In a 2Q 2010 conference call that provided plenty of nuggets for apartment pricing professionals to chew on, the company reported that it pushed collective rents by 5.6 percent on 28,000 units in May and June.

Even more stunning, though, was one of its submarket standouts: in Richmond, Va., Colonial was able to raise its rates by a whopping 14.7 percent.

Those results came during a quarter in which Colonial beat analysts’ earnings estimates by 2 cents, and felt enough positive business momentum to raise its overall outlook for the remainder of the year.

Chief Operating Officer Paul Earle told analysts Thursday that the company’s latest rent increases came while using the Rainmaker Group’s LRO revenue management software to push pricing. On its 1Q earnings call back in April, it announced it would use the system to test rent increases of 7 to 16 percent in various markets.

On its 2Q call Thursday, execs gushed about the initial results of that push, and the software they used to get there.

“LRO is doing a very good job helping us manage our rates,” Earle said. “We kind of turbocharged the LRO system, and then we let the LRO system start working the rents up or down. If we were too aggressive, it helped us adjust rents back down. And if we were not aggressive enough, it moved rents even higher.”

That was the case at the firm’s Richmond properties, where the company originally targeted a 10 percent increase in asking rents for its apartments, and the revenue management system pushed for even more. “LRO moved them up another 4.7 percent, so in Richmond, we’re up 14.7 percent,” Earle said.

Earle described that extra push as a primary example of why revenue management systems shouldn’t be viewed as an autopilot system for setting apartment prices, while noting that it took guts for the company’s leasing agents to follow its recommendations.

“It’s not a perfect black box. It requires a lot of interaction with on-the-ground intelligence,” Earle said. “And I will say that our men and women out in the field were fearless. They embraced this large rent increase beta test with enthusiasm. They were out marketing the price of their apartments far above the competition in anticipation that the competition would come up and join us, and that is what happened.”

Earle’s insights into the firm’s second-quarter pricing moves came in response to a question from FBR Capital Markets analyst David Toti. Citing guidance from Colonial CFO Reynolds Thompson that the firm’s prices for new leases should catch up to its rates for renewing leases sometime in the third quarter, Toti asked why the company was still maintaining a 96 percent plus occupancy, and not pushing prices even more.

Earle’s answer underscored the impact that revenue management solutions are having on the metrics multifamily pros – and indeed, Wall Street analysts – use to gauge the performance of an apartment portfolio. Namely, in a portfolio that’s managed for overall revenue, occupancy alone is not as important as the sweet-spot between optimal occupancy and optimal rent.

“We are really not occupancy driven,” Earle said. “LRO is set up under several business rules, but it really doesn't trigger specifically on occupancy. It looks at unit availability, traffic, our lease renewal schedule that’s coming and historical information from the same period of a year ago. So there are many business rules that will help us determine what is optimal rent, and there's a delicate balance between occupancy and rental rate."

In other words, when it comes to managing to revenue, occupancy alone is no longer king. At the same time, Thompson explained that company was using LRO to maintain current occupancies in anticipation of the seasonal drop that usually comes in the back-to-school third quarter.

Finally, when asked by Banc of America Securities-Merrill Lynch analyst Michelle Ko whether it was concerned about that double-dip recession we’ve all been hearing about, Colonial’s executive team, which actually boosted its Wall Street guidance on the call for the remainder of the year, said it hadn’t seen any evidence of a secondary slump materializing. When Ko asked whether it was pushing rents any less aggressively in July than in June, she got an uncharacteristically unambiguous answer for a Wall Street earnings call.

“No,” Thompson said. “We actually see the continuation of the positive pattern.”

See the transcript of the call here, and listen to it here.

MultifamilyRevenue.com: Given its life-cycle so far, it seems revenue management was born into a recession in our industry early on, before gaining some momentum during the boom. But it seems like the current recession has stymied that enthusiasm again. Is that an accurate assessment?

