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Associated Estates will spend over a
million dollars in 2005 on tools and training, to assist their employees in providing
customers a legendary experience every day
Real Estate Operations
Associated Estates Realty Corp.
5025 Swetland Court
Cleveland, OH 44143
Jeffrey I. Friedman
Chairman, President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
March 24, 2005
Jeffrey I. Friedman
Chairman, President, and Chief Executive Officer
Associated Estates Realty Corporation
Mr. Friedman has been involved in the real estate
business since 1969. In 1971, he became involved in the multifamily housing business,
learning the business from the ground up. In 1974, he obtained his Bachelor of Science
degree from Ohio State University. Mr. Friedman joined the Associated Estates organization
in 1974. In 1976, he was named Vice President and a Director of Associated Estates
Corporation and AEC Management Company. In 1979, he was named Chief Executive Officer and
President. Mr. Friedman continues to hold the positions of Chairman, President, and
Chief Executive Officer. In July 1993, Associated Estates Realty Corporation was formed as
a real estate investment trust (REIT). The Company went public in November 1993 (NYSE:
AEC). Today, AEC directly or indirectly owns, manages or is a joint venture partner in 109
multifamily properties containing 23,657 units located in 12 states. Mr. Friedman is
active in several 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 various professional organizations, including World Presidents Organization, and
Urban Land Institute.
Associated Estates Realty Corporation (NYSE:AEC), one of the largest multifamily
property owners in the United States, is a real estate investment trust ("REIT")
headquartered in Richmond Heights, Ohio, a suburb of Cleveland.
The Company directly or indirectly owns, manages, or is a joint venture partner in 109
multifamily properties containing a total of 23,657 units located in 12 states. AECs
most valuable resource is its intellectual capital. A highly trained and motivated
professional staff is committed to providing an unequaled level of resident service and
meeting or exceeding customer expectations.
Shares are traded on the New York Stock Exchange under the symbol AEC.
CEOCFOinterviews: What was your vision when you became CEO,
and how has that evolved over time?
Mr. Friedman: The vision that we had for Associated Estates at the time we
went public in November of 1993, was to be the dominant owner/manager of apartments in the
Midwest. At the time, we thought that specializing in one geographic market would
differentiate AEC from other apartment companies, so that investors had an opportunity to
choose whether they wanted to invest in a company with Midwest assets, or companies with
assets in other markets. We thought that specialization was a strength. However, as
the landscape for apartment companies changed, and many of the players began operating in
a multi-regional way, it became apparent that, for us to compete for capital, we, too,
would have to be involved in multiple regions. The vision that I had in 1993 has changed
to today where we operate in 12 states. From a strategic standpoint, we will continue to
lessen our dependence on our Midwest assets by both selling some of our Midwest properties
and acquiring properties in other markets, such as Florida, metro D.C., and Atlanta.
do you look for when you are looking to acquire a property?
Mr. Friedman: That is a great question because there
are a lot of us out there looking. I will tell you some things, but if I tell you
everything, I would be giving up what we think might be an edge. Apartments are all
different; even those apartments that may be located next to one another, because suite
layouts are different, amenities are different, and the construction type is different.
What we look for is something that will set our property apart, whether it is the size of
the units, density, or availability of attached direct access parking. For example, we
have a property in Sagamore Hills, a suburb of Cleveland, called Williamsburg Townhomes.
The entire development is made up of townhomes with attached garages. Even in a market
that is otherwise soft because of the competition from single-family home purchases and
condo development, Williamsburg has maintained relatively strong occupancy because it is
different from your typical apartment.
is it that determines where you will be geographically?
Mr. Friedman: In 1998, we acquired a pension fund
advisory business, known as MIG Realty Advisors. As part of that transaction, we acquired
11 stabilized properties, two properties under development, and approximately 30
properties for which we acquired the management and advisory responsibilities. We expanded
from Ohio, Michigan, Indiana and Pennsylvania, to several other states with the
acquisition of the advisory business in 1998. At that time, the acquisition was
going to be much larger and our presence in many of those markets, more substantial. As a
result of only owning a few properties in certain regions, we then began a process of
disposing of assets where we did not have enough of a presence or where the properties
were located in markets where we were not planning to grow, such as St. Louis, Houston, Phoenix,
or Palm Desert.
