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Realty Corporation has done what they said they
were going to do in selling certain Midwest properties and paying down their debt, which
has improved their cash flow, debt service coverage and unencumbered properties by paying
Associated Estates Realty Corporation
1 AEC Parkway
Richmond Heights, OH 44143-1500
Chairman, President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
Published - March 29, 2007
Jeffrey I. Friedman, Chairman, President and CEO, has been involved in the real estate
business since 1969. He joined the organization in 1974. Mr. Friedman has served as
Chairman and CEO of the Company since 1993. He is involved in both national and local
civic and charitable organizations, including the Greater Cleveland Sports Commission. He
is a graduate of Leadership Cleveland and is also active in several professional
organizations, including the National Association of Real Estate Investment Trusts, World
Presidents Organization, Urban Land Institute and the National Multi-Housing Council.
Associated Estates Realty Corporation is a real estate investment trust
("REIT"), headquartered in Richmond Heights, Ohio, a suburb of Cleveland. The
Company specializes in the ownership, management, development and acquisition of apartment
communities. The Company directly or indirectly owns, manages or is a joint venture
partner in 100 multifamily properties containing a total of 20,758 units located in nine
CEOCFO: Mr. Friedman, when we spoke
about 2 years ago you were working on a strategic plan to make some changes to the markets
in which you operate; please bring us up to date as to what you have been doing and how
its been working.
Mr. Friedman: Thank you Lynn,
its really a pleasure to talk with you once again. From a strategic standpoint, we
have continued to do the things that we said we were going to do, which was to sell assets
in the Midwest, to grow in other markets and to use the proceeds of the sale of our
non-core Midwest portfolio and certain other assets to pay-down debt. That has worked very
well. If you measure how well were doing by our stock price performance since we
last spoke, were doing quite well!
CEOCFO: What markets do you operate in
Mr. Friedman: Today we own and manage
about 100 properties and over 20,000 units in 9 states. Properties that are owned by
Associated Estates are, for the most part, what we would refer to as your class-A and
class-B, suburban garden-type apartments. In our 9-state portfolio of properties, just
over 60% of our NOI (Net Operating Income) comes from properties in the Midwest, including
Michigan, Ohio and Indianapolis. We also own one property in Pittsburgh. While Pittsburgh
is not really the Midwest, its close enough. In addition, we own properties in what
we refer to as the Mid-Atlantic, specifically Metro D.C., Atlanta and Florida. Metro D.C.
represents about 9% of the companys market-rate NOI and almost 6% comes from the Atlanta
market. In Florida, almost 16% comes from our properties located in Ft. Lauderdale, West
Palm Beach and Orlando.
CEOCFO: What are your growth areas?
Mr. Friedman: We are repositioning our
portfolio by selling certain Midwest properties, as well as our only property in Houston, Texas,
and we just sold our only property in Raleigh, North Carolina. Our objective is to
decrease the number of markets we operate in and expand outside the Midwest in faster
growing markets. We are always looking to grow in markets with strong fundamentals where
we can buy a portfolio of properties or build enough of a presence to support our
management team, which is really the key to this business
Good properties, good
people and critical mass.
CEOCFO: Service and customer satisfaction
are key for Associated Estates. How do you foster an atmosphere that encourages your
people to go above and beyond?
Mr. Friedman: Clearly, at AEC it is
about the 3 Ps: our people, our processes and our portfolio. About our people, one of the
things that we did just 2 years ago was bring in a seasoned apartment specialist, John T.
Shannon, senior vice-president of operations, to lead the property operations team. John
has built a team of people and created innovative training programs that help each of our
employees at our properties do a better job every day, tending to our customers our
residents and our prospective residents. As a company, we have committed significant
resources, over $1 million per year, in terms of training, educating and providing
resources and support.
