Just before driving into Denver to interview the executive management team at UDR, a multifamily public relations friend of mine hits me up on my iPhone to ask where I’m staying. “Well, the interviews are in Highlands Ranch,” I tell him, to which he replies with the faintest bit of hipster wit: “Highlands Ranch? That’s like China, man. You seem more like a downtown guy.” And he’s right—I’ve forgone the Highlands Ranch Residence Inn for a hotel in the city, and I’m thankful for my decision the next morning as I drive south of town towards UDR’s headquarters, past rolling hills dotted with single-family housing developments, homogenous walk-up rental communities, and retail centers spaced 5 miles apart or so, each with its requisite Starbucks, Best Buy, and Chili’s.
The headquarters for UDR—the real estate investment trust founded in 1972 but spawned in name from the 1984 merger of Old Dominion Trust and United Realty that today boasts ownership and management of 51,486 units of multifamily rental apartments—is in a modern suburban office mid-rise, and the boardroom features floor-to-ceiling windows overlooking one of those picturesque Highlands Ranch garden apartment communities with the snow-capped Rocky Mountains as a backdrop. There are little league fields and a brand new Trader Joe’s nearby, along with immediate access to the interstate for short-haul commuters. Highlands Ranch is suburbia perfectly executed. It is a wonderful place to work and raise a family and put down roots. It is also, ironically, where UDR has spent the past two years modeling its operating platform and corporate strategy on the near certainty that the renter of today—and tomorrow—has absolutely zero interest in living there.
In fact, the apartment community adjacent to headquarters was never a UDR property, and even if it was, it likely would have been among a portfolio of nine assets sold by the REIT to an undisclosed buyer in September 2007 as it exited the Denver and Atlanta markets, pocketing $281 million in disposition capital. The REIT followed up that move with a $1.7 billion portfolio sale in January 2008 to a joint venture between New York-based DRA Advisors and Greensboro, N.C.-based Bell Partners, value-add specialists more than eager to take 25,684 Class B units averaging 24 years in age off of UDR’s hands. UDR president and CEO Tom Toomey characterized the sale at the time as a process of “euthanizing” the firm’s asset base, and boldly announced to analysts on a 2007 fourth-quarter and year-end earnings call a day later that the “right-sizing” of UDR’s portfolio was complete. “We had to do the portfolio sale to be in a position now to make these statements about who we want to be as a company,” Toomey says. “We narrowed down our product to focus on our customer: The 20- to 35-year-old in more urban markets that has a much higher propensity to rent than the national average. If the portfolio was still averaging $750 rents in [secondary markets], we’d never be able to get there. Places like Washington, D.C., and San Francisco with communities in trendy neighborhoods near bars and restaurants and transportation—that’s where people want to live, and that’s what we target.”
Armed with cash from the right-sizing, UDR has been doing just that—leveraging its balance sheet to beef up its operations, technology infrastructure, green initiatives, and energy management, and ultimately prepare itself to be the ideal property owner and manager for an on-the-go Gen Y renter.
Inflexion Points
At the onset of the Great Recession, UDR was well-prepared. The 2007 dispositions had armed the firm with $2 billion in liquidity—capital used to strengthen the REIT’s balance sheet via share repurchases and payment of debt maturities, as well as fuel the acquisition and development of new apartments in the company’s target urban youth markets. By September 2008, UDR had deployed $951 million to acquire 4,093 units in 12 communities in markets such as San Francisco; San Jose, Calif.; Marina Del Rey, Calif.; Mercer Island, Wash.; Costa Mesa, Calif.; Arlington, Va.; Fairfax, Va.; Austin, Texas; Tampa Bay, Fla.; Phoenix; Orlando, Fla.; and Towson, Md., and had additionally broken ground on Vitruvian Park, a $1 billion mixed-use community in Dallas that will eventually feature 5,500 apartment units built through 2017 across six phases.