Our objective, from a strategic standpoint over the next few years, is to reduce the
number of markets that we are in and concentrate more on the markets where we remain. We
will continue to dispose of assets in markets where we are not planning to grow, like Raleigh,
North Carolina, Houston and Phoenix, where we have a single asset in each of those
markets. In some cases, the dynamics of a specific market are such that, even if we want
to grow - in Florida, for example - we may be selling an asset because someone is willing
to pay us a price that we think is a good price, and we can make more money by reinvesting
those dollars in another asset in the same region.
own properties, manage properties, and joint venture with some; why this particular mix
and would you like to see a change?
Mr. Friedman: We own and manage approximately 110
properties and about 23,700 units. Of those, we manage approximately 30 for others, or
approximately 5,500 units. The fee management business is a very specialized business.
Under the direction of our Senior Vice President of Operations, John T. Shannon, and his
team of regional vice presidents, we have determined that certain of these fee management
opportunities can be profitable and enable us to spread some of our overhead costs by
managing other properties in markets where we already have a beachhead of properties we
own. On a select basis, we will be growing the fee management business, but that is not
our core business. Our core business is managing properties that we own or have an
ownership interest in. We will continue to look for opportunities with local developers
and some of our pension fund clients to grow by way of joint venturing.
tell us about occupancy rates and how you get more out of your rentals.
Mr. Friedman: This has been a tough time in the
apartment business in practically every market. The biggest competition in recent years
has been the impact of historically low interest rates and the relative ease for people to
purchase single-family homes. For example, the average price of a first-time buyers
home in the greater Cleveland market is about $115,000. If you think about a five to ten
percent down payment, the monthly mortgage payment plus taxes and insurance, is, in many
cases, lower than the actual rates we charge to rent an apartment. This is the first time
I remember it being this way, and I have being doing this for over 25 years.
It has been difficult to not only keep our properties full because of the competition from
home purchases, but also to raise rents, which has squeezed our margins. At the same time,
real estate taxes and wages have increased. So, on the expense side, we have seen an
inflationary effect, but on the top line, at the rental income level and after the impact
of concessions, we havent had the increases. Today, more than ever, our focus is on
customer service. People want a hassle-free living experience. If there is a problem, they
want to call and have it repaired. When they leave, they want to come home and find things
the way they were when they left. They want to be proud of where they live. Maintenance is
extremely important, as is a friendly attitude and doing things right the first time. We
know that people make a decision about renewing within 15 minutes of signing their lease;
within that brief time period, they realize that they like or dont like where they
are. They may also realize that they like the people with whom they are doing business. It
is our task not to disappoint them and to continue to earn their business over the term of
their lease. In order to raise rents, we must provide a great level of service. To
help offset some of our increasing expenses, we have been able to pass through some of our
utility costs by asking residents to pay a portion of them. Residents seem to be more
willing to pay these kinds of increases because they recognize that those services are a
cost to us.
Legendary customer service and quality employees are two key
focuses for you. How do you foster this throughout your organization?
Mr. Friedman: The concept of an unequaled commitment to
service starts at the top and permeates through every level of the company. Hopefully, the
experience that residents, investors, vendors and the general public have when they call
us is a good one. It does not happen accidentally; we will spend over a million dollars
this year, reinforcing the tools and educating our employees about what they can do so
that our customers have a legendary experience. We support that and reinforce that with
telephone shopping calls and e-mail shops. Our regional vice presidents are in the field,
constantly walking the properties with the managers, developing creative incentive plans
for the maintenance and leasing teams, and figuring out how to stay full and get the
maximum rental dollars at each property, based on the specific competition in each market.
We have to walk the talk everyday. With our 24,000 units, and with an average of a 55%
resident turnover rate, we are turning over approximately 13,000 apartments every year,
which means that, to maintain our occupancy, we have to find 13,000 new customers each
year. In order to lease to one customer, we have to see about four or five potential
customers, based on a 20% closing ratio. So, we are interacting with more than
100,000 potential customers every year in order to try to keep 24,000 customers. We are
constantly reinforcing those practices that we think will help us with that, from
telephone etiquette, to cheerfully greeting residents when our maintenance staffs are
walking the property, to the small things like picking up litter and making sure the
newspapers are not laying in the hallways for days.
