Following on the heels of the departure of CFO Tom Herzog earlier this year, Denver-based AIMCO announced additional personnel changes last week. The Denver-based REIT, the country’s fifth biggest apartment owner according to the MULTIFAMILY EXECUTIVE Top 50 list, released a statement last week saying that David Robertson is resigning as co-president and CFO as of Dec. 31 to “seek opportunity” as a CEO with another company. Tim Beaudin, the company’s other co-president, will continue as president, and Ernie Freedman, current senior vice president of finance, will become CFO and executive vice president.
Freedman sat down with MULTIFAMILY EXECUTIVE this week to discuss the changes at AIMCO and his future plans as the REIT’s new CFO. Freedman, however, isn’t new to the CFO role. Before AIMCO, he was CFO of HEI Hotels and Resorts. That taught him the importance of “managing to the penny”—something he brought with him to AIMCO and something that certainly is valuable in these difficult economic times.
MFE: How long had this move been in the works?
Freedman: When Tom left, Terry and I had a pretty long conversation, and I spoke with David Robertson as well. In the spring, we started telling people that sometime over the next 18 months we expected that I would transition into the role of CFO. We weren’t certain of the timing, but we thought that David would be in the role on a temporary basis to help with the transition and to help get me up to speed in certain areas where I hadn’t been working with Tom directly.
MFE: What triggered the move now?
Freedman: Clearly the timing of November 1 was because we wanted to get through the third quarter. What also triggered it were a lot of conversations between David and Terry. David wants to be a CEO, and he’d love to be CEO at AIMCO. But that’s Terry’s job. That’s what Terry does on a day-to-day basis and what Terry loves doing. This gives David a little more flexibility over the next couple of months to finish out what he’s focused on and also to start testing the waters a little bit as to what his next opportunity will be.
MFE: Was the timing of David’s departure a surprise?
Freedman: It’s something that Terry and David had talked about periodically over the year, and they had been talking about it more frequently over the past few months. It was something that wasn’t shared publicly and was probably taken as a surprise by many in the industry. At the same time, I think most of the industry would agree that David was more than prepared to be CEO of AIMCO. But [given] the fact that Terry isn’t going anywhere, people can see how that makes sense from a career standpoint for David [to leave].
MFE: Now that you’re CFO, what are your big priorities? You’re taking over in a very turbulent time.
Freedman: My top two priorities are making sure that the balance sheet is where we want it to be and that we have the added liquidity. The other priority is on cost containment and making sure that we’re focusing our spending in the right places, specifically with the balance sheet and liquidity. We’ve made a ton of progress in taking care of our term debt that comes due in the first quarter of 2011.
We still have a lot of sales we have to get done in November and December and the early part of January. Until those are done, we’re going to keep a very close eye on what’s going on with the balance sheet. We’ve been very successful in extending and refinancing our maturities that are coming up in 2009, 2010, and 2011. We’re starting to focus on 2012 through 2014. It seems that every six or seven years, there’s a blip that can be a significant blip, be it the dot.com in the 2002 time frame. Now, of course, you have what happened in the capital markets in the 2008 time frame. We have something we have to be thinking about every six years and 2014 is not that far away. It’s not that we can focus on problems that are three or four years away, but we want to be prepared appropriately. We want to manage our maturities schedule.
We’re in great shape short term, once we get that term debt taken care of. I think we’re in very good shape when it comes to our properties. There are things we can do today to take advantage of great interest rates and take advantage of a very good lending environment for us. If those things [lending outlets] aren’t available in three or four years, we have to make sure that we won’t have a similar crisis that most of the industry had to suffer through in the last year or two. That will always be focus No. 1. One of the things Terry told all of his CFOs is that when you wake up in the morning, make sure we have enough cash.
MFE: What’s your second focus?
Freedman: Second is really cost containment. This is an area where I had a lot of experience in prior companies. I want to make sure that the limited resources we have available are focused primarily as close to the property as possible. As we go through tough economic times, the key is to maintain the relationships with our current customers and provide them the services they expect. That meant we had to put a little stress on the rest of our cost structure. We’ve been successful in reducing costs across the organization by more than one-third from 2008. Part of that is from the fact that we sold about 15 percent of our assets in 2008. But most of it is that we saw opportunities where we can be a little bit leaner and focus our spending a little bit better. I want to continue to focus on that as we go into 2010.
MFE: Are there any specific areas where you think you can push savings a little more?
Freedman: In 2009, we’ve done a great job in flexing our redevelopment team. In the last couple of years, we’ve spent $250 to $300 million a year in redeveloping our assets and generating some opportunities to push rents. In this marketplace, we haven’t been able to do that.
The beauty of the redevelopment program is that you can turn it on and turn it off pretty quickly, especially compared to the ground-up development program. We’ve been able to scale that team back over 60 to 70 percent because we scaled the spend back. That’s down to $50 to $75 million a year as we’ve finished up some projects in 2009. It may be an even lesser number in 2010. We’ve been very successful there.
