Two of the smallest publicly traded REITs recently decided to get on board with yield management.
During the third quarter of 2011, Richmond Heights, Ohio–based Associated Estates Realty announced it was adopting Alpharetta, Ga.–based Rainmaker’s LRO revenue management system. Senior VP John Shannon said during the company’s fourth- quarter earnings call that as of the end of January, the new LRO system had finally been fully implemented in each of the company’s 53 properties.
“When we had rolled it out and made the decision to choose the LRO, we had said we really didn’t see a meaningful bump in base rents. Where we saw it was on some of the amenity pricing and short-term leasing, and that would be our expectation going in. It’s really a collaborative effort from what our existing pricing system is, and it’s really an add-on and another data point for us to manage pricing at the properties,” said Shannon.
The timing comes as Associated Estates reported continued revenue growth in 2011 and a 2012 outlook that calls for the same. The company portfolio currently consists of approximately 14,000 units.
San Francisco–based REIT BRE Properties also announced in January that it, too, will be implementing the revenue management system. Rollout of the LRO, region by region, is expected to begin mid-March. And a portfolio-wide implementation is projected to be completed by early July of this year.
During the company’s fourth-quarter earnings call on Feb. 7, Scott Reinert, executive vice president of operations at BRE Properties, commented that he believes the revenue lift the company will see once the LRO is integrated is between 1 percent and 2 percent. While Reinert’s projection may sound conservative, BRE says it’s simply looking for the new system to improve upon what it already has in place.
“Remember, we’re not going from no revenue management system. We’re going from our revenue management system, which we feel was pretty robust,” says president and CEO Constance Moore. “But we’re now going to a third party,” she explains in defense of the somewhat low revenue lift guidance. BRE currently owns or manages more than 25,000 units.
It should be interesting to see if companies with similarly sized portfolios follow suit and add revenue management systems as well. “The benefit is that the system triggers on problems sooner than their human capital would have realized. This way, you’re able to react quicker to market changes,” says Paula Poskon, senior equity research analyst at Milwaukee-based Robert W. Baird. “Revenue management systems are an early signaler of changes in the marketplace, or that we have a problem,” she says, explaining why so many of the large players have already implemented LRO.
But not all multifamily companies rely on revenue management systems. Ann Arbor, Mich.–based McKinley currently manages more than 33,000 multifamily units and has no intention of adopting revenue management any time soon. McKinley CEO Albert Berriz actually sees LRO implementation by the REITs as an advantage for him and other privately held multifamily companies.
“I love that they’re all adding LRO. It makes it easier to compete with them,” says Berriz. He believes that because these REITs come under the scrutiny of financial analysts, they are essentially forced to implement LRO, which Berriz feels makes them homogenous and renders them no longer competitive with their pricing structures.
“Keeping employees in touch with the customers allows them to be much better judges of the market than a computer can. When you’re told every day by a computer what your rents should be, managers lose the power and accountability,” says Berriz.
Analyst interest in LRO means that Wall Street is keeping its eye on whether this system is going to actually add value to Associated Estates and BRE. But smaller multifamily companies that are at or approaching the same scale as these two firms are also likely watching to see the impact LRO has on the companies moving forward—and what, if any, benefit it will provide when the next down market hits.