UDR
That has the firm sitting firmly at the No. 17 spot on the MFE Top 50 Owners list this year, dropping from the No. 9 spot two years ago. But Toomey doesn’t want to be a Top 10 apartment owner. He wants to effectively anticipate trends and point UDR strategically towards those trends. Indeed, far from serendipitous, UDR’s influx of cash—timed at the near-pinnacle of multifamily rent and disposition fundamentals prior to a broad economic downturn and crash in single-family and commercial real estate markets—was long planned, beginning with the arrival of Toomey as CEO in 2001, and is testament to the firm’s practiced ability to key in on market inflexion points to guide corporate strategy.
“We thought the industry had reached an inflexion point in the pricing of assets,” Toomey explains. “There was record-low financing and record-high asset prices coupled with our intention to upgrade the portfolio, so it was time to do something. We are reaching a similar inflection point right now: rents are turning positive; financing and construction costs are bottoming. I can’t tell you what the velocity of recovery will be, but it’s not my job to get the velocity right—the velocity is independent of UDR. My job is to realize when the inflexion point has occurred and adjust the strategy to start moving in the direction indicated.”
Like its REIT peers, UDR has also issued stock and secured lines of credit during the recession as a way to gain access to capital for de-leveraging and for acquisition, development, and general corporate purposes. In October 2008, the firm pulled in $194 million from a common equity offering of 8 million shares, and last year, the company collected the remaining $200 million plus interest due on the Bell Partners deal; secured a $200 million Fannie Mae credit facility for debt repayment and the extension and laddering of its 2010 maturities; and formed a $450 million joint venture with Islamic bank Kuwait Finance House for acquiring Class A properties in high-barrier-to-entry markets. While the JV has yet to make any significant splashes in the deal space, an intended two-year deployment term could likely initiate some significant moves within the first half of 2010, if the acquisition opportunities present themselves.
In many ways, UDR’s strategy since the credit demise takes a similar tack as many other Top 50 Owners—keeping their business simple, avoiding large portfolio transactions, and turning their focus to managing expenses and internal operations. But where UDR stands out is in its financial savvy.
“Our balance sheet strategy has always been simple: Ladder and stagger your maturities and don’t become so dependant on capital markets that you’re being held hostage to them—maintain every avenue of capital so you always have a menu of what fits best for today’s deal,” says UDR senior vice president and CFO David Messenger, who adds that all financing strategies at UDR are geared toward maintaining an investment-level grade on the company. “That rating keeps open every avenue of capital: secured financing, the GSEs, and unsecured debt in the capital markets. [UDR raised $150 million in five-year money at 5.25 percent in February.] We can do convertible debt; we can raise common equity; we can issue preferred equity; we can do secured mortgages through our banks; we have opportunity to get financing through life companies; and construction financing is coming back to the market for us. For smaller operators and developers, that’s non-existent.”
Leadership Lessons: Tom Toomey
Credit that financial know-how to Toomey, whose background as an Arthur Andersen & Co. accountant—not to mention a tenure as chief operating officer and CFO at AIMCO and a senior vice president and treasurer at Lincoln Property Co.—has established an emphasis on returns and ratings that has trickled down to every segment of the company’s internal operations.
Just look at UDR’s accounts receivable, which has boosted ACH rent payment adoption to 72 percent simply by telling residents that rent is paid electronically. “That is 35,000 checks I didn’t have to wrestle with,” Toomey says. “But you don’t need 50,000 doors to make that work. You just have to build the infrastructure, change how you do business at the site level, and redefine corporate roles.”
Regardless of where UDR continues to source low-cost capital or amass opportunistic equity, there’s certainty on how those monies will be deployed: first, to perfect an apartment portfolio with assets tailored to young urbanites, and, second, to fine-tune the development of a marketing and operating platform designed to meet those renters’ 24/7 wants and needs. “The sheer numbers are undeniable,” Toomey says. “Arriving at your doorstep is a bunch of 20-year-olds who are willing to spend more of their first paycheck on housing than almost anything else. And what do they want? Technology, ease of service, self-service, and they want to be close to friends and jobs. Providing that is our business. It really is.”
