For the second time this year, Birmingham, Ala.-based REIT Colonial Properties Trust is pushing rents above levels suggested by its lease revenue optimization (LRO) system.
On the company’s third-quarter conference call, COO Paul Earle said the company introduced an 8 percent increase above the LRO asking rates at 5,259 units across 55 properties. The company slipped on those rents, but still was able to get 4.5 percent more than the LRO asking rate.
In fact, Colonial was so pleased with the results that it is evaluating another push past LRO rents on 30 percent of its portfolio, based on occupancy per unit. “We’re going to be a little more surgical this time; we’re looking at occupancy per unit type in all of our major markets and then we’re going to introduce an increase based on that analysis,” said C. Reynolds Thompson, CFO for Colonial during the conference call, accoreding to a transcript provided by SeekingAlpha.com.
Glenn Chmura, revenue pricing manager for Colonial, clarified that the initiative did not really go outside the LRO pricing system. “We always used the LRO pricing. We recognized things were improving and were able to use LRO to quickly implement a more aggressive pricing strategy. We simply choose to implement more aggressive settings.”
The Rainmaker Group, an Alpharetta, Ga.-based company that provides Colonial’s LRO system, says their system is actually designed to base its renewal prices off of recent new leases. Then the system allows companies to be more or less aggressive, depending on their risk tolerance. So one has to wonder why Colonial decided to add a certain percentage to its asking rents versus just putting more aggressive settings into the system?
“They can be less aggressive or more aggressive in certain markets or even by community,” says Georgie Gaalema, a business consultant with Alpharetta, Ga.-based The Rainmaker Group. “It really does vary depending on client, the market they’re in, and their individual business strategy.”
Gaalema says this variance can be especially pronounced on renewals depending, again, on particular markets or even how a manager treats its renewal strategy. Colonial decided to be aggressive by bumping its renewal rents up 5 percent. “The parameters within LRO are configurable to a client’s renewals strategy,” Gaalema says. “If they want to be aggressive, and they have a gap between the new lease and the renewal price, it is their option in LRO to get as aggressive or conservative as they wish toward that new lease price.”
Colonial isn’t alone. A number of REIT analysts say the public apartment firms are testing rents beyond the parameter of what their revenue management software gives them. “This doesn’t surprise me," says Paula Poskon, a senior research analyst with Robert W. Baird. "People could push rents faster than software if tenants are staying longer and occupancy is going up.”
For instance, Poskon says Memphis-based Mid-America Apartment Communities put in a 3 percent increase as default when its LRO was telling it to cut rents or keep them flat. “They only cut to zero when the tenant gave pushback for the most part,” she said.