09/04/2009 | By Allen Kenney
As a leading multifamily REIT, UDR, Inc. (NYSE: UDR) has demonstrated an ability to successfully navigate tough market environments with sound strategy and forward thinking. Recently, UDR formed a joint venture with Kuwait Finance House. Recently, REIT.com talked with UDR President and CEO Thomas Toomey about this and the challenges facing the multifamily sector.
REIT.com: What are the biggest economic factors weighing on the apartment sector right now?
Toomey: By far the greatest economic factor weighing on the business now is the employment outlook. With more than 7 million jobs lost and many more people just giving up the job hunt, the apartment sector has been hit but is holding up very well, all things considered.
We attribute this relative strength to a weakened single-family housing market and lack of new apartment supply. At the end of the second quarter, our occupancy levels hit just under 96 percent, so our greatest upside lies in front of us when jobs return.
REIT.com: Can you elaborate on the impact residential housing prices has had on rents?
Toomey: With our portfolio sale in March 2008, we were able to extract ourselves from many of the supply-heavy and overbuilt housing markets. In our top-20 markets, which skew toward the more supply constrained MSAs, our average rent is still well below what you would pay in an average monthly mortgage payment.
That being said, as housing prices have fallen, we have not seen the number of our residents moving out to homes (which is typically in the 25 percent range) increasing. Our move-out to purchase homes stats have actually dropped to a record low of 10 percent.
Will this trend continue or will we revert to normal? Time will tell, but our view is that we will see something in the middle. As jobs and consumer-confidence return we believe that the single-family home market may face headwinds exacerbated by higher interest rates and larger down payments. In our view and with our strategic positioning, renting is still a compelling economic option.
REIT.com: How is UDR seeking to leverage developments in technology to appeal to potential customers?
Toomey: Over the last several years, we have invested a significant amount of capital in our technology platform. Our primary target rental pool of 20 – 35 year-olds want to interact with UDR on an electronic platform that includes hand-held devices. Convenience and efficiency are important to this age group. We are very close to reaching the complete loop of being able to secure residents and service them entirely through the internet without paper.
This platform has enabled us to increase our occupancy, reduce our vacancy days, and reduce our cost structure both in turnover marketing and payroll. This has also enabled us to maintain our operating margin at 68 percent or better through the recession. Ultimately, we believe that the apartment industry will service its customers like many other industries-airline, banking, hospitality-through a completely electronic platform.
REIT.com: Tell us a little bit about your new joint venture with Kuwait Finance House (KFH). What is the focus of this fund? What made KFH an attractive partner?
Toomey: We recently announced a $450 million joint venture with KFH focusing on Class A assets that are seven years or newer in selected markets including Boston, New York, Washington, D.C. and many west coast markets. KFH is an attractive partner that has real estate investment experience in the U.S. and around the globe. So for them to see the value in the U.S. at this time is a very good signal. The benefit to us is the ability to leverage our platform and potentially enter new markets that fit our high barrier strategy with an attractive risk-adjusted capital commitment.
REIT.com: What do you consider to be the greatest challenges facing UDR in the next two to three years, and what is the company doing right now to prepare for those challenges?
Toomey: This may be hard to believe, but I think that our greatest challenge may be in exercising patience. As the fundamentals of the business improve, we believe we will see greater opportunities. Therefore, we are continuing to focus on the refinement of our property management delivery systems, our technology and increasing our financial flexibility.
We believe this will position us well for the impending growth in our business - from an increase in the number of renters and record low development activities, to a tendency for capital to flow to superior operators with large footprints.