One of the big changes since we last spoke is that we now send our training teams to the
properties to train the staff to understand the local market and the competition. In
addition, our training team helps develop programs for leasing and setting rent that is
specific to the properties in each market. For example, one of the things that we have
done is that we have partnered with a company that provides a 24-hour, 7-day a week call
center. So, if one of our team members at a property, such as a leasing agent, is sitting
and talking with a prospective customer or a resident and the phone rings, he or she does
not have to stop mid-task to answer that phone. Rather, the phone is picked up by a
trained professional who is experienced with regard to that property and can handle the
information that a customer may need, whether it is a service call or someone who is
interested in renting.
Technologically, weve created an online concierge, electronic payment, interactive
websites and property management software that make it easier for all of our customers to
communicate. We have created something that is proprietary called, Responsive Service
Visit Program, and the acronym is RSVP. That program requires that our site level staff be
in contact with each of our residents at least 12 times per year, so that it is not only
when there is a maintenance issue or something that needs to be done. This is regular
contact to make sure that we are meeting the expectations of that resident. To measure how
were doing, we have created an enhanced reporting environment, so that we, as a
company, get information and results quickly. With that, John Shannon and his team are
able to provide the hands-on attention and support that is always needed to get the best
performance from each of the properties.
CEOCFO: Do your tenants know that they are
in an AEC managed property and should it matter to them?
Mr. Friedman: We like to call our
customers residents, and what you are referring to is our branding concept. That is where
the third P, our portfolio, is so very important. Number one, residents want a
hassle free living experience. They want to think that they are getting a good value for
their money. We all know from our own personal experience that sometimes we are willing to
pay a little more for something if we think that it is better or we think that we are
getting better service. Therefore, we think that the capital that we invest in our
property helps residents recognize that when comparing AEC to others that they are getting
better value. In addition, there is also location to consider, and at AEC, because we do
not just buy or build a property anywhere, we want to be in the right school system, the
right side of the street and located close to certain services that make it convenient for
our residents. When they walk onto our property, they see the AEC name, but hopefully they
feel our Service, Satisfaction and Value mantra. At the property level, it isnt
about promoting AEC, its about ensuring that each of our residents believe that they
are getting good value for their money and that they have as hassle free living experience
CEOCFO: What do you like about the Suburban
Garden Apartment arena, since it seems that you are choosing to be almost exclusively in
Mr. Friedman: If we describe the
apartment business, we would describe it as either Suburban Garden or Urban Infill. You
dont typically see Garden apartments in the downtown urban centers of major cities
due to the amount of land needed for these style properties. Instead, you will see
vertical or High-Rise buildings in the central business district. Historically, except in
a few 24-hour cities like Chicago and New York, people were not living downtown. It is
only recently that you find cities, such as Los Angeles, Dallas and Miami, where lots of
people are beginning to live downtown. Only in recent years have cities become a hub for
rental units. At AEC, our focus continues to be on the suburban locations. We believe
that, over the long haul, suburban properties will continue to perform well. However, that
is not to say that in the future, we wouldnt consider opportunities to grow in urban
locations, but at this point our concentration is in the suburban style property.
CEOCFO: Tell us about the apartment housing
market, how it has been affected by the housing market in general and specifically to your
occupancy, rates and ability to increase rent.
Mr. Friedman: The rental housing
business is driven by two things. The number one driver is household formation and second
to that is job growth. Very simply, you will see the strongest rental markets in the
communities that have the most people moving into them, and when you combine that with,
for example, job growth, you have both of the main drivers for the apartment business. For
example, in Las Vegas, you have people moving in and tremendous job growth; in Southern
California, you have people moving in with lots of jobs, but not as many jobs as Las Vegas.
