Safeguard Scientifics (NYSE: SFE) Investor Relations Presentation - December ...
Presentation to Ontario, CAN Apartment Association
1. Lessons from a Large US Apartment Operator
(AIMCO Chief Property Operations Officer 2002-2008)
And
US Multifamily Investment Opportunities
(President, The Sanctuary Group, LLC 10/08-)
Jeffrey Adler,
President, CEO
The Sanctuary Group, LLC
www.sanctuarygroup.us.com
jeff.adler@sanctuarygroup.us.com
2. Agenda
1. Lessons from a Large Operator
2. Raising Revenue in Regulatory Constrained
Markets
3. Understanding Product Type Differences
4. US Multifamily Investment
3. 1. Lessons from a Large Operator
• Apartments are a consumer service business trapped in a capital intensive industry
• Residents expect CONSISTENCY from professionally managed firms- which can only
be delivered through process mgmt
• Apartments are an EMOTIONAL service, with untapped potential
– Staff attitude and camaraderie are essential
– Segmentation, customization, and personalization can be tackled after consistency has
been achieved
• Transparency and Visibility are Critical- Existing and New customers, expenses,
people, capital spend
• Resident Screening & Selection is the Moral Imperative of Property Mgmt
4. History of Apartment Investment &
Management Company (“AIMCO”)
Initial Public Offering in 1994 with $315 million gross asset value
Rapid growth followed by an integration period.
Doubled in size every 18 months from 1994 – 2002 through several large portfolio acquisitions.
Rationalized portfolio and operations, selling more than 350 properties worth over $4.5 billion from
2001 – 2006 and substantially exiting the third-party property management business.
Gross Book Value of Real Estate Number of Aimco Employees
$12,000
14,000
$10,000 12,000
10,000
$8,000
$ in millions
8,000
$6,000
6,000
$4,000
4,000
$2,000 2,000
0
$0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Built operating infrastructure to take advantage of scale and support growth.
Operating platform stabilized by 2006, positioning AIMCO for growth- decline in values since 1Q07 has led
to a rapid sell-off as stock price has fallen faster than private market value of US real estate
4
5. Background & Context – How Aimco Creates Value
The primary focus is creating value through the management and redevelopment of high land
value assets in good locations. This implies serving customers w/different value propositions.
Acquire High
Land Value Assets
Customer Segment 1
Market Operational
Sell at Gain Selection Excellence
Operate and Customer Segment 2
Incubate
Capitalization
Measuring
Strategy
Success - NAV
Aimco Value Drivers
Customer
Customer-Centric
Segment 1
Lease Up
Customer Property Operations
Redevelopment,
Segment 2 Entitlement and Tax
Redevelopment/ Entitlements
Customer Credits
Segment 3
Tax Credit Transactions
Finance Strategy
Joint Ventures
5
6. AIMCO Operations Philosophy
The apartment management industry has been undergoing a transformation from a cottage
industry to a scale driven, professional business system that is customer-centric, driven by
rising customer expectations.
AIMCO Operations has been at the forefront of this transformation, led by a team that is
grounded in other geographically distributed consumer businesses.
AIMCO has refocused its Operational Philosophy into five major Components:
Customer Driven - based on a solid foundation of consumer research, we focus on the
entire customer experience, measure it, and seek to differentiate ourselves beyond the
physical quality of the property, in order to achieve a relative price premium.
Forward Looking & Data Driven - we measure, in detail, to manage our four pipelines
1) revenue, 2) expense, 3) people, and 4) capital spend.
Scale Driven - we seek to leverage our size into scale driven advantages, and to
transform site operations from mini transaction processing centers to places of
personalized experiences.
People Driven - selection, hiring, on-boarding, training, development, performance
management, and succession planning is itself a set of processes that are
developed, measured, and managed.
Product Driven - curb appeal, unit turn quality standards, capital investment, financial
management, construction services, and the redevelopment process are all areas that
receive intense focus to ensure that we are competitive on the basis of product quality
and amenities.
