Associated Estates Realty Corp. (AEC-NYSE)
Interview with:
Jeffrey I. Friedman, Chairman, President and CEO
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109 multifamily properties containing a total of 23,657 units located in 12 states.


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Associated Estates will spend over a million dollars in 2005 on tools and training, to assist their employees in providing customers a ‘legendary’ experience every day

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Real Estate Operations

Associated Estates Realty Corp.

5025 Swetland Court
Cleveland, OH 44143


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Jeffrey I. Friedman
Chairman, President and CEO

Interview conducted by:
Lynn Fosse, Senior Editor
March 24, 2005

Jeffrey I. Friedman
Chairman, President, and Chief Executive Officer
Associated Estates Realty Corporation

Mr. Friedman has been involved in the real estate business since 1969. In 1971, he became involved in the multifamily housing business, learning the business from the ground up. In 1974, he obtained his Bachelor of Science degree from Ohio State University. Mr. Friedman joined the Associated Estates organization in 1974. In 1976, he was named Vice President and a Director of Associated Estates Corporation and AEC Management Company. In 1979, he was named Chief Executive Officer and President.  Mr. Friedman continues to hold the positions of Chairman, President, and Chief Executive Officer. In July 1993, Associated Estates Realty Corporation was formed as a real estate investment trust (REIT). The Company went public in November 1993 (NYSE: AEC). Today, AEC directly or indirectly owns, manages or is a joint venture partner in 109 multifamily properties containing 23,657 units located in 12 states. Mr. Friedman is active in several national and local civic and charitable organizations, including the Greater Cleveland Sports Commission. He is a graduate of Leadership Cleveland and is also active in various professional organizations, including World Presidents Organization, and Urban Land Institute.

Company Profile:
Associated Estates Realty Corporation
(NYSE:AEC), one of the largest multifamily property owners in the United States, is a real estate investment trust ("REIT") headquartered in Richmond Heights, Ohio, a suburb of Cleveland.

The Company directly or indirectly owns, manages, or is a joint venture partner in 109 multifamily properties containing a total of 23,657 units located in 12 states. AEC’s most valuable resource is its intellectual capital. A highly trained and motivated professional staff is committed to providing an unequaled level of resident service and meeting or exceeding customer expectations.

Shares are traded on the New York Stock Exchange under the symbol AEC.

CEOCFOinterviews: What was your vision when you became CEO, and how has that evolved over time?
Mr. Friedman:
“The vision that we had for Associated Estates at the time we went public in November of 1993, was to be the dominant owner/manager of apartments in the Midwest. At the time, we thought that specializing in one geographic market would differentiate AEC from other apartment companies, so that investors had an opportunity to choose whether they wanted to invest in a company with Midwest assets, or companies with assets in other markets. We thought that specialization was a strength.  However, as the landscape for apartment companies changed, and many of the players began operating in a multi-regional way, it became apparent that, for us to compete for capital, we, too, would have to be involved in multiple regions. The vision that I had in 1993 has changed to today where we operate in 12 states. From a strategic standpoint, we will continue to lessen our dependence on our Midwest assets by both selling some of our Midwest properties and acquiring properties in other markets, such as Florida, metro D.C., and Atlanta.”

CEOCFOinterviews: What do you look for when you are looking to acquire a property?
Mr. Friedman: “That is a great question because there are a lot of us out there looking. I will tell you some things, but if I tell you everything, I would be giving up what we think might be an edge. Apartments are all different; even those apartments that may be located next to one another, because suite layouts are different, amenities are different, and the construction type is different. What we look for is something that will set our property apart, whether it is the size of the units, density, or availability of attached direct access parking. For example, we have a property in Sagamore Hills, a suburb of Cleveland, called Williamsburg Townhomes. The entire development is made up of townhomes with attached garages. Even in a market that is otherwise soft because of the competition from single-family home purchases and condo development, Williamsburg has maintained relatively strong occupancy because it is different from your typical apartment.”

CEOCFOinterviews: What is it that determines where you will be geographically?
Mr. Friedman: “In 1998, we acquired a pension fund advisory business, known as MIG Realty Advisors. As part of that transaction, we acquired 11 stabilized properties, two properties under development, and approximately 30 properties for which we acquired the management and advisory responsibilities. We expanded from Ohio, Michigan, Indiana and Pennsylvania, to several other states with the acquisition of the advisory business in 1998.  At that time, the acquisition was going to be much larger and our presence in many of those markets, more substantial. As a result of only owning a few properties in certain regions, we then began a process of disposing of assets where we did not have enough of a presence or where the properties were located in markets where we were not planning to grow, such as St. Louis, Houston, Phoenix, or Palm Desert.

