New CEO is determined to keep growing

Birmingham Business Journal - May 19, 2006 by Kaija Wilkinson Staff

Since going public in 1993, Colonial Properties Trust has proven a good bet for investors more often than not. Through acquisitions and a steady pace of development projects, the real estate investment trust is positioning itself to grow further under new CEO C. Reynolds Thompson III, who succeeded Thomas Lowder last month.

Diversity, say analysts who favor the firm, is the key factor driving its success. Management couldn't agree more.

But that doesn't mean they're standing pat. Despite its relatively consistent performance in years past, the Birmingham-based REIT has decided to tweak its portfolio in pursuit of continuing growth.

For example, nearly half of Colonial Properties' portfolio now consists of apartment buildings; in 2004, multifamily residential accounted for only 29 percent.

The company also has begun to focus more on mixed-used projects, just one of the factors that sparked Ryan Dobratz's interest during a REIT conference earlier this week in Chicago. Dobratz, an equity analyst for investment research firm Morningstar Inc. in Chicago, says he and his colleagues sat in on a presentation by Colonial Properties CFO Weston Andress at the conference and feel Colonial has "nailed it" with the strategic shifts of the past 18 months.

The greater emphasis on mixed-use projects, which Dobratz says municipalities are more apt to approve, has been complemented well by recent acquisitions of multifamily properties and Colonial Properties' expanding geographic reach.

The company's office holdings, meanwhile, have crept up slightly to 33 percent, while retail has shrunk to 20 percent. The reduction in retail holdings is a result of Colonial Properties' decision to sell off its enclosed malls to focus on open-air, or "lifestyle," shopping centers.

Its geographic diversity notwithstanding, Colonial Properties Trust is making its new strategic focus apparent in the company's own backyard. A new office tower at Brookwood Village in Homewood, coupled with tentative plans to add condos and a hotel there, certainly reflect the new focus on mixed-use development.

Footprint begins to swell

Colonial Properties' geographic expansion has been deliberate, and the greatest single share of its holdings - 26 percent - are still in Alabama. Nonetheless, its growth has become more visible in other markets, especially Georgia and Texas, which now represent 18 percent and 14 percent of its properties, respectively.

Real estate analyst Rod Petrik of the Baltimore office of Stifel Nicolaus & Co. Inc., calls Colonial Properties a worthwhile investment for someone looking for diversification.

"They invest in apartments, shopping centers and office, and the vast majority of the real estate investment trusts are property-specific," Petrik says. The company's new CEO will be building on a strong foundation, the analyst adds.

Founded in the early 1970s when E.L. Lowder's Colonial Cos. split into three separate companies - banking, construction and insurance, and retail - Colonial Properties was a successful family-run business before it went public, Petrik says.

Things have only gotten better since, the analyst says.

Colonial Properties experienced remarkable growth under Thomas Lowder, who remains chairman of the board.

In the five years since it went public at $23 a share, its share price has risen about 19 percent per year, far outpacing many specialty real estate indexes. (At press time, Colonial Properties Trust was selling for about $44.61 a share.)

Colonial Properties is part of an industry that currently consists of about 200 companies, according to Rob Kuhkendall, a spokesman for the National Association of Real Estate Investment Trusts, based in Washington. Colonial was among many REITs that opted to go public in the mid-1990s, Kuhkendall says.

An eye for trends

Paul Earle, executive vice president of Colonial Properties' multifamily division in Birmingham, says the company is one of 17 REITs that are considered truly diversified, and one of only a handful that own three types of property.

In 2006 and beyond, Earle says, the tide will turn back toward apartments. Colonial Properties' operating income from multifamily holdings is expected to grow 28 percent this year to about $180 million, compared with $140 million last year.

Historically, income from multifamily has accounted for up to 60 percent of the company's total net income, Earle says, and is likely to represent as much as 75 percent within the next year or so.

The new CEO is determined to maintain the company's solid performance for years to come.

"Our vision is to be the star performer in real estate," Thompson says. "In order to be that star performer, we have to perform better than the average company."

Emphasizing that real estate is a long-term investment - company managers say Colonial Properties' NYSE ticker symbol, CLP, stands for consistent, long-term performance - Thompson maintains that Colonial Properties' diversity will help shield it from inevitable dips in its various markets.

