Risk Return Part of the company’s game plan is producing the highest risk adjustment return in real estate, and it does that by following specific standards and techniques when repositioning its properties.
Home Properties targets properties that are at least 150 units and 10 years old, and in high-barrier-to-entry markets – which includes the New York, Philadelphia, Detroit, Chicago, Boston and Washington, D.C., metropolitan areas. The company typically buys brick properties (because they tend to be very well constructed) that have outdated kitchens and bathrooms.
When repositioning properties, the company generally focuses on landscaping, interior improvements and the addition of community centers. Home Properties also includes activities and services in its property makeovers, such as social programs, computer training and other educational programs.
Lounges where neighbors can sit and talk are very popular. The company tries to host “meet the neighbors parties,” says Nelson Leenhouts. “It’s just amazing to introduce neighbors that have lived practically across the hall from each other for 10 years and have never met.”
Adding exercise facilities, business offices and computer centers, and offering educational programs, also promotes communication among residents.
When feasible, the company adds amenities that are found in class B+ to A properties. “In property management, a large part of our mission is to enhance the quality of life of our residents,” says Nelson Leenhouts, “and that goes well beyond just the physical structure.”
According to Nelson Leenhouts, a typical family-owned property has great difficulty financing the improvements needed for older properties. If a new kitchen costs $3,000 and a new bathroom costs $2,000, it’s very difficult to finance that upgrade without remortgaging the property, he says.
Home Properties’ criteria is to get a 15 percent return on that $5,000 investment, says Nelson Leenhouts. But with the demands from Wall Street, the company needs to be able to finance the improvements without carrying too much negative cash flow. The company is committed to having an average leverage of 50 percent or less. It does that by financing some projects at 60 percent leverage and leaving others free and clear of debt.
Because the company has debt free properties, it can remortgage those properties when it needs to raise funds. In addition, Home Properties’ pay out ratio is about 70 percent, so only 70 percent of its funds from operations (FFO) are distributed, which leaves the company with available cash flow for capital improvements.
At every project the company purchases, the goal is to improve the facility, raise the rents and improve net operating income. At the recent acquisition of a Long Island, N.Y., property with 500 units, the company raised rents $170 immediately. As the units turn, the company will spend approximately $10,000 per unit on renovations, and raise the rents an additional $170, says Nelson Leenhouts.