6
7. AIMCO’s Conventional Strategy Roadmap
>2008
Resident Quality is the Moral Imperative-
Selection of Neighbors is the Unique function 2007/8
Customer
of a management company
Information as
Competitive
Style/Design &
Advantage
2006/7 Community
Building
Continue migration of
Expense,
2004/5 admin tasks offsite
Capital & Revenue growth
Service Mgt through customer Refinement of
experience, style emotion-based
Revenue and product customer segments
Turn Production differentiation On-Site
Vendor/Expense experience
Increasing
Management Media
emphasis on
Resident quality
Customer Service Property
Team-member
Mtkg and Media Websites
Measurement processes and
Customer Call Center
systems
Product Lines
Response (phone Revenue Mgmt
(Student) Web Enablement
and email) Customer
Ramp up of
Underwriting
Sales (New &
Redevelopment &
Renewal) Retention
Capital Programs People
Revenue
Disney Training –
Services
Management
Customer Capital Invest
Experience
7
8. A Fragmented Market – the AIMCO Target Bulls eye
The market is fragmented and AIMCO operates in a fraction of the market.
•
Rentals
(Fragmented Market)
House
Tapestry Segments
% Who Rent:
Townhome
Global Roots = 60-80%
Condo -
Solo Acts = 60-70%
Management
Upscale Avenues = 30-60% Company
Condo-
Landlord
Sublet
2-3 Flat
We occupy only 1-2% of the “management company”
AIMCO
rental market Apartment
Target
•300 million people In the US Building with
•100 million US households Professional
•30 million rental units, (including condos, Management
flats, individual LL etc.) Company
•30-40% are professional management
=9-12 million
Aimco with 125,000 current units = <1%
8
9. Consumer Housing Choices
30-40% of 60-70% of
available available
market market
Professional
Management Landlord Ownership
Company
Consistent standards & Can negotiate cost/rent Equity
security Landlord takes extra/personal Chose neighbors (more
Access to “whole team of care (updates) scrutiny)
people” 24/7 Inside has character Free to personalize to taste
Fast/responsive (know Deal with one person Take pride in my space
Positive building and have the Landlord knows/chooses me
appropriate resources)
Public company (meets public
scrutiny)
Can escalate issues if
necessary
“Cookie cutter.” No character/ • Landlord is too close for • Economic/market fluctuation
personalization comfort, would rather • Maintenance/incidentals can
complain to larger company
Profit oriented be a headache and costly
Negative • Landlord can be greedy • Risk of community issues
Risk of many neighbors
• Less consistent maintenance • Escalating Property Taxes
Can I be myself?
(polarized- they are either on
top of you or take a long time)
The components of strategy must enhance “Perception” of uniqueness and
positives, while mitigating negatives as personalization
much as possible
9
10. The Market Value Equation
CUSTOMER PRIORITIES
Rational Drivers Emotional Drivers
Service
Security
Location Respect/Pride & Care
Friendly Community/
Price
Value System
Amenities Updates
10
11. Consumers Priorities are Rational Drivers + Emotional Drivers
The Market Value Equation
Emotional Drivers
Rational Drivers
Service
- Clean/spotless with cues - Fast/responsive (24 hrs), Fixed the first time Fear/Risk:
(lobby/main entrance, carpet/floors/paint) - Reliable/dependable (know maintenance staff
Consumers
by name)
have fear/risk
about
Security Service and
- Window locks, buzz in doors, gate/lighting, guard - Security you can see Security, these
- “People around and watching over me”
- Neighborhood 2 drivers are the
- Screening (background checks/high rent weeds out) cost of entry
(visual proof of
guarantee
Respect/Pride & Care
Location needed)
Dimensions
Suburban
• Pride in work
• Green/nature/parks, close to malls/shops/restaurants
• Staff enjoys job, they WANT to help me
• Interstate highways, public transportation (commuting =
• Appreciation/humility
currency)
• You are our responsibility/pride, Residents are #1
• Schools
priority over prospects….”how can we help you?”
• 2 way communication
Urban
• No surprises, makes me feel valued
• Schools
• Reach out and ask/listen to needs
• Walk to public transportation
• Empathy
• Convenience stores/restaurants
• Visible touch-point (family, connection, feels like home)
Metro
Emotion:
• Consistency (change is very disruptive)
• Walk to public transportation, walk to convenience
Pride & Care
stores, restaurants, culture/events
Price
Friendly Community/Value System
• Washer/dryer (#1)
• Friendly neighbors
• Big closets/storage
• Not friends, but friendly. “A smile goes a long way”
• Wood floors
• Shared Values/Community value system (among both
• Kitchen/living area open floor plan
residents and staff)
• Price Range
• View/ceiling to floor windows
Updates
Amenities
• FUNCTIONAL aspect of Updates for Residents: “Justifies rent
• Gym (24/7)
increases”
• “At my convenience” and “On my own time”
• EMOTIONAL aspect of Updates for Residents: “Shows me you
• Amenity value beyond Gym alone (pool, enclosed community
care as much as I do, and you care about me, feels like a
center)
hug, and keep me updated with the latest styles/trends”
11
12. Sub Segments Consumer Demographics
Cultural Pride Singles
Village Collection Day-to-Day Pride Couples
Family Restart Families
Ultimate Goal Financial Leverage
Safe Haven “Village” for my family. Cash yield through longer duration
Value for a full life within a (retention) and lower operating
community (a Village). costs.