From a compensation standpoint, one of the things
that we have done that I think resulted in exceptional performance in 2004, and should
continue, is that we went deep into the organization to incent our employees. Today, over
500 employees are incented based on either how well their properties perform or on the NOI
(Net Operating Income) the total company generates against our budget. We have incented
our people at the deepest levels of the company, from those people touching and dealing
with the residents everyday all the way up through the corporate support staff. Our
business is a customer service business. We want to provide the best services that we can
so that our margins are as strong as they can be. I believe that it is our compensation
plan that has focused so many people in the company on what drives our stock price and the
value of AEC.
that resident turnover rate for your company only, or is it typical of the industry?Mr. Friedman: Our turnover is probably lower than the
industry for two reasons. First, we think that our residents really do like living in our
apartment communities. In addition, the Midwest, where we have so many properties, does
not have the movement of people in and out of the region, that other markets may have. For
example, in Atlanta, the turnover rate may be 65% or 70%, or in San Antonio, because of
the large military population, it may be as high as 80%. It does depend on the market, but
I would say that our turnover is below the industry standard.
the difficulties of raising rents over the past couple of years, are you able to continue
the maintenance and improvements that you need to do on a regular basis?
Mr. Friedman: It is very important that we maintain our
properties. We do not substitute maintaining the property in exchange for earnings.
We recognize that we cannot keep a property full and we cannot rent an apartment if the
carpet is not in good condition, the public areas are not up-to-snuff, or the amenities
are not in proper working order. Certainly, areas such as parking lots have to be
maintained. If we cant satisfy our existing residents, then we will find ourselves
having to fix things for another resident in the future. We spend a lot of money, $600 or
so annually per unit, on the recurring capital expenses relating to the maintenance of our
properties. From time-to-time, we will evaluate a property and determine if there are
other improvements that we can make that might generate higher rents in exchange for
making those investments in the properties.
should potential investors be interested in AEC, and what should they know that they might
not realize when they first look at the company?
Mr. Friedman: First, our shareholders who were
shareholders in 2004 had a very good year; they had a total return based on stock price
appreciation plus the dividend, of 45%. With regard to our dividend, almost all of it was
return of capital, which means it was not taxable. Our investors in 2004 were rewarded in
a big way. We told the Street that we would focus on improving our margins, which we did
by improving them by over 400 basis points. We also told the Street that we would generate
enough funds available for distribution, or FAD, to cover our dividend, and we did. We
said we would improve our balance sheet, our debt service coverage and our fixed charge
coverage, and albeit slightly, we did.
I believe the Street is finally starting to recognize that we have begun to deliver on
those things that we have said we would do. We recognize that we cannot affect stock
price, but what we can affect are the drivers of our stock price. By increasing our
same-store NOI $5.6 million year over year, we are doing the things that create
significant added value and that all of our shareholders will benefit from. Why would an
investor buy today, coming off a 45% return? I think there are a couple of reasons. First,
based on the consensus FFO per share estimate for 2005, our stock is currently trading at
a 9.5 multiple. We have given guidance for 2005 of between $1.05 and $1.10 per share.
Based on our guidance, our stock is trading at a 10.7 multiple. The average of the
apartment REITs is a 13.8 multiple. That says that there should be $2.50 to $3.00 of stock
price appreciation if our stock was trading at the average of the other apartment REITs,
so we think there is continued opportunity. We have also said to the Street that we expect
to generate FAD to cover or exceed our current dividend, and I think the Street is
comfortable that there will not be a dividend cut. Many apartment REITs and other REITs
today are facing tough decisions relating to their dividend levels. I think that potential
investors recognize there is an opportunity for a multiple expansion at AEC, which should
reward our investors, everything else being equal.
CEO, what is your focus?
Mr. Friedman: Day to day, I would say that 50% of my
time is related to human resource matters. Whether it is compensation and incentive plans
at all levels of the company, or ensuring that we have the bench strength and the depth
necessary in the markets in which we are growing. Most of the rest of my time relates,
from a strategic standpoint, to laying out and directing our future growth. In
todays very competitive market, there are a lot of dollars chasing every deal. That
is more than a full time job.
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