it makes sense to change our strategy. It would not be surprising to see us do something in the next five years.
MFE: Do you think you’re set up to deal with the challenges of the public markets?
WARD: We are organized to change the capital structure from an accounting standpoint. It will be a question of whether it is the most efficient way for us to access the capital. We have the organization that can manage it, should we choose to do it.
MFE: Do you regret not being more aggressive when the markets turned bad?
WARD: We bought quite a few projects in 2009 but should have bought twice as many as we did. The best opportunities were right at the beginning of the downturn; however, that window didn’t last very long. Frankly, we knew that we should have shifted more quickly from development to acquisition, but it’s difficult to retool your organization in a hurry. Today, we’re still looking at acquisitions. The pricing has moved up and cap rates have drifted down. Although the low-hanging fruit isn’t as readily available, you can still purchase assets at below-replacement costs in certain markets—and with the rent growth we’re able to achieve, these deals are going to look very good in three years.