12
13. Sub Segments Consumer Demographics
Towne Collection Reprieve Young Professionals (Singles and
Reprieve Plus Connection Couples)
Families
Ultimate Goal Active Adults
A Peaceful Reprieve. Students/Roommates
Value for their money, a home
without the house (trees, Financial Leverage
landscape, park, playground Scale through Net Operating
feels like backyard) because Income (NOI) and Controllable
“I’m/We’re sacrificing for now.” 13
Operating Expenses (COE)
optimization.
14. Sub Segments Consumer Demographics
Metropolitan Fiscally Minded, “PRIDE” PRIDE: Young Professionals
Collection “Wow” Factor, “FUN” FUN: Financially Secure
Consumers, Artists, Singles
Ultimate Goal
Resort Living. Financial Leverage
Better quality of life (resort, things Revenue growth through selective
to do nearby, restaurants, investment for rent increase.
nightlife).
14
15. Improvement to Resident Quality
AIMCO’s first step to improve operations began with improving resident quality.
Neighbors are an essential ingredient to successful communities.
Employ an unyielding system relying on financial stability to judge resident
quality.
Results from Improving Resident Quality
2003 Current
Annualized Skip/Eviction % 9-10% 6-7%
Accounts Receivable > 12.0% < 2.5%
Bad Debt 3.0% < 1.0%
Aimco Average Physical Occupancy
95.0%
94.0%
93.0%
92.0%
91.0%
2004 2005 2006 YTD 2007
15
16. Operational Excellence
AIMCO continues to build its platform
Processes and Standards
Data-driven people and culture with the systems and tools to accomplish as much.
“Automate the Routine, Humanize the Exception”
Improving productivity, the hiring profile, and in the end the customer experience.
Many opportunities exist to leverage supplier “eco-systems” for smaller companies
2006/7 Accomplishments 2008
Internet Customer Experience
Electronic Procurement
60% of demand web generated
Electronic Revenue
Management
43% of leases from web
Electronic Lease Documentation
>50% growth in web demand
Operating Standards
23% of apps on line and growing
Accounts Payable
On-line leasing live in Atl/Orl
Centralization
16
17. How Customers Search
• Our research validated a need for a differentiated web experience, which drove our
investment in a new property website platform
– Usage of ILS is very high: 76%
– Usage of Search Engines is also high: 71%
– 68% started their search online
– After online search,
• 40% - word of mouth
• 32% printed resources
• 31% phone calls
– Community web site: 67%
– Craig’s List web site: 43%
– 3 clicks/3 bricks: Consumers average 3 web site and 3 community visits
– The web experience must be “real”, as if I was there, no glamour views that may
disappoint
17
18. Efficiencies from Scalability
Internal Scale vs. Vendor Scale
Transformation of communities from mini-transaction processing centers to a focus
on revenue enhancing customer relationships- 2/3 of Front office time spent on
administrative tasks
Community Support Centers in 2008 handle e-procurement and other
administrative tasks
Centralized procurement increases standardization across Aimco
Call Center to manage all leasing inquiries to Aimco
Missed calls have declined from 25% to <5%
Media purchasing and development has been centralized
The national media group executes all large scale web and print buys
Transaction Category Timeline for Move to Off-Site Responsibility
Incoming leasing calls 2005
Incoming leasing e-mails 2005
Outbound Appointment Confirmation 2005
Utility Bill payments 2005
Electronic procurement 2006
Electronic revenue management 2006
Electronic Lease documentation 2007
Centralized accounts payable 2007
Web Customer Self-Service payment, service in place
Goal is to eliminate the back office from Aimco’s leasing centers
18
19. Utilization of Technological Systems
Build vs. Buy Decisions
PROFIT Revenue Management System is a heavily data-driven tool used to accurately
price rents through:
Forecasting inventory based on historical season trends.
