Case Study

Alliance Residential Company

Founded in 2000, Alliance Residential Company is one of the largest private apartment owners and the 15th largest management company in the U.S. It owns 20,000 units and manages another 30,000 units in 12 states. In 2010, Alliance made the decision to embrace a revenue management system to maximize rent growth across its portfolio. Under the direction of Blerim Zeqiri, Director of Research and Revenue, Alliance rolled out Rainmaker LRO™ software and currently has 6,750 owned units and 6,647 managed units on LRO.

Strategic Pricing Energizes Rent Growth

THE CHALLENGE

Recoup Lost Revenue at Owned and Fee-Managed Properties

The worst recession in 70 years had a profound effect on the entire multifamily industry: By the end of 2009, owners/operators witnessed net effective rents decrease in some markets by as much as 40%—and the outlook was not promising. Alliance Residential, however, saw an opportunity to make up the lost ground by implementing a comprehensive revenue management system to focus on rent growth. It was a business plan the company put into effect at its own properties and shared with owners of its fee-managed properties.

“Everyone was hurt by the downturn,” said Blerim Zeqiri, Director of Research and Revenue for Alliance. “The idea that we could recoup those losses considering supply and demand was very appealing.”

Alliance’s main objective was to unleash rent roll potential of all its properties and eliminate concessions and discounts—sometimes as much as three months of free rent—forced upon properties by the recession. “We were locked-in [on concessions and discounts], and needed to turn around quickly so we could get the full potential at each property,” said Zeqiri.

However, fee management companies face a complex set of challenges when implementing revenue management on behalf of their customers. Alliance wanted to show its clients that revenue management was the right choice to mitigate the after-effects of the economic downturn, energize revenue and rent growth and provide future pricing stability.

THE SOLUTION

LRO™ Focuses on Rent Growth

When evaluating revenue management systems, Alliance was committed to finding technologies to match the firm’s dedication to excellence and strategic vision on re-igniting rent growth. “We wanted the best revenue management system out there, one that fit with our philosophical approach as well,” said Zeqiri.

Since the pricing and methodology employed by Rainmaker's LRO™ system were similar to the objectives Alliance wanted to implement as a company, LRO was rolled-out to four Alliance-owned test sites in June 2010. “LRO priced units in a more transparent way, which simplified the process and the way pricing is presented to prospects and current residents,” said Zeqiri. “It gave us a much more sophisticated way of calculating pricing, allowing us to quickly determine the optimal return for each unit.”

Being able to create value at its own properties by determining unit-level premiums to secure every single unit the highest revenue growth possible enabled Alliance to approach owners of its fee-managed properties with strong empirical data demonstrating successes using LRO.

“One of the biggest hurdles was explaining to investors the macro-economic principles behind LRO,” said Zeqiri. “Once they understood that LRO pricing is carefully based on expirations, availability, demand, and everything else that goes with it, they had confidence.”

Yet championing a new system that flies in the face of the traditional occupancy-based strategies did pose challenges. “We had trouble explaining to clients the equilibrium between occupancy and rent growth,” Zeqiri noted. “One of the biggest challenges was convincing them that sometimes it makes more sense to be at 90% occupied and achieving higher rent growth than to be at 95% occupied.”

With the LRO system, Alliance found the equilibrium. “It allowed us to say to our clients, ‘If your goal is increasing occupancy because you’re preparing your assets for sale, this is how we can approach it.’ Once told what they would see – on average, between a 3% and 5% revenue lift – they were more responsive.”

THE RESULTS

Increased Revenue Lift, Amazing Comebacks

Following the implementation of the LRO system at Alliance properties, revenue lift has averaged 4.25% across the portfolio on top of market growth at 5%, translating to a 9–9.5% rent growth for owners. “Once you multiply total revenue by this increase and see you’re bringing in X dollars more, you put a cap rate on that and the value of your asset increases substantially,” said Zeqiri.

One of Alliance’s apartment owner clients was in dire straits at a particular property prior to implementing LRO. The property was not only struggling in occupancy, turnover, and cash flow, but 24 units were taken offline for much-needed repairs.

“The properties were subjected to strenuous financial terms,” said Zeqiri. “We initially rolled LRO out at two properties and saw an unbelievable comeback in three months.” In that short time, occupancy improved from 81-82% occupied to 93-94%. “Even though we took 24 units offline, we still managed to outperform what we had budgeted if all the units were in place.”

Once the owner saw the power of LRO, the system was rolled out at their remaining properties. “They saw the concrete benefits [of LRO], not only in terms of revenue growth but also in how much they were putting in the bank, which helped their lender negotiations,” said Zeqiri.

For Alliance, LRO provided a comprehensive pricing approach to its owned and fee-managed properties, helping the company recover from lean years and position itself for a financially successful future. The system helped better control expiration management and incrementally reduce concessions, leading to the greatest return on investment: the rent growth it has generated for its properties.

Key Highlights

Business Objectives

  • Increase rent roll potential of Alliance-owned properties
  • Help institutional investors increase asset valuation
  • Create equilibrium between occupancy and rent growth at all properties

Results

  • 4-4.5% average revenue lift above market at all properties using LRO
  • Increased asset valuation —ability to prove revenue growth
  • Time savings and reduced administrative burden

LRO priced units in a more transparent way, which simplified the process and the way pricing is presented to prospects and current residents. It gave us a much more sophisticated way of calculating pricing, allowing us to quickly determine the optimal return for each unit.”

Blerim Ziqiri, Director of Research and Revenue Alliance Residential Company

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