Technology First, Energy Next
To that end, UDR has spent the bulk of the recession looking inward, particularly towards creating an industry-leading technology platform of Web-based services tailored for deployment over the iPhone and other hand-held mobile devices. “They are technology czars,” says fellow REIT CEO Ed Pettinella of Home Properties. “The industry is waiting to see what they build next so everyone else can go out and build it, too.”
Indeed, UDR was the first multifamily company to create and launch both standard apartment search applications and augmented reality (AR) applications for smart phones. It was also the first company in any sector to integrate social media functionality into AR apps by allowing rental prospects to use Twitter to pass on community and neighborhood specs and info to friends and followers.
In late March, UDR rolled out additional enhancements to its mobile platform, completely expanding its app functionality beyond the iPhone to BlackBerrys, Palm Pre, and Google Android handhelds, while allowing users to check daily updated apartment pricing; check out photos, amenities, and floor plans; view apartments available for rent; and reserve and place a hold on specific units. The company has optimized its entire platform not only for mobile users, but for Spanish-speaking apartment seekers as well, investing $75,000 in 2008 for the ongoing translation of all of the REIT’s 4,000-plus dynamic Web pages, embedded text graphics, RSS feeds, PDFs, and style sheets.
“I don’t see these projects as having much risk,” Toomey says of his top-down push for multifamily bleeding-edge technology. “I look at the future, and I say inevitably, I think these things are going to happen—so why not start working on it today? How much money does it cost me, and what do I have to do to get there? Instead of chasing the customers, I’m trying to get a little bit ahead of them.”
And the fact of the matter is that UDR likely is ahead of the Gen Y renter looking for an apartment on his or her smart phone. Job creation will be necessary to completely unleash the demographic into the apartment sector (See “Gen Why Not?” on page 39), as the company attributes just 100 leases to mobile applications in 2009. Still, that’s 100 leases within a four-month time frame of launch in a down economy, and the company thinks the writing on the wall regarding mobile Internet usage—11 percent of the more than 1 million unique UDR Web visitors last year came via mobile—is blatantly clear.
Yes, these technovations cost money, but most UDR tech initiatives budget out in the low five-figure range, and ROI can be achieved through minimal incremental adoption, even as the REIT perfects applications and works to complete its tech platform build-out with the creation of an automatic, Web-based renewal system. “We’ve spent a lot of effort in 2008 and 2009 to say we’ve got to finish this now because there will be a day—and it has arrived—where the inflexion point between technology and rent velocity will kick in,” Toomey says. “When we get to electronic renewal, that will complete the entire lease cycle—it’s the mobile user, it’s the Internet, it’s the kiosk, it’s anyway you want to do business with us.”
Technology isn’t the only area UDR has been content to funnel capital expenditures into. Since the Bell Partners disposition, the company has annually increased its redevelopment and rehab budget for the ongoing maintenance and improvement of its apartment stock. “We have kept our assets at the same level, if not a better level, of quality, and I think that has enabled us to take market share from the private guys,” Messenger says. “Last year, that amount was roughly $675 a door. It will be higher this year, and last year was higher than the prior year. We have not slowed down our cycle of improvements—if it needs to be turned, we are turning it.”
UDR’s portfolio-wide initiative to outfit all units with green energy devices—including compact fluorescent bulbs, low-flow water fixtures, and programmable thermostats—acts as a catalyst in that regard: Unit rehab is already somewhat mandated to bring all apartment homes up to the company’s green standards. But UDR has additional motives for investing in unit-level energy savings and costs—the company is preparing for the onset of energy disclosure mandates in multifamily. For some time, the firm has been working on efforts to establish—and publicly broadcast via the Internet and mobile devices—average energy costs per unit.