PROFIT (Pricing Revenue Optimization and Forecast
Upcoming lease expirations – AIMCO’s Revenue Management
for the specific property.
Information Tools)
Forecasting of market demand metrics, including Aimco’s own lease pipeline
System
(inquiries, visits, etc.).
Aimco has strategicallytoinvested in technological systems which have SIGNIFICANTLY
• Historical detail the lease level is also available for the Property and ROC teams. (each dot is a lease)
IMPROVED operating efficiency Home to Aimco
2007 America Comes 8
19
20. Highest Emphasis Placed on Customer
Experience
We involve our residents in improving the customer experience through several feedback systems.
On-line surveys are offered to residents at:
1) move-in; 2) two days after move-in; 3) 120 days after move-in
4) completion of each service request (Customer Experience Measurement).
Results are immediately available for staff review and impact the variable compensation
program.
Retention has improved 3% from ’03 to ’08
A key attribute is TRANSPARENCY of the Customer Experience
Net Promoter Score is our primary customer experience metric
Customer Experience Measurement
2007 2008
Metric 2005 2006
Net Promoter Score 18% 18% 31% 38%
Office Courtesy 90% 90% 93% 94%
Maintenance Overall Rating 82% 86% 90%
Customer Average Duration (months) 16 17 17 19
Willingness to Renew 70% 75% 75% 93%
Move-in Defect Rate 14% 8% 11% 11%
Unit Turn Cycle Time 34 days 15 days 15 15
Unit Availability 40% 90% >90% >90%
20
21. The Team Member Experience – Extending the
Operating Platform
Team Member Engagement- Reduced turnover by 8%
•Selection- Behavior based hiring screens deployed mid year ‘07
•HR People Pipeline Mgmt System- START- deployed early ‘07
•Training/Development
•Continued CM training program
•Learning Management system deployed early ‘06
•New long-term training relationship with the Disney Institute
• Retention programs
• “Aiming for the Stars”, Aimco Cares, Aimco Cares4U, College Scholarships,
Active Duty Service Members, Tuition Reimbursement, Scorecard
payments to 63% of properties in ’06, 50% in ‘07
• Performance mgmt, career paths, succession planning programs.
21
22. Employees are at the Heart of Quality
Customer Service
“Hire for attitude, train for skill”
Aimco has developed rigorous training programs to ensure our people deliver the
highest level of customer service.
Approximately 5,000 Regional and site team members have completed an
average of 10 courses per person year to date.
Aimco has improved team member satisfaction through specific initiatives including
pay for performance, quarterly CEO/Executive Town Halls, active succession planning,
and numerous training opportunities.
Indicator 2005 2007 Increase
Engagement
Job Satisfaction, Retention, 57% 65% 8%
Recommending Aimco as a place to work
On the Job
Training, Role Clarity, Information, 81% 88% 7%
Resources, Using Skills & Abilities
Work Life 57% 78% 21%
Compensation (Pay & Benefits) 57% 67% 10%
Values (Living Up To)
Integrity, Respect , Teamwork, Customer, 66% 75% 9%
Team Member Focus, Performance
Values (Believe In) 97% 99% 2%
22
23. Employees are at the Heart of Quality
Customer Service
“Hire for attitude, train for skill”
Aimco has developed rigorous training programs to ensure our people deliver the
highest level of customer service.
Approximately 5,000 Regional and site team members have completed an
average of 10 courses per person year to date.
Aimco has improved team member satisfaction through specific initiatives including
pay for performance, quarterly CEO/Executive Town Halls, active succession planning,
and numerous training opportunities.
Indicator 2005 2007 Increase
Engagement
Job Satisfaction, Retention, 57% 65% 8%
Recommending Aimco as a place to work
On the Job
Training, Role Clarity, Information, 81% 88% 7%
Resources, Using Skills & Abilities
Work Life 57% 78% 21%
Compensation (Pay & Benefits) 57% 67% 10%
Values (Living Up To)
Integrity, Respect , Teamwork, Customer, 66% 75% 9%
Team Member Focus, Performance
Values (Believe In) 97% 99% 2%
23
24. (at 120
Team Member Experience- CM Training Results
days post hire vs. prior year)
Measure Rating Comments
1 Sales Strong New CM sales performance-
Effectiveness improvement
10.7% point increase
3.2% improvement vs. month
average
2 Office Courtesy Improvement Office Courtesy scores
10.5% improvement to above 93%
3 Employee Strong Employee turnover improvement
Retention Improvement
+30% vs. baseline
4 FSG Tickets Strong Reductions of FOCUS tickets vs.
Improvement benchmark improvement of 2.9
tickets per 100 units
24
25. Results of the Operating Improvements
The operating improvements are further evidenced through above-market rents and
occupancies.
