Creating Shareholder Value

By Michael Ratliff, Associate Editor

New York—UDR Inc. had a big year in 2011. The REIT entered New York with the acquisition of four communities containing 1,916 homes. In the past decade, the company has increased its enterprise value more than two-and-a-half times thanks to a focus on luxury, amenity-rich apartments in its primary markets. MHN Associate Editor Michael Ratliff recently spoke with Tom Toomey, President and CEO of UDR, about the strategy for the REIT’s continued success.

What has been your major objective for UDR since joining the firm? How have you worked to reach this goal?

If you look back on what turns out to be 11 years since having the opportunity to take over UDR, the objectives really haven’t changed much over that time frame. I think the first goal is to always create shareholder value, and that is not done in a short window of time. In the real estate field, it is usually done over a long period of time, and I think we have accomplished that. Perhaps our biggest objective was to improve the overall portfolio quality.

In 2001, our company was comprised of 77,000 apartment homes in 62 markets within 21 states. Today, it is 60,000 apartments within 23 markets in 14 states and Washington, D.C., so we have shrunk the size of the enterprise in terms of the number of homes but increased the value. In 2001, the enterprise value was probably about $4 billion. Today, it is a $10 billion enterprise, with another $4 billion in joint ventures. So the size of the company has increased but the market focus of the company has shrunk, and the portfolio quality—which one might measure by rent per home—has gone up from approximately $700 a month to nearly $1,400 a month.

Looking back at 2011, is there a particular achievement that you are most proud of?

I think the biggest success in 2011 was entering New York. New York now represents more than 15 percent of the enterprise. Twelve months ago it was zero percent, and that was through $1.5 billion in acquisitions. Entering New York in a significant way was one aspect of our success in 2011.

I also believe that our operating team did a fantastic job  of managing the business out of the recession from both a long- and short-term perspective. To deliver the type of net operating incomes they achieved while the company transacted $1.8 billion in acquisitions and, at the same time, selling $600 million is very impressive. We have put a lot on our operating team in the past year, and they have certainly delivered.

Can you describe the ideal property in which to invest for 2012?

What we have been looking for in our acquisitions and the assets we have been trying to bring into the portfolio is something where we can create value. You can add value through an operating platform, a redevelopment platform or through something that is well priced in an up-swinging market. These are the things we are always looking for. We don’t just go into an auction, but rather lean towards a strategy of figuring out how to create some value that is embedded in the asset.

What about the disposition side? How do you ensure a good return on investment?

I always think you have to look at individual assets. Everyone looks at companies as a whole, but the truth is that you have to look at the individual asset. To that extent, we are going to sell a lot this year. We have looked at some of our properties and decided that we have accomplished what we can. I think the people who are going to buy some of the assets that we are going to sell are going to do very well on the financing side and make a lot of money. I just think you always have to look at your individual communities. They are not like your children, who you get to keep forever—you do have to look at them and say it is time to move on.

What are some of the challenges the industry faces today?

There are some challenges that have always existed and there are others that are newer to us.  One that has always existed is the element of capital disruption.  We have somewhat hedged against this with our access to many forms of capital, including common equity, preferred equity, and secured and unsecured debt.

So one aspect of risk is capital disruption, and realizing that every time there is a disruption, there is an opportunity. You should always have it in your mindset that disruptions are going to occur. What you have to do running a company for the long term in our business is see past those setbacks and take advantage of those disruptions and volatility. It is also important to have the right long-term strategic partners. UDR has a long and deep relationship with MetLife, and to a smaller extent but perhaps more interesting at times is our relationship with Kuwait Finance House.

I think another challenge that is clear, that is always out there, is government intervention and the noise that it creates around housing policies and rent control, and these are aspects that you just have to try to minimize your exposure to. You are not going to escape them, and you are not going to be able to hedge them, if you will.

On a more recent and more surprising front is the connectivity of the global economy. I would never have thought that a potential default of Greece’s debt would have had an impact on my enterprise.  I think that you have to be more aware of the global aspect of the economies and political environment, and realize that on some derivative they are going to have a direct impact on you and your business.

And lastly, as far as challenges go, there is always the talent in your organization. The successful organizations always have to work at bringing in talent, as well as nurturing and keeping the talent that they have. That is easy to do in a recession, but in a recovering economy it is a lot easier for competitors and startups to hire talent than it is to create a culture and raise their own.