"If you look back over time, all property types tend to go through cycles, so having multiple product types in the portfolio gives us the ability to focus on the product type that is doing well and de-emphasize the product type that may not be performing as well," Thompson says.

And again, at this point in the cycle, the company has become bullish on apartments. Colonial's Petrik says that as interest rates, and thus the cost of homeownership, creep back up, the market for apartments will grow.

"They've had very strong occupancies," he says, "and you have rents that are starting to move again."

Earle says "good, old-fashioned job growth," paired with a demographic shift, will ensure the strength of the multifamily market in the Sunbelt for years to come. Seventy-five million baby boomers are reaching retirement age, and many of them are relocating to the South, he says.

Another demographic group, the "echo boomers," or children of baby boomers, are already having a significant impact on the rental market, Earle says, and that is likely to continue as well. Born between 1977 and 1995, the echo boomers are now leaving college and seeking places to live. Their choice during the first two to six years is typically a rental, he says.

The CEO says, "We knew that (apartment) business was going to perform well and went out and pursued opportunities to grow that part of our business." To wit: Colonial Properties merged with Richmond, Va.-based Cornerstone Realty Income Trust, a $1.5 billion company focused on multifamily properties, in April 2005.

Through the first quarter of this year, Colonial Properties Trust has now reported 10 consecutive quarters of growth in its multifamily division. Earnings from that arm of the business were up 7.5 percent in the first quarter of 2006 vs. the same period last year.

Targeting hot markets

Colonial Properties also invested heavily in office buildings in 2005, most notably in a joint venture with New York-based fund adviser DRA Advisors LLC. The joint venture purchased a $1.8 billion-asset office REIT, Crocker Realty Trust Inc. Colonial owns a 15 percent share in the company and provides all property leasing and management for that portion of the portfolio.

Thompson says the deal gave Colonial Properties a much higher profile in Atlanta. In its Book of Lists, The Atlanta Business Chronicle, a sister publication of the BBJ, ranks Colonial Properties Trust as the city's third largest office landlord.

The strategic shift of recent years can be seen in several other cities, too, as the company's holdings spread across the Sunbelt - a region Colonial Properties defines as stretching from Washington, D.C., through Florida and out to Las Vegas.

Colonial Properties appears to be becoming more meticulous about where its acquires and develops, targeting metro areas such as Birmingham that are experiencing strong population, job and income growth.

Thompson says the company ranks the 148 strongest metropolitan markets and targets the top 35 or so.

"In 2005, we had a little bit less than 50 percent of our income from cities falling in that top quartile," he says. "In 2006, we expect roughly 80 percent of our income to come from those cities."

In the past couple of years, he says, Colonial Properties' income has "shifted dramatically."

According to Colonial Properties' formula, Birmingham is in the second tier of the top quartile - somewhere in the top 30, Thompson says.

Locally, Colonial Properties is busy indeed. The company is building the second phase of its $70 million Colonial Promenade Alabaster, the $80 million Colonial Pinnacle Tutwiler Farm, and Colonial Promenade Fultondale.

And although it hasn't been formally announced, the company is seeking zoning boards' approval to build a new retail center at Intestates 459 and 20 in the Tannehill-Bessemer area.

Meanwhile, Colonial's extreme makeover of Brookwood Village in Homewood continues, with a state-of-the art office tower taking shape. Condos and a hotel also are being considered for the site, which underwent a multimillion-dollar renovation several years ago.

Colonial Properties' Earle says the company is recognized by developers for being able to successfully deliver mixed-use properties. Such projects typically require various zonings and can be tedious from a regulatory standpoint.

He says the company is confident that the mixed-use trend has legs, especially in light of the cost of gasoline, which seems unlikely to descend back to levels considered normal only a year or two ago.

The CEO says Colonial Properties' "development pipeline" is a major focus this year.

"Our goal is to have a billion-dollar development pipeline in terms of the total value of the projects that we're working on, and we estimate that we'll spend about $500 million in 2006 on them."

So far, he says, Colonial is about three quarters of the way there.

kwilkinson@bizjournals.com · (205) 443-5637

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