Aimco versus REIS Occupancy & Rent
$840 98.0%
96.0%
$820
94.0%
Average Rent per Occ. Unit
$800
92.0%
Occupancy
$780
90.0%
$760
88.0%
$740
86.0%
$720 84.0%
$700 82.0%
Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07
Aimco Rent REIS Rent Aimco Occ. REIS Occ.
Source: REIS.
Used with permission from Reis.com
25
26. 2. Raising Revenue in Rent Constrained Markets
• Ontario rent regulations are similar to several US cities (San
Francisco, Northern NJ, Alexandria VA). You are not alone!
• Utility Rebilling- a form of “Unbundling” and Risk Transfer
– Does result in about a 30% reduction in usage – very “Green”
– Direct Bill vs. RUBS based on physical plant and age
– Electric, Heat (Oil, Nat Gas, Electric), Air Conditioning, Hot
Water, Trash and Pest Control have all been “unbudled”
– Vendors in US are ISTA, NWP, RealPage
– Must be included in the rent statement to be truly effective, does
require regulatory authorization, sometime regulation
– Represents $1,000/unit/yr change or 10% change in total expenses
– Success depends on customer type—seniors will pay up for stability
27. 2. Raising Revenue in Rent Constrained Markets
• More Unbundling- Represents 4% of Rental Income
– Comes with Danger of Being “nickled and dimed to death”
• Effective with Cost Conscious Consumers- backfires in luxury/senior segments
– Renter’s Insurance- required liability insurance
– Surety Bond vs. Security Deposit
– Fee Income- application fees, upfront admin fees, late charges, lease
cancellation fees, month to month fees, transfer fees, lost key fees, pet
rent, pet deposits, parking costs,
• Ancillary Revenues- 1% Opportunity & Growing
– Communications- Internet, Phone/Wireless, Television
– Vending
– Laundry and/or Washer/Dryer Rentals
28. 2. Raising Revenue in Rent Constrained Markets
• Revenue Management Systems- the Biggest Opportunity
– Still only operative on 10% of US Apartment Rentals
– Lift of 2-5% documented with available vendor systems
– Requires a compatible Property Mgmt Operating System
– Requires a documented Revenue Management Process
• Centralized Staff of some sort
• Collaborative decision making—but OFF SITE
• Data Driven based upon historic conversion ratios
• Requires interaction of internet media sources
• Assumes most demand is sensitive to price—but that’s exactly what good
segmentation should reduce!
– Enables price segmentation as to move-in date, lease duration, and
unit amenities
– Next Wave will layer in resident credit stability
29. 3. US Major Apartment Product Types
• Urban- Brownstone, Mid and High Rise
– Long Useful lives among major building systems
– High land values based on density, difficulty to replace
– Expensive/difficult to Renovate Common area elements-
elevators, HVAC, Plumbing
– The Neighborhood is the lifestyle amenity
• Suburban- Garden Apartments- predominate US Housing
Apartment Style given reduced US population density
– Clusters of 10-12 unit apartment buildings- 300 unit avg size
– Easier to bite off Cap Ex- roofing, siding, HVAC units, hot water
– Dependent on the automobile
– Growing trend is along metro rail lines, universities, hospitals
– Many Common areas amenities- club houses, pools, etc.