 Our objective, from a strategic standpoint over the next few years, is to reduce the number of markets that we are in and concentrate more on the markets where we remain. We will continue to dispose of assets in markets where we are not planning to grow, like Raleigh, North Carolina, Houston and Phoenix, where we have a single asset in each of those markets. In some cases, the dynamics of a specific market are such that, even if we want to grow - in Florida, for example - we may be selling an asset because someone is willing to pay us a price that we think is a good price, and we can make more money by reinvesting those dollars in another asset in the same region.”

CEOCFOinterviews: You own properties, manage properties, and joint venture with some; why this particular mix and would you like to see a change?
Mr. Friedman: “We own and manage approximately 110 properties and about 23,700 units. Of those, we manage approximately 30 for others, or approximately 5,500 units. The fee management business is a very specialized business. Under the direction of our Senior Vice President of Operations, John T. Shannon, and his team of regional vice presidents, we have determined that certain of these fee management opportunities can be profitable and enable us to spread some of our overhead costs by managing other properties in markets where we already have a beachhead of properties we own. On a select basis, we will be growing the fee management business, but that is not our core business. Our core business is managing properties that we own or have an ownership interest in. We will continue to look for opportunities with local developers and some of our pension fund clients to grow by way of joint venturing.”

CEOCFOinterviews: Please tell us about occupancy rates and how you get more out of your rentals.
Mr. Friedman: “This has been a tough time in the apartment business in practically every market. The biggest competition in recent years has been the impact of historically low interest rates and the relative ease for people to purchase single-family homes. For example, the average price of a first-time buyer’s home in the greater Cleveland market is about $115,000. If you think about a five to ten percent down payment, the monthly mortgage payment plus taxes and insurance, is, in many cases, lower than the actual rates we charge to rent an apartment. This is the first time I remember it being this way, and I have being doing this for over 25 years.

It has been difficult to not only keep our properties full because of the competition from home purchases, but also to raise rents, which has squeezed our margins. At the same time, real estate taxes and wages have increased. So, on the expense side, we have seen an inflationary effect, but on the top line, at the rental income level and after the impact of concessions, we haven’t had the increases. Today, more than ever, our focus is on customer service. People want a hassle-free living experience. If there is a problem, they want to call and have it repaired. When they leave, they want to come home and find things the way they were when they left. They want to be proud of where they live. Maintenance is extremely important, as is a friendly attitude and doing things right the first time. We know that people make a decision about renewing within 15 minutes of signing their lease; within that brief time period, they realize that they like or don’t like where they are. They may also realize that they like the people with whom they are doing business. It is our task not to disappoint them and to continue to earn their business over the term of their lease.  In order to raise rents, we must provide a great level of service. To help offset some of our increasing expenses, we have been able to pass through some of our utility costs by asking residents to pay a portion of them. Residents seem to be more willing to pay these kinds of increases because they recognize that those services are a cost to us.”

CEOCFOinterviews: “Legendary customer service” and “quality employees” are two key focuses for you. How do you foster this throughout your organization?
Mr. Friedman: “The concept of an unequaled commitment to service starts at the top and permeates through every level of the company. Hopefully, the experience that residents, investors, vendors and the general public have when they call us is a good one. It does not happen accidentally; we will spend over a million dollars this year, reinforcing the tools and educating our employees about what they can do so that our customers have a legendary experience. We support that and reinforce that with telephone shopping calls and e-mail shops. Our regional vice presidents are in the field, constantly walking the properties with the managers, developing creative incentive plans for the maintenance and leasing teams, and figuring out how to stay full and get the maximum rental dollars at each property, based on the specific competition in each market. We have to walk the talk everyday. With our 24,000 units, and with an average of a 55% resident turnover rate, we are turning over approximately 13,000 apartments every year, which means that, to maintain our occupancy, we have to find 13,000 new customers each year. In order to lease to one customer, we have to see about four or five potential customers, based on a 20% “closing” ratio. So, we are interacting with more than 100,000 potential customers every year in order to try to keep 24,000 customers. We are constantly reinforcing those practices that we think will help us with that, from telephone etiquette, to cheerfully greeting residents when our maintenance staffs are walking the property, to the small things like picking up litter and making sure the newspapers are not laying in the hallways for days.

