Six Questions for Aimcos Bezzant
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NEW YORK CITY-As investors continue their flight-to-quality in gateway markets, other REITs are taking the road less traveled. John Bezzant, executive vice president of transactions at Denver-based Aimco, said the industry’s “sweet spot” is way beyond core.
“For us, the story is not so much trying to position ourselves at the top of the market in two-year old product in an A++ location,” Bezzant said, during an exclusive sit-down interview at GlobeSt.com’s headquarters at 120 Broadway. “But frankly we would be even happier if we could get a 15 or 20-year-old product in an A++ location that is priced a little more rationally and allowed us to position ourselves at 100% to 125% of the local market average rent.”
Bezzant will be one of 30 speakers at RealShare Apartments East on February 15th in Washington, DC. In preparation for the event, he discussed where Aimco is investing—and why.
GlobeSt.com: You’ve recently launched the redevelopment of Pacific Bay Vistas, a massive multifamily complex in the San Mateo submarket. How does this project fit into the company’s 2012 strategy?
Bezzant: For us, if you’ve been looking into where Aimco has been investing in the last couple of years we have bought back partnership interest and various types of legacy partnerships that we’ve acquired over the years. We’ve put money into existing redevelopment into our existing portfolio and we have made a few select acquisitions. As it relates to the Pacific Bay Vistas redevelopment , it fits right into our target strategy of investing our dollars where we can get our best return. We’ve owned that property for several years, emptied it out five or six years ago. Prior to the crash, we entitled it for a tear-down and a re-build. Economically, that did not make a whole lot of sense, so today we are taking that down to the studs and re-building it with modern finishes, new design, a new leasing center and a recreation center.
Last year we bought a couple different deals on the West Coast: one in La Jolla area of San Diego and one in Marin called Madera Vista. Madera Vista was an empty project that we bought and the prior owners were looking to do a condo conversion. We intend to do a rehab and repositioning of that project.
GlobeSt.com: Aimco has recently closed on a $500 million credit facility. What are your plans for that money?
Bezzant: It is primarily there for us to have some flexibility for general corporate purposes, such as backstopping for potential acquisitions and corporate needs as they develop. This was just an upsize of the existing line and an extension of term. We don’t have specific targets. We have historically not bought on our line. The Madera Vista project we did buy because of it was an opportunistic chance to execute on a transaction quickly, so we did put that on the line and subsequently completed a financing with Prudential on that deal. But we didn’t upsize it specifically so we could go buy $500 million worth of real estate that we could carry on the line for any period of time.
GlobeSt.com: With the high level of competition for apartments in primary markets, have you considered secondary/tertiary markets?
Bezzant: Generally speaking Aimco has been perceived to be a secondary and tertiary market owner in many markets across the country. Our strategy has evolved to focus on 20 key markets. We like many of our REIT peers, are focusing on the coasts. However, we have a continued presence in Phoenix, Houston, Chicago and Denver, our hometown. A vast majority of our assets are located in our target markets -- over 90%. Our target markets also include Seattle, San Francisco, Los Angeles, San Diego, Boston, Manhattan, DC, Philadelphia and Miami. The differentiator for us is that we are not a developer and we don’t do ground-up. We have clearly delineated our space as B/B+ apartments, so we are not typically competing on the A assets in the core markets that are drawing the real intense interest right now. For us, the story is not so much trying to position ourselves at the top of the market in two-year old product in an A++ location. But frankly we would be even happier if we could get a 15 or 20-year-old product in an A++ location that is priced a little more rationally and allowed us to position ourselves at 100% to 125% of the local market average rent. That’s really our sweet spot.
GlobeSt.com: With class A asset prices at or above replacement costs in high-barrier-to-entry markets, is development on your agenda?
Bezzant: I won’t say it’s entirely off. We do not have internal infrastructure for ground-up development. We will look and consider, and have over the last year or so, considered a few development deals where there’s a good local sponsor partner there and available to us on a site that we like long-term. We will look at development in that way. However, our model has focused more heavily on redevelopment of attractive assets and we have a robust redevelopment program ahead of us in 2012. We also have been re-investing in our portfolio to upgrade our properties to enhance their value and provide greater amenities to our customers.
GlobeSt.com: It’s been said that 2012 will be the best year for apartments in a long time. Do predict that rental rate growth will continue to go up or will it stay the same?
Bezzant: We predict it will be good solid fundamental rent growth higher than market average. We, and all of our REIT peers are very well-positioned from an occupancy standpoint coming into this year. Everybody is mid- to high- 90% on their occupancies. Traffic is good. I’ve been touring communities, not ours, but of others here in New York. Traffic in the city has stayed strong all throughout the winter. In years past you get the “winter effect,” but it didn’t hit in New York this year. It stayed very steady, and we are experiencing the same thing. Some markets are stronger and others are weaker, but we believe ’12 will be a good year. I wouldn’t sit here and prognosticate and say it would be a record-breaking year, but we feel very comfortable that it will be a good solid year.
GlobeSt.com: By all accounts, the demand surge from former homeowners has come and gone and it costs too much now to get a mortgage for single-family to be much of a threat to traditional apartments. The focus now is on job growth and household formation. What are your expectations for that?
Bezzant: The single-family piece of it hasn’t been a major factor for us. We have not seen that return to the levels where it was in ’08 and ’09. In exit surveys in ’08, there was a much higher portion who were buying a new home. It is a significantly lower number today. Credit is still very tough. Even though home prices are down, the fact of the matter is, four years ago you could get a loan for 5% down, today you can’t – you have to have 20% down. While there certainly is a demand structure there, I’m sure people would love to be able to buy a house, but they can’t. And that’s certainly driving some to us. Our age demographic—20 to 35 year olds—hasn’t changed over the last four years from what it was before. The reality is the renter world hasn’t changed markedly. Our retention of residents is about 60%, and we manage our portfolio in that direction. We like that retention rate, and if you look at our peers, it is almost flipped, where some of them have a 40% retention and a 50% return rate annually. This goes back to the B/B+ marketplace strategy versus the A top of the market strategy. At the top of the market, there’s a lot more fungibility of income and of lifestyle. In any of the urban areas, there is more mobility in terms of jobs and lifestyle. Those top-end operators, if you will, have a tendency to see those residents move more often. Ours, in a B/B+ market, our average lease duration is two years. They stay longer. That piece of it is an important us. A imco likes rent growth and top-line revenue growth, but we are really focused on NOI. The fact that we turn two-thirds of the units our peers turn every year, we think helps us from a cost standpoint. Our net income is better than it would be otherwise.
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