31. Market Divergence Continues
Fundamentals softening short-term
(2009-10)
Construction starts are decreasing
Future supply / demand favors appreciation
Apartments remain a preferred investment
Split between:
Family firms and Institutional Capital
32. Market Divergence Continues
• Short-term transactional value
Debt and equity more expensive
Investors are fearful and conservative
Unemployment is damaging fundamentals
Expectation of “discounted / distressed
pricing” by institutional investors
34. U.S. Employment Losses Have Reached
Extreme Levels in Recent Months
500
250
Thousands of Jobs
0
Monthly Absolute Change
May: -137,000
June: -161,000
-250 July: -128,000
August: -175,000
September: -321,000
-500 October: -380,000
November: -597,000
December: -681,000
January 09: -655,000
-750 February 09: -651,000
00
01
02
03
04
05
06
07
08
*
09
*Through February 2009
Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics
35. Retail Sales Continue to Decline Despite Relief from
High Energy Prices
Retail Sales Oil Prices
10% $120
Crude Oil (Price per Barrel)
5% $90
Retail Sales (Y-O-Y Change)
0% $60
-5% $30
-10% $0
00 01 02 03 04 05 06 07 08 09*
* Retail Sales YOY as of February, Oil as of March 18th
Sources: Marcus & Millichap Research Services, Economy.com
36. The Fed and Treasury Have Become Aggressive
– Helped by Falling Inflation
Fed Funds Rate Ten-Year Treasury Core Inflation
8% 8%
Core Inflation (Y-O-Y Change)
6% 6%
Fed Funds and Ten-Year Rates
4% 4%
2% 2%
0% 0%
*
00 01 02 03 04 05 06 07 08 09
* Ten-Year/Fed Funds through March, Core Inflation through February
Sources: Marcus & Millichap Research Services, BLS, Federal Reserve Board
37. Housing Inventory Overhang Indicates
Further Weakness (months of supply)
Single-Family Condo
Y-O-Y
20
Change
Number of Months
16 17%
12
-1%
8
4
0
01 02 03 04 05 06 07 08 09*
* Through February
Sources: Marcus & Millichap Research Services, National Association of REALTORS®
38. U.S. Existing Single-Family Home Trends
1990-2007 2008 2009*
Change: ’02 to ’Peak: 34% 49% 21% 23% 51%
Change: Peak to Present -22% -5% -15% -16% -38%
$400
Median Home Price (000s)
$300
$200
$100
$0
U.S. Northeast Midwest South West
* Through February
Sources: Marcus & Millichap Research Services, Economy.com, National Association of REALTORS ®
39. Y-O-Y Feb. 2009 Employment Ranking
Top 10 & Bottom 10 Markets
Bottom 10 Y-O-Y
Top 10 Y-O-Y
Markets Percent Change
Markets Percent Change
Fort Lauderdale -4.2%
Oklahoma City 0.5%
Austin 0.1% Atlanta -4.4%
San Antonio -0.1% Las Vegas -4.5%
Washington D.C. -0.1% Orange County -4.7%
Houston -0.3% Orlando -5.0%
Dallas/Ft. Worth -1.1% Sacramento -5.2%
Kansas City -1.3% Charlotte -5.5%
Inland Empire -6.3%
Boston -1.5%
Phoenix -7.3%
Columbus -1.6%
Detroit -7.4%
New Haven/Fairfield Cty. -1.6%
United States -3.0% United States -3.0%
Sources: Marcus & Millichap Research Services, BLS
40. Notice of Default Ranking
Top 10 & Bottom 10 Markets
Past 12 Months vs. Previous 12 Months
Bottom 10 Y-O-Y
Top 10 Y-O-Y
Markets Percent Change
Markets Percent Change
Oakland 39%
Denver -12%
Oklahoma City -4% Inland Empire 41%
Boulder -2% Bakersfield 42%
St. Louis -1% San Francisco 42%
Memphis 11% Los Angeles 46%
Anchorage 17% Orange County 52%
Albuquerque 19% San Jose 60%
Las Vegas 84%
Sacramento 22%
Portland 86%
New York/NNJ 25%
Honolulu 176%
Santa Barbara 26%
U.S. Average 39% U.S. Average 39%
* 12 months ending in February
