Lots of Ways to Make Money
- Mar 13, 2015
For best practices and innovation in the multifamily sector, look no further than UDR, Inc. The apartment REIT has been a market leader for more than 42 years by carefully attending to the needs of its shareholders, residents and employees. An S&P 400 company, UDR has delivered excellent returns by successfully managing, buying, selling, developing and redeveloping attractive real estate properties in targeted U.S. markets. As of December 31, 2014, UDR owned or had an ownership position in 51,293 apartment homes including 1,387 homes under development. MHN Editorial Director Diana Mosher recently interviewed Thomas Toomey, UDR’s CEO and president, on a range of topics from his optimistic apartment market outlook to best practices for safeguarding against cyber security risk.
What’s your overall forecast for the apartment market? Where do you think we are in the cycle, and are you optimistic about the year ahead?
First I would say that we’re certainly optimistic—not just about the year ahead, but for many years to come. Every market has its own type of cycle and rhythm. It’s hard to just throw a blanket over all of them, but in trying to do so, the way I tend to think of it is by using a baseball analogy, and I also look at it from a perspective of how do we make money in this business? We really do it in three ways. The first way is operations, and 2011 was when the tide started turning up. We’re now four years into that cycle of continued improvement in operations on a national level. So, as I look at demographic shifts, the propensity to rent, income levels, affordability levels and the economy itself—if this were a nine inning game—we think it’s probably in the third inning.
The second way you make money in this business is in acquisition and sales which are really determined by capital flows. You can see the amount of capital that has flowed into the apartment space and real estate as a whole, and you certainly look at what’s driving that capital flow. Are people looking for growing cash flows and security [or] risk adjustment. We can probably think of that more in the fifth inning. Interest rates won’t stay here [at this level] forever but they don’t look like they have any forward momentum of being pushed up anytime soon. So I think we’re going to be in that fifth inning for some time.
On the development front, we’ve been at this long enough to watch it ebb and flow. In our view, people have probably missed that a significant amount of the lending for multifamily is really concentrated in a handful of banks. In the past it was always a case of many local, regional banks making significant loans and things would get out of hand. The benefit of having so few banks lend in the space is the data flow about what’s going on seems to be very high. As a result, we tend to think that it’s going to be pretty tight on the supply side of the equation for development. We don’t see it really getting out of hand. So we’re probably more in that fourth or fifth inning. Again, this is a view that’s got many years to run [its course] just because of demographics and the other characteristics we talked about.
Are there any markets that you’re currently avoiding or are especially enthusiastic about and soon to be entering?
At UDR we’re not really market timers. We’re a long-term value creator. It’s awfully hard to time markets and call them favorable or unfavorable. In fact, I have probably seen us do better when we go into a market when it’s down, and ride the natural recovery wave on the way up. With so many markets caught in the equilibrium right now, I’m not opposed to any of the 15 markets that we’re invested in today. I don’t see us expanding beyond those 15. I think there are plenty of opportunities within them. We don’t really say, “Boy, we’re excited about this market or not excited about that market.” I think the 15 we’ve selected are long-term value markets. We’ll do well in them, if we stay patient and stay focused on individual opportunities.
At the last NMHC OpTech Conference you presented some interesting best practices for minimizing cyber security concerns. Can you share some of the key points?
There are four things regarding security that we discussed on that panel. The first is UDR focused on getting our server hardware out of our hands and managed by professionals that must pass rigorous third party audits on a regular basis. By not having hardware around, and putting things to the cloud, we thought we increased our security profile and lowered our risk. The second, we built out a robust monitoring of all our network traffic. You can move the boxes around and the software around. If you watch the traffic on every device that’s connected to our system, you can detect things that are unusual volume-wise, unusual registries. By putting in a monitoring system we are able to keep an eye constantly on what’s going on. The third is we walled off everything that is not required for an associate’s job. Every associate has a risk profile, has an authorization profile, and their access rights are governed by those two. They are constantly being reviewed. You limit access to what you just need to do your job. No wandering, if you will. The fourth is we implemented a software that proactively removes a lot of malicious links and emails (it works so well that I think it screens my mother’s emails). By stopping things before they are presented to associates or get into your system, we think we’ve strengthened it. No one is ever bullet proof and we don’t tend to think of ourselves that way. What we tend to do is continually look at what’s going on, ask ourselves inquisitive questions and investigate, and partner with great third-party vendors that see it the same way we do, and we’re always testing their systems for weaknesses and susceptibility.
This isn’t new to us. We moved everything to the cloud about four years ago in anticipation of looking at our cost structure and our risk profile and arriving at the conclusion that it was the best way for us to lower our risk. We didn’t lower our costs. We reinvested those dollars that we saved by getting rid of hardware. The staff related to it, and we focused more on our customer. We turned it around and spent all of those dollars on our forward facing systems to our residents. I think we’ve always been trying to press forward with our technology by really listening to our customer and looking at what they are doing.
It’s a hard game to play catch up. It’s a hard game when you go down and talk to the IT group and you say where we need to go, and they come back with a recommendation of let’s move it to the cloud, get rid of boxes, and we’re going to get rid of people. But at the same time you say where do you want to re-invest those savings? I think [we have] a good working group that has a lot of foresight. Our group is led by Chief Information Officer Scott Wesson, who I think is one of the better IT guys in the whole space.
What are the three most important amenities that you’re offering apartment residents today?
I don’t think in terms of standardizing amenities. What we tend to do is look at every individual community and ask ourselves, “What is the profile of the people who are going to live there? What are they most likely going to use?” And then we start building from there down. Obviously we want to devote bigger spaces to areas that are going to get used a lot. In the past I would have said, “Every community gets a movie theater.” But we go to the communities today and we realize people have 72-in. screens in their apartment homes. They don’t want to go downstairs to a movie theater. They want to have all their friends over. So the theaters seem to be disappearing. We’ve also seen the continuing trend toward more pets. So residents are more interested in dog parks and dog washes—and also bicycle shops. Probably 15 years ago we didn’t have a bicycle shop, and today it seems to be standard equipment. In every community we really are trying to customize the amenity package for that profile of people, and then size it accordingly for what we think the traffic is going to be. There is no set template for us. I think you just can’t say anymore, “Here’s how we’re going to do it,” and hope they come to you. I think you have to build your business around two critical structures which are listening to your resident and listening to your associate. Companies that do those two things and continue to adjust their products, their operating technique, their technology—our view is those are the companies that will prosper. Ask yourself, in any other industry, when people lose sight of those two things—meaning their customer and their associates—they tend to get very programmed and they tend to struggle against smaller, more innovative capable companies. We want to stay on that side of our resident and our associate.
Is there anything else you’d like to add that our readers should know?
I think we all should be excited about the opportunities in the industry right now and I think there are a lot of different ways for people to make money. I think the industry is growing in so many ways. You see it from the products that we’re putting up to the way we’re servicing our residents. I’m just proud to be part of the industry that I think is doing a better job every day. That’s fun. That’s exciting. It’s what keeps you in the game after 25, 30 years. It’s [energizing] to constantly realize that we’re getting better and we’re doing a better job at it—not just as a company, but as an industry. And we always encourage people to reach out to us. We’re glad to share what we think is working and what’s not. There are no secrets. You can go by any of our communities and test what’s working and not working. We’re glad to tell you. What we want to do is get better. I think we have a great culture, a great group of people. We’ve got a great team that’s leading it. We’re pretty excited about our prospects.