“We have arrived at the conclusion that within a short period of time, the industry will be forced by our customers or by city regulators to begin disclosing consumption of energy,” Toomey says. “So immediately, we want to figure out what are the things that we can do that are cheap on turns that will start bringing that number down? All of this will arrive at our doorstep in the next three to five years, and if you wait until that moment, you will have lost the opportunity to build momentum.”
Growth Spurt
The company is also gauging opportunities to resume growth momentum via asset acquisition and ground-up development when the time is right. To that end, UDR has five active development projects and two active redevelopment projects underway, totaling 2,424 units, at a total cost of $421 million. Including phase one of Vitruvian Park, which opened 329 apartments for lease-up in February, UDR expects to deliver all its active developments to market in 2010. Toomey has also indicated in conference calls that new development could also commence this year and would likewise also be targeted—in location, design, and amenity availability—to the 20- to 35-year-old renter demographic.
“As developers, we are in the fashion business, too,” explains UDR senior executive vice president W. Mark Wallis. “We are experimenting with [larger-sized] California closets; we’re distributing clubhouse amenities across the properties to have a variety of amenity areas across the property, not just a clubhouse making a country club statement. In development and redevelopment, we are installing demonstration and outdoor kitchens that are off the chart: They are cheap to build, they look cool, and they create socially active areas that make it harder for your resident to leave you.”
While UDR has remained fairly quiet on the acquisitions side relative to some of its REIT peers, market opportunities combined with scaled growth prospects will likely command some action in 2010 and 2011. While rumors of an acquisition of Atlanta-based Post Properties have come and gone, don’t count UDR out of a big deal, especially one that brings deeper penetration to the REIT’s core markets.
“We intend to increase our exposure in California and in the Washington, D.C., corridor, and we intend on expanding into new markets in New York and Boston while also trading up or reducing our exposure a little bit in Florida,” says UDR’s senior executive vice president, general counsel, and corporate secretary Warren Troupe. “But we’re at 51,000 homes now, and we’d like to get back into the 75,000 homes range. It is pretty hard to do that through organic development and one-off asset acquisitions. Eventually, you really have to look at a company or portfolio acquisition.”
Operationally, UDR will look to incorporate new units—whether developed or acquired—into sub-market pods of several assets located closely together that allow the company to sell customers on a local portfolio as opposed to a single asset, better matching renters to specific property qualities and amenities rather than forcing an ill-fitting lease that is unlikely to renew. “People have ignored that part of the business for far too long and simply considered it a renewal, instead of a chance to reset and upsell,” says Toomey of the push to enhance the renewal process at UDR properties, particularly leveraging renewal technologies still under development. It’s one of the ways he plans to hold the firm’s current portfolio-wide occupancy level of 95.5 percent. “I think we are going to make a difference. It is one of the few times I have sat back and looked at a process and thought: ‘Boy, we are really going to do something out of the box here.’”
Toomey says it’s time for the industry—particularly when it comes to the Gen Y renter demographic—to more fully embrace the apartment lease as a $20,000-a-year decision, and to offer resident lease and terms flexibility accordingly. He intends to mandate that as UDR powers its way via organic development growth, acquisition, and same-store NOI improvements towards the greatest rent spike of all great rent spikes.
By 2012, the first wave of iPhone-toting, suburbia-resistant millennials will unleash itself on the multifamily industry, and UDR thinks it is largely prepared for that eventuality today.
“We are in 23 markets, and in March, it looks like renewals turned positive, so the inflexion point with your current resident and their propensity to move has arrived at our doorstep,” Toomey says. “Rents are turning up, construction costs are about to turn up, and financing is cutting loose. Now is the time to start building and growing. Where to do that is the only remaining question, and I understand that can involve a whole different set of issues. But these fundamentals have turned—go out and find opportunities. Show me a deal. That’s the way it works in our place.”
