Associated Estates Realty Corporation
Associated Estates Realty Corporation
Incorporated: 1964 as Associated Estates Group
Sales: $108.8 million (1997)
Stock Exchanges: New York
Ticker Symbol: AEC
SICs: 6798 Real Estate Investment Trusts; 6513 Operators of Apartment Buildings; 6512 Operators of Nonresidential Buildings; 6531 Real Estate Agents & Managers
For the first 30 years, Associated Estates Realty Corporation was a family-owned business that built, managed, and owned apartment communities in the Cleveland, Ohio area. When it became a publicly traded real estate investment trust (REIT) on the New York Stock Exchange in November 1993, all of its holdings were located in northeast Ohio. Over the next four years it expanded into other states but kept its focus on the Midwest. At the end of 1997, it was the only one of some 30 publicly traded multifamily apartment REITs that was focused on the Midwest. About half of the company’s portfolio was located in northeast Ohio, with four percent in northwestern Ohio, 22 percent in central Ohio, one percent in southern Ohio, 15 percent in Michigan, three percent in Indianapolis, and three percent in Pittsburgh. With the acquisition of MIG Realty Advisors, Inc. in 1998, the company’s focus expanded beyond the Midwest into multiple markets across the United States, including higher growth cities in the Southeast and Southwest.
Established in 1964 as Associated Estates Group
The company was established in 1964 as Associated Estates Group to build, manage, and own apartment communities in Cleveland, Ohio. It was a family-owned business focused on generating profits by owning, developing, and managing apartment communities. When it went public in 1993, it still owned practically every property it ever developed or purchased. It referred to its apartments as “suites” and to its tenants as “residents.”
Associated Estates was involved mainly in the Cleveland and Akron markets in northeastern Ohio. During the mid-1970s, when apartment building was not justified because of economic conditions, the company explored existing government programs and decided to provide housing to senior citizens and families through government-assisted programs. Associated Estates did not expect to expand this area in the 1990s, but its existing portfolio of government-assisted housing provided continued and steady growth. The company also managed properties owned by nonprofit and other owners, but again this was not perceived as an area for further acquisitions.
The company’s growth strategy was focused on conventional, or market-rate, apartments that could be purchased at below replacement costs and at rental rates that had not yet been hit by inflation. Taking a conservative approach to controlling expenses and generating rental income, management realized this was not a quarter-to-quarter business, but rather one of long-term growth. Northeastern Ohio was particularly attractive because of its large employer base and revitalization efforts in the region.
Initial Public Offering Raised $144.8 Million in 1993
Associated Estates Realty Corporation was formed in 1993 to continue the business of the Associated Estates Group. In addition to properties in northeastern Ohio, the company owned properties in the Columbus area in central Ohio, all of which were built since 1988. They ranged from newly constructed, single-story brick apartments to luxury townhomes.
On November 19, 1993, the initial public offering (IPO) of Associated Estates Realty Corporation consisted of 7.25 million shares of common stock offered at $22 per share. Net proceeds to the company were $144.8 million, of which $86.7 million was used to repay some of the company’s debt. The reserved proceeds from the IPO were used for acquisitions in early 1994 rather than to pay down the company’s long-term, fixed-rate debt, as originally planned. Associated Estates planned to finance its growth through a balanced combination of debt and equity. It believed that long-term debt was the best source of financing for real estate.
At the time Associated Estates went public, Chairman, President, and Chief Executive Officer (CEO) Jeffrey I. Friedman and his family owned more than 33 percent of the company’s common stock. The company elected to be taxed as a self-administered and self-managed real estate investment trust (REIT). An REIT is basically a corporation that pools funds from investors and invests the funds in real estate. So long as Associated Estates met the Internal Revenue Service’s requirements for an REIT, its net income would not be subject to federal income tax. Most states honor this federal tax treatment and do not require REITs to pay state income tax, either.
One of the requirements Associated Estates had to meet was that it had to distribute to its shareholders 95 percent of its income that would otherwise be taxable. In addition, the company could not engage or pay for an REIT advisor. It managed all of its properties itself. Of the 55 multifamily properties it owned as of March 1994, it had developed 39 of them and acquired 16 of them. Many of the acquired properties were rehabilitated substantially. Ten of the 16 acquired properties were acquired after the IPO. In addition, Associated Estates managed 7,155 multifamily property suites and eight commercial properties not owned by the company.