We also have an opportunity to be much more successful in our technology and what we’re using to run our back office. In the past, AIMCO leaned toward customized software and using our own stuff. We’re starting a program to start shifting to more off-the-shelf applications. The programs that are available today are much better than what were available five or ten years ago. We had to create our own thing to make sure we had the information we needed. But we don’t need to do that anymore. By going to an off-the-shelf type product, we’re going to have an opportunity to trim a lot of costs within our IT department in the next 12 to 18 months.
We’re just very focused on making smart decisions across the organization, spending our travel dollars better. We have the opportunity, like many companies, to go back to vendors and say, 'It’s a tough economy, let’s talk about the services you’re providing and see if you can provide the same level of services for a little less.’ People are hungry.
MFE: As far as portfolio trimming, what are you seeing in the market? It looks like the sales market is loosening up, and in some markets there is actually pretty healthy bidding among 30 to 40 people. Is that what you’re seeing?
Freedman: It absolutely is. The turn for us was in the June and July time frame. We closed a transaction in July that was a $70 million transaction in Plainsboro, NJ. It was an institutional buyer, and the lender was an agency, not a bank. It was a little bit of a bellwether event for us.
We’ve seen in the last 90 days that pricing has stabilized. In some cases, we’re seeing that it’s improving. Six months ago someone came to us with a re-trade where they needed more time to complete their due diligence. We were willing to see if we could do an accommodation that would work for both parties. Today, we have the confidence to push back a little bit more and not extend the due diligence and not compromise as much on re-trades. It’s generally shifted a touch toward the seller.
There have been a few good institutional assets that had significant bids. We’ve actually chosen to slow our sales program a touch only because we’re getting closer and closer to raising the proceeds that we need to pay off our term debt. We want to shift from selling assets to paying down our term debt and improving our balance sheet to making sure that we sell assets with identified use of proceeds, whether that’s investing it back in our portfolio or whether it’s time to start trading from a weaker asset to a stronger asset.
MFE: Based on third-quarter conference calls, some of your peers are thinking more offensively than defensively. Whether it’s buying assets or even starting new development or doing redevelopment, are you thinking along the same terms?
Freedman: We have to make sure that we take care of our balance sheet. Everyone gets so excited about the potential future opportunities that will come up, that they lose track of next year. Over the next three to five months, we have a lot of sales that we expect to get done to have the term debt fully paid. Over the last seven years, we’ve tried to rightsize our portfolio and make sure that we’re in the markets we want be in and we have the assets we want. Now, we can be a little more opportunistic as we think about 2010. We’re very close to having that portfolio we want. Now the opportunity is to start trading those weaker assets and investing in redevelopment dollars and capital dollars in our portfolio. That’s exciting.
We talk about being more of a neutral player. If we do sell, the proceeds would be available to invest in the company through redevelopment and acquisition of new assets. We were never going to stop selling. Any good real estate operator always will be looking at their portfolio and looking for opportunities to take what’s at the bottom of the portfolio and trade up for better assets. I would expect, in a typical environment, that we would probably be selling 5% to 10% of our portfolio every year. But the difference going forward is that we will be reinvesting that capital in our portfolio by buying better assets or improving the current assets we have. We haven’t been doing that over the past few years. Starting in 2010 and into the future, that’s what you will see out of AIMCO.
MFE: What are your biggest challenges right now?
Freedman: The biggest challenge is that it’s a tough operating environment that we’re dealing with. We’re really pushing our local teams to be clever. We continued to push hard on the cost side with vendors. We think there are some untapped revenue opportunities for us. There might be some opportunities at some of our urban properties to be more aggressive on pricing for things like parking. We also think there’s opportunity in regards to storage spaces. Plus, we think there’s a lot of singles and doubles [units] out there that can add up to some big dollars. Across a portfolio as massive as ours, if you can generate more money out of singles and doubles, it adds up to a huge number. It’s really at the local level going asset by asset and saying this is a $10,000 opportunity here and $25,000 opportunity there, and they quickly add up across the board. That’s one of our biggest challenges, to take this economy head on and do the best we can to focus on our current customer and do everything we can to retain that resident.
Our other challenge as we get into 2010 and as we go forward is taking advantage of any opportunities that may be out there [for acquisitions] as far as tough situations for current owners who got themselves in a little bit of trouble with debt financing.
MFE: Do you think Last Friday, the Federal Deposit Insurance Corp. policy that allows banks to continue to modify and extend commercial real estate loans, will thwart this flood of distress everyone talks about?
Freedman: I think the bigger opportunities will come from the CMBS world, where you’re dealing with special servicers. The broader question will be how the special servicers deal with the issues they’ve had. Nine months ago, everyone expected these phenomenal opportunities coming up very quickly because of owners being overleveraged. Clearly no one is interested in taking the real estate back. And, if you’re dealing with an owner who has been honest and is trying to work through things, we’ve seen the banks and special servicers giving them opportunities.
People were thinking it might be like the RTC days. But most people have come to the conclusion that this won’t be the case. But we still need to see. Some of the biggest opportunities will come over the next two or three years. We learned this year that it’s a very volatile market. To try to predict what the capital markets will look like in the next few years will very challenging.