From a compensation standpoint, one of the things that we have done that I think resulted in exceptional performance in 2004, and should continue, is that we went deep into the organization to incent our employees. Today, over 500 employees are incented based on either how well their properties perform or on the NOI (Net Operating Income) the total company generates against our budget. We have incented our people at the deepest levels of the company, from those people touching and dealing with the residents everyday all the way up through the corporate support staff. Our business is a customer service business. We want to provide the best services that we can so that our margins are as strong as they can be. I believe that it is our compensation plan that has focused so many people in the company on what drives our stock price and the value of AEC.”

CEOCFOinterviews: Is that resident turnover rate for your company only, or is it typical of the industry?Mr. Friedman: “Our turnover is probably lower than the industry for two reasons. First, we think that our residents really do like living in our apartment communities. In addition, the Midwest, where we have so many properties, does not have the movement of people in and out of the region, that other markets may have. For example, in Atlanta, the turnover rate may be 65% or 70%, or in San Antonio, because of the large military population, it may be as high as 80%. It does depend on the market, but I would say that our turnover is below the industry standard.”

CEOCFOinterviews: Given the difficulties of raising rents over the past couple of years, are you able to continue the maintenance and improvements that you need to do on a regular basis?
Mr. Friedman: “It is very important that we maintain our properties.  We do not substitute maintaining the property in exchange for earnings. We recognize that we cannot keep a property full and we cannot rent an apartment if the carpet is not in good condition, the public areas are not up-to-snuff, or the amenities are not in proper working order. Certainly, areas such as parking lots have to be maintained. If we can’t satisfy our existing residents, then we will find ourselves having to fix things for another resident in the future. We spend a lot of money, $600 or so annually per unit, on the recurring capital expenses relating to the maintenance of our properties. From time-to-time, we will evaluate a property and determine if there are other improvements that we can make that might generate higher rents in exchange for making those investments in the properties.”

CEOCFOinterviews: Why should potential investors be interested in AEC, and what should they know that they might not realize when they first look at the company?
Mr. Friedman: “First, our shareholders who were shareholders in 2004 had a very good year; they had a total return based on stock price appreciation plus the dividend, of 45%. With regard to our dividend, almost all of it was return of capital, which means it was not taxable. Our investors in 2004 were rewarded in a big way. We told the Street that we would focus on improving our margins, which we did by improving them by over 400 basis points. We also told the Street that we would generate enough funds available for distribution, or FAD, to cover our dividend, and we did. We said we would improve our balance sheet, our debt service coverage and our fixed charge coverage, and albeit slightly, we did.

I believe the Street is finally starting to recognize that we have begun to deliver on those things that we have said we would do. We recognize that we cannot affect stock price, but what we can affect are the drivers of our stock price. By increasing our same-store NOI $5.6 million year over year, we are doing the things that create significant added value and that all of our shareholders will benefit from. Why would an investor buy today, coming off a 45% return? I think there are a couple of reasons. First, based on the consensus FFO per share estimate for 2005, our stock is currently trading at a 9.5 multiple. We have given guidance for 2005 of between $1.05 and $1.10 per share. Based on our guidance, our stock is trading at a 10.7 multiple. The average of the apartment REITs is a 13.8 multiple. That says that there should be $2.50 to $3.00 of stock price appreciation if our stock was trading at the average of the other apartment REITs, so we think there is continued opportunity. We have also said to the Street that we expect to generate FAD to cover or exceed our current dividend, and I think the Street is comfortable that there will not be a dividend cut. Many apartment REITs and other REITs today are facing tough decisions relating to their dividend levels. I think that potential investors recognize there is an opportunity for a multiple expansion at AEC, which should reward our investors, everything else being equal.”

CEOCFOinterviews: As CEO, what is your focus?
Mr. Friedman: “Day to day, I would say that 50% of my time is related to human resource matters. Whether it is compensation and incentive plans at all levels of the company, or ensuring that we have the bench strength and the depth necessary in the markets in which we are growing. Most of the rest of my time relates, from a strategic standpoint, to laying out and directing our future growth. In today’s very competitive market, there are a lot of dollars chasing every deal. That is more than a full time job.”


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“The vision that I had in 1993 has changed to today where we operate in 12 states. From a strategic standpoint, we will continue to lessen our dependence on our Midwest assets by both selling some of our Midwest properties and acquiring properties in other markets, such as Florida, metro D.C., and Atlanta.” - Jeffrey I. Friedman


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