Rich Hughes, AMLI: It is. For me, the interesting thing is that obviously, all revenue management tools are multivariate systems. Basically, you’re looking at a subset of the past, and trying to form an inductive model to predict what you should do in the future.

Given the fact that we came out of a very good time and went into a very bad time, I wonder how well some of the models responded. Did they still induce from a good time, and use a “good time” set of rules to try to predict what you should do in a bad time?

Anecdotally I’ve heard of people turning their revenue management systems off during the bad times. We certainly did not, but I think the confidence in revenue management’s ability to make money went down.

Of course, during the bad times, a revenue management system should manage the downside as well as it did the upside. That’s really what we are hoping for.

MFR.com: How did Rent Cheque respond?

Hughes: It made the right directional changes. I think with hindsight, we can ask whether the magnitude of the changes was large enough. Again, sometimes people think they can outperform the system. They may feel their product is worth more than it is. But it’s the market that tells you how much your product is worth, and we have to be very, very clear about that.

Getting caught in the vanity of the past is a loser’s game. Personally, I think all of our product is worth a lot more than you can rent it for right now. My advice would be, if anyone is looking to rent an apartment today, get in there quick while you can still get a deal.

MFR.com: The commercial and retail sectors measure results on a square-footage basis. From a revenue management perspective, would it be useful for us to measure ourselves on an NOI per square foot basis, for example?

Hughes: Again, it’s a bit of a different animal. Commercial and retail, when they’ve got blocks of space, have the ability to divide and subdivide that space, and find the cleverest fit for their tenants to make the most money from it. When a tenant moves out, they can elect to do that all over again if they want. So they’ve got flexibility in their product.

We don’t. We have one bedrooms, two bedrooms and three bedrooms, and I can’t make a three bedroom into a two bedroom and a one bedroom. That’s just not going to happen.

Also, we know empirically that small apartments have higher rent per square foot than larger apartments. The reason for this is that every apartment has certain capital intensive requirements; things like bathrooms and kitchens cost a lot of money. Bigger apartments can divide these costs across a lot of square feet, and smaller apartments divide them across fewer square feet.

The interesting thing is, if you run a regression analysis, you’ll find there’s actually a fixed component for any apartment, regardless of size. We did it with one of our high rises.

Let’s say that fixed component is $500 for every apartment. Once you subtract that out, the variable, per-square-foot rent is actually very linear, regardless of apartment size. But of course, the industry doesn’t look at it that way at all.

MFR.com: Does revenue management have the potential to change the focus of “keeping the heads in beds” in the apartment industry, to say, maximizing the yield per unit instead? Do you see that happening now or in the future?

Hughes: That’s a great question. I think that you’re basically asking whether NOI is a helpful number. The answer is, for development and underwriting, it is the helpful number.

The problem for us from a pricing standpoint, though, is that a lot of the expense side of NOI is built in by the time we get to the equation. Of course, to set price, the only expenses we really care about are the ones that influence the demand function, such as marketing.

For instance, one of the great questions of revenue management is, ‘Would you spend a dollar in marketing or customer acquisition to get two dollars in rent somewhere in the future?’

‘Absolutely,’ is probably the right answer.

The trouble is, marketing is not NOI. You can say the same thing about certain amenities. Can you get extra rent if you have a 24-hour doorman?

For costs that have a demand corollary, you may be able to get a better quality resident, or higher paying resident, or just more residents. But those costs are really just a very tiny subset of the overall expense structure, which includes the physical structure, maintenance and everything else.

So when you use NOI, you have this tiny bit on the expense side that’s good and meaningful in terms of revenue management, and then this whole massive part that you can’t affect at all. NOI, from a pricing standpoint, becomes very nebulous.

I would certainly make the argument that we should start looking at breaking out expense categories so that we can look at just those items that influence demand. That would be absolutely legitimate. NOI as a whole is just too cumbersome and holistic to be meaningful for revenue management.