Sources: Marcus & Millichap Research Services, DataQuick Information Systems
41. Apartment Vacancy Ranking (2008)
Top 10 & Bottom 10 Markets
Top 10 2008 Bps Bottom 10 2008 Bps
Markets Vacancy Change Markets Vacancy Change
Indianapolis 7.6% -70 San Jose 5.2% 130
Palm Beach 7.6% -40 Las Vegas 7.7% 160
Milwaukee 3.7% -40 Jacksonville 11.6% 170
Cincinnati 6.7% -30 Tampa 8.6% 170
Atlanta 10.2% 200
San Francisco 3.6% -30
Charlotte 8.0% 200
Minneapolis 4.3% 20
San Antonio 8.7% 210
New York 2.3% 20
Orlando 9.7% 250
Oakland-East Bay 5.3% 20
Phoenix 10.9% 260
San Diego 3.9% 20
Tucson 11.2% 300
Boston 6.0% 30
United States 6.7% 90
United States 6.7% 90
Sources: Marcus & Millichap Research Services, Reis
42. Apartment Vacancy Ranking for 2009*
Top 10 & Bottom 10 Markets
Top 10 2009* Bottom 10 2009*
Markets Vacancy Markets Vacancy
New York 3.6% Charlotte 9.8%
Milwaukee 4.4% San Antonio 10.0%
San Diego 4.4% Tampa-St. Petersburg 10.4%
San Francisco 4.6% Austin 10.5%
New Jersey 4.8% Houston 10.9%
New Haven-Fairfield Co. 5.2% Atlanta 11.1%
Minneapolis 5.4% Orlando 11.1%
Phoenix 12.6%
Los Angeles 5.7%
Jacksonville 12.7%
San Jose 5.9%
Tucson 13.3%
Oakland-East Bay 6.1%
U.S. Average 7.7%
U.S. Average 7.7%
* Forecast
Sources: Marcus & Millichap Research Services, Reis
44. Apartment Effective Rent Ranking (2008)
Top 10 & Bottom 10 Markets
Top 10 2008 % Bottom 10 2008 %
Markets Eff. Rent Change Markets Eff. Rent Change
Seattle-Tacoma $958 4.9% New Haven-Fairfield $1,536 0.6%
Oklahoma City $519 4.6% New York $2,801 0.6%
Houston $715 4.4% Sacramento $921 0.4%
Austin $783 3.8% Jacksonville $757 0.1%
San Francisco $1,827 3.6% Detroit $768 -0.4%
San Diego $1,303 3.4% Phoenix $710 -0.4%
Louisville $618 3.3%
Fort Lauderdale $1,050 -0.6%
Washington D.C. $1,307 3.3%
Inland Empire $1,018 -0.7%
Oakland-East Bay $1,332 3.2% Palm Beach $1,040 -0.8%
Boston $1,651 3.1% Miami $1,041 -2.0%
United States $995 2.1%
United States $995 2.1%
Sources: Marcus & Millichap Research Services, Reis
45. Construction Starts Declining
Multi-Family Single-Family
500 2,000
(SAAR, in thousands)
Single-Family Starts
400 1,600
(SAAR, in thousands)
Multi-Family Starts
300 1,200
200 800
100 400
0 0
4
4
4
4
4
4
4
4
4
4
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
90
92
94
96
98
00
02
04
06
08
19
19
19
19
19
20
20
20
20
20
Sources: Marcus & Millichap Research Services, U.S. Census Bureau
46. Reversal in Home Ownership Rate
Points to Increase in Renter Households
Homeownership Rate Renter Households
Number of Household (millions)
72% 40
Homeownership Rate
69% 35
66% 30
63% 25
60% 20
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010*
* Forecast
Sources: Marcus & Millichap Research Services, U.S. Census Bureau
47. “Shadow” Rentals a Significant
Factor in Rising Vacancies
2+ Unit Structure 1-Unit Structure
7,000 1-Unit as % of Total 55%
1-Unit Structure as % of Total
6,000
50%
Units (in 000s)
5,000
45%
4,000
3,000
40%
2,000
35%
1,000
0 30%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08*
* As of 3Q
Sources: Marcus & Millichap Research Services, U.S. Census Bureau
48. Fannie Mae Composite Rates
Apartment Spreads 10-Yr. Treasury
400 8%
Average Conduit Spread (Large Loan)
All-In Rate**
10-Yr. Treasury and All-In Rate
300 6%
200 4%
100 2%
0 0%
02
03
04
05
06
07
08
*
09
20
20
20
20
20
20
20
20
* Through Feb 13, 2009
**10-Year Treasury Yield Plus Average Conduit Spread
Sources: Marcus & Millichap Research Services, Marcus & Millichap Capital Corp.