Increased Real Estate Holdings by 38 Percent in 1994
In the five months following the IPO, Associated Estates grew its portfolio by 15.5 percent, from 8,704 suites to 10,056 suites. From January to March 1994, it acquired ten properties with 1,352 suites. Nine of those properties were located in central Ohio in the Columbus area. The other property was located in northeastern Ohio near the company’s headquarters. A Columbus office was established to handle management tasks and situations on-site at the company’s properties.
Of the company’s 10,056 suites, 7,801 were in conventional high-rise, mid-rise, and garden apartments. A total of 2,085 suites were contained in multifamily properties with rents subsidized by the U.S. Department of Housing and Urban Development (HUD). The latter were called government-assisted properties, with tenants consisting of a mix of senior citizens, physically impaired individuals, and lower-income families or individuals. Also included in the company’s portfolio were some 170 suites in apartment communities for elderly persons that provided them with a personal service package.
All of the company’s properties were held for long-term investment. Ongoing property improvement programs included an annual review of each property to determine budgets for renovation and other improvements. The company also conducted routine preventive maintenance as a way of reducing operating costs over the life of each property. Costs associated with such improvements and maintenance were expensed rather than capitalized by the company to the extent permitted by generally accepted accounting principles.
In August 1994 Associated Estates completed a secondary offering of three million common shares at $20.625 per share, with net proceeds of $58.5 million. Substantially all of the proceeds from this secondary offering were applied to pay off the company’s credit facility.
With access to capital markets, Associated Estates could capitalize on situations where liquidity or management problems created favorable opportunities to acquire existing properties. During 1994 the company acquired 21 properties consisting of 3,349 suites. It also completed construction on its 40-suite addition to a central Ohio property. The acquisitions represented a 38 percent increase in the company’s portfolio, bringing the total number of suites owned to 12,093. Much of the acquisition activity was focused on the Columbus area, which had a variety of employers in addition to being the state capital and home to the Ohio State University. The company owned 17 properties in the Columbus area. Rents ranged from $440 to $700 per month, providing a measure of diversification that would help weather various real estate cycles. In December it established its newest region in southern Michigan.
For 1994 Associated Estates had total revenue of $55.5 million, including rental revenue of $48.9 million. Net income was $13.5 million, and funds from operations (FFO) were $22.9 million. FFO per common share were $1.92. At the end of the year, the company had 658 employees. About 104 of them worked at the company’s headquarters, with the rest being employed at the company’s respective properties. In December the company relocated its corporate headquarters from Mayfield Village, where it had been located for almost 20 years, to Richmond Heights.
Experienced Steady Growth, 1995–96
During 1995 Associated Estates acquired 15 apartment properties containing 2,276 suites and three parcels of land. It added 132 suites to three existing properties, including properties in Rochester Hills, Michigan and in Medina, Ohio. In March 1995 it acquired Arrowhead Station, a 102-suite property in Columbus, bringing to 70 the number of properties the company owned and managed.
For 1995 Associated Estates had total revenue of $77.1 million, which included $70 million in rental revenue. Net income was $16.2 million, and funds from operations were $28.3 million, or $2.04 per share. For 1996 total revenue increased by 23 percent to $94.5 million, and rental revenue was up 26 percent to $88.0 million.
Associated Estates Realty Corporation will be recognized for an unequaled commitment to resident service, employee satisfaction and investor value.
Lower Than Expected Growth in 1997
Associated Estates experienced lower than expected growth in 1997. Management felt it was a disappointing year. Rent growth was lower than expected, and the average economic occupancy for its core market-rate portfolio was the lowest posted in several years. The company had a four to five percent rental growth objective. For the year, rental income was $101.6 million, up 15.5 percent over 1996, and total revenues were $108.8 million. Net income was $20.7 million, up 7.3 percent over 1996.