MFR.com: Revenue management has obviously been a game changer for the industry. How has revenue management changed the way that you do business at AMLI?

Hughes: Our focus seems to have gotten more and more granular. Back in the old days, we looked at the portfolio or asset level, and said okay, AMLI at Happy Acres is doing okay.

Of course, that’s a very broad statement. Maybe the one bedrooms are doing great, and the three bedrooms are doing terrible, and it averaged out to be okay.

As we’ve gotten more and more granular, we’ve started optimizing unit types. Then, we’ve used amenities to optimize units, and now, we optimize leases and lease options.

So when you rent a unit, you look at the specific unit you want to rent. We have a basket of potential options that you can choose to customize your lease. We know that you can only pick one of those options, but we make sure every option we offer is profitable, or at the very least cost neutral, for us.

People talk about submarkets of one, and micromarketing and things like that. We are actually getting there. As we try to de-commoditize our product and move from renting blocks of space to the selling of apartment homes, which is what we all really want to do, it’s about tailoring a very, very specific offer to the customer. That may be a little bit more retailing than revenue management, but that is the pathway that we’ve been following.

MFR.com: What would you say to young professionals who want to pursue a career in revenue management in multifamily today? How should they prepare themselves?

Hughes: It’s funny. Not every company agrees on where revenue management lives and who should be in charge of it.

Some people think it’s an IT function, because it certainly is very technologically heavy.

Others would put it in more of a finance role, because it’s about making money.

Some people put it in operations, because it’s all about managing people and process.

And then there’s the fact that marketing is clearly a part of revenue management, too. It’s a part of the demand function, and that’s revenue management.

I think the right answer is, be prepared to embrace all of these disciplines. Be able to bring all of them to the table in a way that those departments can all feel vested in the outcome, and be stakeholders in the process.

It’s not one very specialized pathway, although it sounds that way from the job description. It sounds like a very specialized job, but you will touch a lot of other departments and a lot of other disciplines in order to fulfill your revenue management goals.

Revenue management works when the system works, when people have faith that it’s working, and when it has upper management support. So there are a lot of moving parts, and a lot of  cross-disciplinary aspects to good revenue management. I think you have to bring all of them together in order to be a success.

MFR.com: Thank you.

Hughes: It was my pleasure. Thank you for the opportunity to share my thoughts.

To kick off our regular series of Revenue Manager Q & A interviews, we chatted with Hughes about the revenue management career path within multifamily, the adoption of yield management in the current environment and how revenue management principles are slowly but surely changing key metrics for the apartment industry. Check back for Part 2 of our interview, coming soon.

MultifamilyRevenue.com: Thanks for joining us, Rich. You worked in the hospitality industry before coming to revenue management in multifamily. Is that a typical career path? How do you become a revenue manager in multifamily today?

Rich Hughes: Typically, there are two paths. One is sort of the hospitality background, which is the side I come from, and the other is for the very “quant” heavy folks. They tend to come from operational research and industrial engineering. I’ve done a bit of that as well in a former life.

When I went to grad school at Cornell, I was looking at all the different paths in finance. I enjoy revenue management because it is fairly new as a science. It’s also applicable in lots of places, but has not yet been deployed on a widespread basis. And finally, revenue management is about making money, which of course gets us all excited.

MFR.com: How did you get involved in LRO?

Hughes: I was very fortunate to get to work with Donald Davidoff, who for my money is the pioneer of revenue management in the multifamily space.

What became LRO was initially a Manugistics’ product, and Donald worked there, specializing in the heavy quant models for different industries. When Archstone engaged Manugistics, and eventually bought the product from them, Donald came with it. I was fresh out of school, and had some ideas about revenue management and apartments, but had never really gotten to play with live wires.

We spent a lot of time in the later stages of development working on the nuances of the application. I was very fortunate to work with Donald and his team, and I learned a lot. I’m very thankful.

MFR.com: What revenue management solution do you use today?