49. U.S. Commercial Mortgage Backed
Securities (CMBS) Issuance:
2004-2007 Vintage at Highest Risk Level
U.S. CMBS
$250
$230.2
$205.6
$200
$169.2
CMBS Issuance (billions)
$150
$93.1
$100
$77.8
$74.4
$52.1
$48.7
$50
$12.1
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: Marcus & Millichap Research Services, Commercial Mortgage Alert, MBA
50. Apartment Investment Trends
Dollar Volume by Price Category
$1M - $9.99M $10M - $19.99M $20M+
$120
$104 Billion
$100 Billion
Total Dollar Volume ($bil)
$90 $85 Billion
$60
$45 Billion
$30
$0
00 01 02 03 04 05 06 07 08
Excludes Archstone Privatization
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
51. Commercial Mortgage
Delinquency Rates by Group
CMBS (30+ days and REO) Life Companies (60+ days)
Fannie Mae* (60+ days) Freddie Mac (60+ days)
2.0% Banks & Thrifts (90+ days)
1.5%
1.0%
Delinquency Rates
0.5%
0.0%
4Q 97
4Q 98
4Q 99
4Q 00
4Q 01
4Q 02
4Q 03
4Q 04
4Q 05
4Q 06
1Q 07
2Q 08
3Q 08
4Q 08
08
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
4Q
Delinquency rates at the end of each period
Sources: Marcus & Millichap Research Services, Mortgage Bankers Association
52. Total CMBS Outstanding: $799.7 billion
Self- Healthcare Other
• By Property Types:
Storage 0.6% 7.7%
• Office 30.2% 1.8%
• Multifamily 15.6% Hotel Office
• Retail 29.5% 9.5% 30.2%
• Industrial 5.1%
• Industrial
Hotel 9.5%
5.1%
• Self-Storage 1.8%
• Healthcare 0.6%
• Other 7.7%
Multifamily
Retail
15.6%
29.5%
Sources: Marcus & Millichap Research Services, MBA
53. Apartment Sales Trends
Average Price per Unit vs. Average Cap Rate
Avg. Price per Unit Average Cap Rate
$120 9%
Avg. Price per Unit (000s)
$90 8%
Avg. Cap Rate
7%
$60
$30 6%
$0 5%
01 02 03 04 05 06 07 08 09*
* 1Q Estimate
Sales $1 million and greater
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
54. Re-Pricing of Risk Trends
By Market Quality
Primary Secondary Tertiary
9%
8%
Average Cap Rate
7%
6%
5%
04
04
05
05
06
06
07
07
08
08
2Q
4Q
2Q
4Q
2Q
4Q
2Q
4Q
2Q
4Q
Sales $5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics
55. 12 – Month Cap Rate Adjustment Matrix *
Class “A” Class “B” Class “C”
1.25
Primary .65 1.00
1.50
1.00 1.25
Secondary
1.50 2.00
1.25
Tertiary
* Change in cap rates last 15 months
56. 12 – Month Pricing Adjustment Matrix
Class “A” Class “B” Class “C”
-20%
Primary -12% -17%
-24%
-16% -21%
Secondary
-22% -26% -30%
Tertiary
6.00 / 6.75
5.50 / 6.25
Base = 5.00 / 5.50
57. 2009 Commentary
Capital markets remain fractured and
expensive
Investor demand tempered, motivated by
anticipated discounts
Vacancy rate approaches 9% (+2%)
Effective rents erode due to concessions
Velocity remains low during 2009
Distressed asset sales escalate in 3rd / 4th Qtrs
Cap rates continue to increase 50 bps
59. Echo Boomer Demand
Supports Appreciation
Ages 20-24 Ages 25-29 Ages 30-34
10%
Change in Population
5%
0%
-5% 6.5 Million
Increase
-10%
1990-95 1995-00 2000-05 2005-10* 2010-15*
* Forecast
Sources: Marcus & Millichap Research Services, Economy.com
60. U.S. Population Trends Favorable For
Rental Market (Projected 20-34 Year Old)
70,000
20-34 Yr Old Population (000s)
66,000
62,000
58,000
54,000
90
92
94
96
98
00
02
04
06
08
10
12
14
16
18
20
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
Sources: Marcus & Millichap Research Services, U.S. Census Bureau
61. Demand From Immigration
Supports Appreciation
2.0
Number of Individuals (millions)
1.5
6.4 million
increase
1.0
0.5
0.0
80 85 90 95 00 05 10* 15*
* Forecast
Sources: Marcus & Millichap Research Services, Economy.com
62. Summary
Apartments are a Consumer Business as
well as a Financial One
Value to Consumers Can be Unbundled
Successfully
Apartments are an Attractive Investment in
the US (and Canada!).
