Credit: Andrew Spear

The 2005 Forbes article tormented Jeffrey I. Friedman, chairman, president, and CEO of Associated Estates Realty Corp. (AEC). And rightfully so. In the piece, Forbes called Associated Estates the “worst REIT”—an unenviable spot that the Cleveland-based firm had held from 2002 to 2004.

This obviously didn’t sit well with Friedman, 58, who had invested nearly 35 years of his life in the company—which today owns and manages 12,108 apartment units in eight states. Burdened by its aging portfolio and haunted by financial miscalculations, AEC had a bad rap.

Friedman had already charted a new course for the beleaguered REIT in 2001, but the article—which has sat prominently on Friedman’s desk for more than five years—kept him focused (though he says he didn’t agree with all of it). The goal: Prune the AEC portfolio by selling off older assets and investing in younger properties in stronger markets, all while delivering on promises to investors and employees. The strategy seems to have worked. Despite generating 58 percent of its NOI from the oft-ridiculed Midwestern markets, the REIT has survived, even thrived. In 2008, it delivered the highest same-store NOI growth, at 5.4 percent, of any publicly-traded apartment community. And, over the past three and five years, it was ranked No. 1 in total shareholder return (dividends plus stock price appreciation) in the industry.

Credit: Andrew Spear/Aurora Select

The results are a far cry from where analysts saw the company less than five years ago. “When we look at AEC’s fundamentals compared to other companies, they’re holding up pretty well,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm.

Now, with the Great Recession taking its toll—AEC reported fourth-quarter 2009 earnings below expectations—Friedman is charged with the daunting task of holding on to the progress his firm has made in recent years. He plans to keep AEC on its path to becoming a profitable, sound REIT. But with lower occupancies and higher overhead costs driving weaker than expected fourth-quarter funds from operations of $0.02 below the expectations of New York-based broker Benchmark Capital, that goal remains a challenge.

The Problem