Then you have South Florida, where you have lots of people moving in, and in certain
cities good job growth, such as in Orlando, with Universal Studios (a subsidiary of NBC
Universal) and The Walt Disney Company (NYSE: DIS). Then you go down into Dade County or Miami,
where there is not as much job growth, but lots of people moving in. Therefore, a
combination of those factors drive rents. In Atlanta, we have tremendous job growth and
because of that, you have people moving in. Now the question is, how do those jobs
relate to household formation and then what drives price? What drives price is the
difference between the cost to own and the cost to rent the higher the average home
prices, the higher the average rents. Specifically, if you think about the markets that
have the highest cost to own, those would be New York City and maybe San Francisco or even
Chicago or Miami. These are cities where the cost to own a home is so great that there are
many people who cant afford them. Over the last couple of years with the inflation
in home prices, even though today people would describe the housing market as being soft,
costs have gone up so much that in many of these markets, it costs much less to rent. This
has given apartment owners the ability to push rents. Thats one of the reasons we
have been so profitable and successful over the last few years. So, even though the
housing market has been softer, of late, apartment owners have had pricing power because
of the decrease in the spread between the cost to own and the cost to rent.
CEOCFO: Why should investors be interested
in Associated Estates Realty Corporation today?
Mr. Friedman: If I said that it was
just because we had a lot of hard working people, certainly, that is not enough to attract
the interest of investors. However, we do have a couple of very compelling, yet simple
reasons. First, it helps that we have done what we said that we were going to do.
Weve improved our cash flow, our debt service coverage and unencumbered properties
by paying off mortgages. That is very important to our stockholders; we said were going to
pay off mortgages and improve the balance sheet, and we did. Secondly, what we said when
we recently announced our 4th Quarter earnings is that we are going to continue
to sell Midwest properties at historically low cap rates, we are going to use the sales
proceeds to continue to pay down our high coupon debt, to further improve our cash flow
and we are going to look for acquisitions opportunistically. We expect to generate over
13% FFO (Funds From Operations) per share growth, based on the mid-point of our 2007
guidance. Therefore, the most important reason you buy AEC stock today is that 13% FFO
growth is, as of now February 2007 the highest projected FFO per share
growth of any other apartment company that I know of. Lastly, and most important, with
regard to the why, is that the company has said that the net asset value,
which is the value of all of our properties, minus the debt, plus the other assets, minus
the other liabilities, is over $27.00 per share, and we are trading at about $16.50 as we
speak today. There is an opportunity for people who buy AEC stock, to buy a REIT at a
substantial discount to its net asset value. In addition to the expected growth, an
investor should also be able to benefit from the current $0.68 per share annual dividend
in 2007. I think those are compelling reasons to own AEC.
CEOCFO: What challenges do you see going
forward and how are you ready?
Mr. Friedman: Our management team has
many years of collective experience in the apartment business; we have the deepest bench
in the history of the company. Therefore, in terms of challenges, we are a prepared team
with expertise to deal with the market conditions as they change from time to time. The
things that we can control are things like the training, the condition of our properties,
a hands-on approach to running our properties and then being flexible and responding to
the changes and demands in the market. The things that we cannot control are things like
the world geo-political situation and what happens with interest rates. Therefore, the
challenges in the apartment business are to try to anticipate how those global issues and
micro-market issues affect our properties and our bottom line. Those changes may include
plant closings, new jobs and trends in living downtown verses suburban. Then, our
challenge is to make sure that we have dedicated experienced people on the ground at every
property and in our corporate offices in Richmond Heights, Ohio, to be able to address
CEOCFO: Do you have any final thoughts for
Mr. Friedman: To sum it up, we have a
very simple strategy. We are selling properties at historic low cap rates and high prices.
We are paying off high coupon debt and strengthening our balance sheet. The group of
properties that we own today are well positioned to be able to perform, at or better than
the market, and to generate what we believe will be above market returns. As a result, the
performance expected from AEC and probably its stock price as a result of the relationship
between our performance and stock price should be spectacular. In 2006, our stock
appreciated 50%, and the total return to our shareholders was over 57%, which is the stock
price appreciation plus dividend. Although that will be a tough act to follow, we expect
that our shareholders will see significant stock price appreciation, in addition to our
dividend, in 2007.
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