Efficient Management Technology initiatives have not only fattened the bottom line, they have helped the company achieve economies of scale. “The moves they made have streamlined and cut costs and made the operations run better,” says Stevenson.
However, to obtain true economies of scale, the company realized it needed to sell off properties in undesirable markets. When Toomey took over, UDR specialized in middle-market apartment communities. It held more than 77,000 units in 62 markets. Today the company operates in 55 markets, with the goal of reducing that number to 30. It still concentrates on the middle-market renter, though.
In the 25 markets that it wants to exit, half of those have only one or two assets in them. Toomey believes that’s an inefficient way to run a business. “For example, if you run a company based in the District of Columbia, and you only have one asset in Palm Springs, Calif., how often are you going to get to it? That’s not management. That’s ownership, stewardship … but not management. It’s not effectively running the property,” he says. “We think you have to have focused concentrations.”
UDR conducted a four-month study to determine which markets to stay in and which to exit. It decided to pull out of San Antonio because the average rent there was $650 per month, and a three-bedroom, two-bath home could be purchased for $90,000 – a monthly mortgage payment of $675. At this price point, there was too much competition from single-family homes and new development. “So, markets where there is little job growth or the competition is too tight pricing wise, we will exit,” says Toomey.
The company wants to expand in markets where growth prospect exceeds the national average by 250 basis points. To do so, it looked for markets with more than 1 million people. At that size, the company could have scale, there would be enough properties to buy and sell, and the middle market apartment population was deep enough.
“I don’t have a timeline for moving from 55 markets to 30, it’s a direction, not a time table,” says Toomey. “Instead, I want to approach this in a judicious manner that doesn’t erode shareholder value. I want to be opportunistic, I want to be smart, and I want to be efficient at executing our strategy. So, we are going to take our time. But as you can see we’ve got 15 percent of it done already–as in number of markets – and probably 25 percent of it done in volume. We have made good progress in two years.”