A Simple Plan: Jeffrey Friedman Invests in Portfolio, Preparing for Market’s Return

A 30-year veteran of Associated Estates Realty Corp. who has led the company as chairman, president & CEO for the past 18 years, Jeffrey Friedman invested in and developed apartments through multiple cycles. Long a Midwest contender, the REIT is now expanding selectively into Eastern and Southern submarkets with high barriers to entry.

A 30-year veteran of Associated Estates Realty Corp. who has led the company as chairman, president & CEO for the past 18 years, Jeffrey Friedman invested in and developed apartments through multiple cycles. Long a Midwest contender, the REIT is now expanding selectively into Eastern and Southern submarkets with high barriers to entry. Friedman spoke with CPE editor-in-chief Suzann Silverman about his recent and future strategy as he anticipates a
boom in the apartment sector.

Q. What stood out for you about this recession in relation to multi-family performance?

A.Historically, softness in the apartment business was brought on by overbuilding. This time, that wasn’t the case. Everyone was moving out to buy a home or a condo. New construction starts were down significantly compared to prior years, and even when you added unsold condos coming into the rental pool, it still wasn’t enough to totally crater the apartment business, given the strong demographics.

Q. That said, is there anything you learned from this past recession that you’ll be applying to your corporate strategy as you move into the next up cycle?

A. We learned the importance of a simple strategic plan and how critical it is to stick with it.
Between 2005 and 2009, we sold properties at high prices and low cap rates, while using the proceeds to improve our balance sheet, and positioned the company to grow. Now, we’re able to buy below replacement cost at a time when rents are below the peak.

Q. What steps did you take to maintain performance during the recession, and what are some experiences you drew on in determining them?

A. We continued to invest in our properties. The easiest thing for owners to do to maximize cash
flow is to defer maintenance. Ultimately, that makes a property less competitive. We realized that when the markets came back we would be positioned to benefit.

Q. You’ve said you’re expecting 2012-2013 to be fundamentally the strongest period in years. How are you preparing to take advantage of that market when it comes?

A. We call it the three P’s: people, processes and portfolio. The apartment business is a service
business. We emphasize the importance of hiring and training so that we have the strongest team at each level and throughout the company. We have the systems to support and assist them to be sure our site-level teams have the most time (possible) to provide great customer service. Our properties are in great shape, and our apartments offer a great value in highly desirable locations.

Q. What opportunities do you see for acquisitions and new construction in the coming year, and what type of balance are you striving to achieve between them?

A. For 2011, our guidance for acquisitions is $50 million to $150 million. As long as we are able to purchase below replacement cost, with inplace rents below peak, we will be aggressive buyers. With land and construction prices down, we will also look for opportunities to build selectively. We plan to start one or two new projects in 2011.

Q. What is producing these opportunities to buy?

A. We’re one of a handful of companies that are able to execute quickly because of our strong
balance sheet and significant liquidity. Stabilized apartments didn’t see much distress during the darkest hours of the dislocation in the capital markets in 2008 and 2009. Owners whose intentions were always to sell, whether to create a liquidity event or just because it was the end of a holding period, are now coming to market with their properties. Sellers want to deal with buyers they believe are most capable and most likely to close.

Q. You’ve been expanding outside the Midwest. You’ve just entered Dallas, for instance. Can you discuss your plans for expanding into other regions?

A. We are currently operating in the Midwest, the Mid-Atlantic and the Southeast, and have just
expanded into suburban Dallas. While we were selling in 2005-2008, we were analyzing submarkets in these and other regions where we thought the underlying fundamentals would support strong long-term apartment demand. We will continue to evaluate most major markets where we can buy or build at good prices.