In an effort to improve customer satisfaction, the company introduced a 24-hour maintenance guarantee at 12 of its properties. Under this program, a portion of a resident’s monthly rent would be refunded for each day or portion of a day that passed with no response after 24 hours from the submission of a written maintenance request. The company found that the 24-hour response time was met or exceeded 99 percent of the time.
In 1997 Associated Estates entered two new markets, Indianapolis, Indiana and Cincinnati, Ohio. In Indianapolis, it acquired The Gables at White River and Waterstone Apartments. In Cincinnati, it acquired Remington Place Apartments. It also expanded its presence in Toledo and Columbus with the acquisition of Hawthorne Hills in Toledo and Oak Bend Commons and Saw Mill Village Apartments in Columbus. The company expanded its presence in Michigan with the acquisition of Clinton Place Apartments in Clinton Township and Spring Valley Apartments in Farmington Hills. All told, Associated Estates added eight properties in 1997 containing a total of 1,762 suites at a cost of $105.1 million.
Whereas most of the company’s growth in 1997 came through the acquisition of existing properties, it also had extensive experience with new construction. In 1997 it completed construction of the 324-suite Bradford at Easton development in Columbus, Ohio. Two other properties were scheduled for completion in 1998, and expansions to three Michigan properties were under way.
At the end of 1997 the company’s market capitalization exceeded $750 million. During the year it filed with the Securities and Exchange Commission a $368.8 million proposed shelf registration to raise funds through debt securities, preferred shares, depositary shares, common shares, and common share warrants. A total of 71 of the company’s 81 wholly owned properties were unencumbered. The company enjoyed an average economic occupancy rate of 94 percent. Its turnover rate was 49 percent, well below the national average of 65 percent.
Acquired MIG Realty Advisors, Inc. in 1998
In January 1998 Associated Estates announced plans to acquire the privately owned MIG Realty Advisors, Inc. (MIG), a leading multifamily asset manager and pension fund advisor, for $306 million in cash, stock, and assumed debt. Associated Estates would acquire the property management and advisory business of MIG as well as 11 properties managed by MIG. In addition, it would acquire three properties under development in Florida that would contain 1,216 suites upon completion.
Founded in 1982 and based in West Palm Beach, Florida, MIG managed 36 multifamily apartment communities containing more than 11,000 suites for institutional clients. The 11 MIG-managed properties that Associated Estates would acquire contained 2,734 suites located in Arizona, California, Florida, Georgia, Maryland, Missouri, North Carolina, and Texas. In February 1998, Associated Estates acquired three of the properties, which contained 1,004 suites located in Florida, Georgia, and Maryland. With 350 employees, MIG would remain headquartered in West Palm Beach, Florida, and operate as a wholly owned subsidiary of Associated Estates. MIG Chairman Larry Wright would become an executive vice-president of Associated Estates and, probably, would be elected to the company’s board of directors.
In February 1998 Associated Estates acquired the 316-suite Country Club Apartments in Toledo. The three MIG properties and the Toledo acquisition cost a total of $74.4 million. These acquisitions increased Associated Estates’ portfolio of owned and managed properties to 92 multifamily properties containing 18,920 suites. Once the MIG acquisition was completed, Associated Estates would own or manage properties containing more than 35,000 suites, making it the fourth largest multifamily REIT property manager.
Continued Growth Projected for the Future
Associated Estates’ growth strategy involved two distinct markets. One, which the company called continuous markets, included those that had a diversified economy, a long trend of growth, and a deep apartment market. Included in this type of market were Columbus, Ohio; Atlanta, Georgia; south Florida; and the greater Washington, DC area. Associated Estates planned to seek new properties in those markets continuously.
The second type of market in which the company was interested was opportunistic markets. Those would include places that had potential growth and good buying opportunities. Acquisitions would be concentrated in shorter time periods while opportunities existed.
MIG Realty Advisors, Inc.
“Associated Estates Realty Corporation To Acquire MIG Realty Advisors, Inc.,” PR Newswire, January 29, 1998.
Ball, Brian R., “Cleveland Investor Group Snaps Up Multifamily Complex on East Side,” Business First-Columbus, June 20, 1997, p. 7.
Flint, Troy, “Associated Estates Buys Company,” Cleveland Plain Dealer, January 30, 1998, p. 1C.