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Introduction | Hudson Advisors
Formed in 1995, Hudson Advisors LLC (formerly known as Brazos Advisors, LLC) is headquartered in Dallas, Texas, and has significant expertise in loan servicing and asset management, providing a full range of services that include due diligence and valuation, financial services and reporting, income and property tax compliance, currency and interest rate hedging, risk management, information technology development and systems support. Hudson has direct experience in repositioning of real estate assets across a variety of property types, land and real estate development and servicing a variety of debt instruments.
The Challenge | Management Without Micromanagement
Purchasing a distressed asset is a complicated affair. You have a lot of factors to consider, including the cost of repairs, possible legal fees for receiverships, the delta between current rents and market rents, and selecting the right management team. Among the many challenges, what’s often overlooked is the value of the third-party management provider. That’s because companies like Hudson Advisors, which specializes in acquiring and improving distressed assets, are often hands-on asset managers that have become accustomed to micromanaging the property management companies they select. When Hudson Advisors purchased Coopers Crossing (Landover Hills, MD), Henson Creek (Temple Hills, MD) and Seasons at Bel Air (Bel Air, MD) in July 2013, however, it was looking for a property management company with experience and expertise in managing distressed assets, which were in need of substantial renovations.
“We are a pretty hands-on asset management group,” says Mitch Knicely, assistant vice president and the asset manager of the properties for Hudson Americas, the U.S. division of Hudson Advisors. “Even though we have a property manager that directs day-to-day operations, we have weekly calls with our property managers to discuss and refine our strategy.”
All three communities needed a significant amount of work, estimated in excess of $10 million, including new roofs, erosion mitigation and even foundation repairs. In addition, there were 50 apartment homes out of 1,900 that were vacant because the previous owners didn’t have the capital needed to turn them and make them ready for new residents. Because the communities hadn’t been maintained, overall occupancy was below 90 percent with one community lagging around 70 percent. “It was definitely a clear, distressed opportunity with regards to lack of effective ownership,” Knicely says. “A lot of companies don’t want to work through the number of repairs or the legal aspects involved with distressed assets. We specialize in them.”
While most third-party management companies have expertise in managing day-to-day operations such as leasing apartment homes and resident relations, few are equipped to assist in the management of the extensive renovations and rent increases that are often associated with distressed asset recovery.
The Solution | Strategic Experience and Expertise from ROSS
ROSS Management Services had been managing all three communities while they were in receivership prior to their purchase. Because they were in receivership, there wasn’t any capital to invest in the renovations ROSS recommended for the communities. During the acquisitions process, Hudson Advisors quickly recognized the expertise and value ROSS Management Services could provide and retained it as the management company.
“For one, ROSS offered extensive expertise and knowledge, both in the market and in managing the distressed asset process,” Knicely says. “The second reason we decided to keep them on was because of our interviews with their property management team, including Dave Miskovich and Don Stocks, who demonstrated significant experience and expertise in managing distressed assets.” Hudson Advisors had informal conversations with other management groups, but “ROSS won it before we even went to a broader audience,” Knicely adds. “It wasn’t necessarily that they had the best terms, such as management fee and other compensation, although they were competitive. It was their personnel. They were smart, capable and willing to take the steps necessary to improve the assets and produce results.”
During the renovation process, ROSS Management Services was intimately involved in the strategic decisions, often offering recommendations that Hudson Advisors wasn’t accustomed to receiving from community management partners. “They established a level of trust that some other groups we’ve worked with haven’t been able to achieve.,” Knicely says. “We put a lot of weight on their advice about strategic plans for the assets, because they demonstrated their knowledge and expertise on the strategy calls. They are invested in the management and overall success of the communities on a daily, weekly, monthly and annual basis.”
The two companies worked together to make the right improvements to the assets – installing new roofs, turning vacant apartments, repairing foundations and mitigating erosion issues – to maximize their value, increase occupancy and improve the overall resident experience. “We definitely did a lot of analysis to figure out which direction to go and where to put money,” Knicely says. “ROSS had a lot of the answers and some of the answers we developed together. And they worked because we studied the properties, we studied the market and we were able to accurately diagnose the problems and treat them appropriately.”
The Results | Occupancy Gains, Rent Growth and Everything Nice
The collaborative effort resulted in overall occupancy increases from 89 percent to 95 percent, including one of the communities jumping from an occupancy of about 70 percent to the low 90 percentile range. Rents have also grown at the properties by an average of approximately 10 percent per apartment home. Knicely attributes the gains in occupancy and rent growth to a smart strategy of implementing community improvements before increasing rents, which ensured that resident turnover remained within market norms.
“With ROSS’s input, we addressed the occupancy issues first to get the communities to a stabilized level,” Knicely says. “Then, we started attacking the rent increases. There wasn’t a ton of turnover, because we waited until a lot of the deferred maintenance and capital improvement issues were already addressed. By that time, the residents could see a change in the property. It didn’t feel like we were asking them to pay more for the exact same product. They were getting a better product so they were willing to pay more for it.”
What’s more, the increases in rent and occupancy were so strong that Hudson Advisors was able to dispose of two of the three properties at an attractive return, according to Knicely. Selecting ROSS Management Services to manage distressed assets it acquired in the Washington, DC area, not only produced attractive results in occupancy, revenue and return on investment, but also reduced the complexity of the renovation process and eliminated the need to micromanage the management of the community.