United we stand In 1972, United Dominion Realty Trust opened its doors owning only four apartment homes. Twenty-six years later, it has made a large dent in the multifamily housing sector with a portfolio of 72,000 completed apartment homes in 268 communities and 1,900 apartments under development. Moreover, United Dominion is hardly slowing down. On Sept. 9, a date that will be remembered by the 3,000 employees at the company, United Dominion's board approved the acquisition of American Apartment Communities (AAC), a REIT that owns 14,141 apartment homes. After thecloses, United Dominion will own 86,000 apartment homes in 324 communities.
Richmond, Va.-based United Dominion is one of the largest real estate investment trusts specializing in Class-A and Class-B apartments, with homes in 26 markets, primarily located in the Mid-Atlantic, Southeast, Southwest and West. And after the major acquisition takes place during United Dominion's fourth quarter, its reach will expand to the West Coast, the Midwest and Florida.
"In September, we agreed to acquire American Apartment Communities, which was a San Francisco-based private real estate investment trust that was controlled by Lazard Freres, a boutique New York investment banker," says Chairman and CEO John P. McCann. "We will close on that transaction around the beginning of [this month]. In this deal, in terms of value, [AAC has] about $500 million of western U.S. properties, with the largest portion being in. So that gives us a very significant position on the West Coast."
This latest deal is typical of United Dominion's strategy to repositioning itself by upgrading its portfolio and geographic breadth through acquisitions,and strategic dispositions. To date, the company has sold apartment homes equaling approximately $200 million since its repositioning program began in mid-1997. United Dominion plans to continue with these strategic dispositions and will use proceeds to fund acquisitions and development and to reduce debt.
"At the end of 1996, we acquired Southwest Property Trust, which was headquartered in, in a merger. That gave us a portfolio in the Southwest, but primarily in Texas, with a very large position in Dallas," says McCann, who has been CEO of the company since 1974. "In 1997, we worked to grow in the Southwest and to enter some other markets. When we bought ASR in March , it was a Tucson, Ariz.-based REIT. They were small, and their portfolio included Phoenix and Tucson, Dallas and Houston, Albuquerque and the Pacific Northwest, up in the state of Washington. So we were growing in the Southwest markets and ... other western markets."
And even with all this acquiring, developing and selling going on, United Dominion, which has a total market capitalization of $3.2 billion, wasn't always soaring above the clouds.
"Growth in the latter part of the 1970s and throughout the 1980s was slow, typically growing by acquiring a few properties each year," says McCann, who is on the board of governors of the National Association of Real Estate Investment Trusts and on the board of directors of the National Multi Housing Council. "It wasn't until the beginning of 1991 when the growth accelerated, although the company grew in the latter part of the '80s faster than it grew in the previous 10 years."
McCann also thinks he can contribute growth to the specific communities that the company targets. By focusing on providing low-cost quality apartments in the Class-A and Class-B apartment markets, United Dominion attracts many residents who are looking for just that - low-cost quality apartments. When customers are satisfied, obviously the market, at least for United Dominion, reaps the benefits.
"Initially going back to our long-term history, we bought problem apartment communities and upgraded them, repositioned them and, in the 1990s, we bought a lot of portfolios that included a range of apartments," says McCann. "We decided in 1996, based on the consolidation that was occurring in the business and where we wanted to put our company, we would begin to reposition our company to make us ultimately into a national low-cost provider of quality apartment homes."
Understanding that United Dominion's principal niche wasn't at the high-end of the market, the company prepared to do some major repositioning.
"This meant we were going to sell some communities that really did not meet our objectives, including what we would call the C-grade part of our portfolio," adds McCann. "We were going to exit some markets where we would never attain the kind of size or position that we would want to have in a market and that we were going to expand geographically, so we truly were a national company, and we were going to add development capability so when we looked at a market, and particularly a submarket, we could acquire, we could develop or we could sell. And so we have been, over the last two years, repositioning our company to make it this national low-cost provider of quality apartment homes."
And not only has United Dominion made itself a national low-cost provider, but it made itself a company that provides its residents with what they need and want.
"We believe that our residents are very focused on security, and so we add intrusion alarms to our communities and apartment homes. We fence and gate a lot of our communities. We have been adding garages and storage units ... because we find that some of our residents want them," says McCann. "We also believe that our residents will pay in their rent for a large fitness center that is health-club like. And so we have been enlarging fitness centers to make them much more health-club like. We believe that's very important to our customer."
Spending from $1,200 to $12,000 for each apartment, McCann says that doing a total upgrade or repositioning is what the company is focusing on to create value for its residents.
"In an acquisition and in developing, you're looking to create value. And sometimes you're able to buy good value because you make a very good buy. But other times there is an opportunity to add features or to reposition or to upgrade the residences in some way that you can create some value," says the fifty-something McCann. "At the same time on the development side, our product that we build is a B+ to an A- product that we build very efficiently, and we're looking for high returns on investment or to have new communities that provide high returns on investment, which is another way of creating value. So our focus is really on creating value."
A typical United Dominion apartment community is going to be between 250 and 350 apartments, and the rent ranges from the low $500s to the high $1,500s (the high-end cost is usually found in California). But McCann says that the average rent is usually between $600 and $700.
With the company being so value-focused as well as customer-focused, it plans to invest $150 million annually on development. And with its large apartment operations group behind it, as McCann calls it, development shouldn't be a problem. The apartment operations group is organized regionally and is made up of three regions. It manages, leases, maintains and adds features to the apartment homes and, adds McCann, "They always want to be helpful."
With the multifamily industry prospering, industry leaders seem very encouraged about the future of the business. In five years, a hopeful McCann says, "We want to truly be a national low-cost provider of our product, and that means that we want to continually improve our operating margins. We want to be an efficient company, an efficient user of capital when we develop, when we acquire, [and] when we improve. We want our systems to be efficient, we want them to be scalable so they can support the added size, and we believe the company will continue to be a significant player in the consolidation of the apartment business."
And according to McCann, it won't be hard to reach these five-year goals. "Because I've been with the company forever - you know when you look at it's almost 25 years - we are a better company today than we've ever been at any point in our history, and that's really the key to strengthen this company in many ways; to really build a much better company."
And with this in mind, McCann is determined that United will stand.