We employ a proprietary solution that’s been developed in-house, known as Rent Cheque.

MFR.com: There’s been a lot of focus on how revenue management has behaved in the current environment. What are you seeing at AMLI?

Hughes: In general, we’ve seen good results.

But one of the bigger hurdles is the cultural side. You need buy-in from your people. They have to believe that the technology works.

That can be a challenge, especially in times like these. When people have been beaten up by low occupancy and low rent expectations for a couple years, it’s important to remind them that we’ve seen rents higher than this four years ago, and that we can get back there.

When you haven’t had strong occupancy for a while, and your occupancy finally starts coming back, people can become  fearful that their occupancy will fall away again if they start pushing rents and revenue growth to the bottom line. But that’s what the model is recommending. Sometimes, it just takes faith to follow it. It’s about being as bold on the upside as you were on the downside.

MFR.com: Let’s talk about occupancy in the multifamily industry. It’s possible to have 90 percent occupancy with strong rents that are right on the edge of sustainability, as well as 100 percent occupancy with lower rents that leave money on the table. Given the adoption of revenue management in the multifamily industry, and our ability to move the rent needle in a targeted way, is occupancy still the right metric to look at to gauge a property’s performance?

Hughes: Occupancy is a legacy metric.

In days of yore, I think occupancy was a fairly good proxy for how well you were doing. If you’re 20 percent full, you don’t have your prices right. And I think we would all agree that if you’re 100 percent full, you’re leaving money on the table.

It’s really just a question of how much you’ve missed by. In the airline business, they like their planes to take off with one empty seat, because then they know there was one customer that wouldn’t quite pay that amount. It lets them know they were on the verge of being just the right amount of expensive.

From our standpoint, occupancy is still much more powerful than straight rent, though, for an important reason. When a unit goes from empty to full, you’ve got that instant — and often very large — revenue lift. You don’t get that with incremental tactical pricing changes, as the airlines do.

However, for the long-term sustainability of your business, you also cannot grow occupancy to 130 percent, so the future of your business and revenue growth has to come from your rates. It’s really about finding the balance between the two.

MFR.com: In the hospitality industry, occupancy has become less important, and yield per available room has taken on more prominence as a leading metric. Will occupancy become less important in multifamily, as we get more mature with revenue management?

Hughes: Although we are certainly revenue manageable, there are some nuances to our situation that are different from other industries. The big one for us is the slow inventory cycle. You sign a lease for 12 months. The advantage to that is we don’t have the price volatility that you see in the hotel business, where you can go from full to empty in three days.

The apartment business is much more incremental and marginal. I think occupancy will always be a high-level metric that C-level executives look at. If you’re at 70 percent, you’ve got problems. Even if you’re getting huge premiums at that occupancy, you’ll never convince me that the marginal dollars you’re making on one or two leases will make up for 30 percent vacancy. The math will never work that way.

I would say that at low occupancy regimes, you know what your problem is. The interesting thing is when you get to the submarket average, or what you might deem a strong occupancy position, whether that be 92 percent, 93 percent, or higher. Then it’s a question of what incremental dollars we can make on our available leases, versus the opportunity cost of people not leasing those units. And that, of course, is the very exciting question that revenue management attempts to address.

MFR.com: Even though we’ve seen concrete results in the multifamily industry from the use of revenue management technology, in terms of adoption, we’re still in the high single or low double digits.  Why do we still have relatively low revenue management penetration in our industry, even though we’ve seen results at this point?

Hughes: First of all, we are a traditional industry. We are probably not the quickest to embrace change. There are a few reasons for that.

We can embed a rent roll, and be fairly stable in terms of operations. We don’t have very high transaction density, as you might see in retail or banking. So the utility of this technology – and this kind of thinking, frankly – may be less relevant for us than it is for other industries.

With regard to adoption, let’s not forget that there is an expense to having revenue management. There’s a cultural expense, a salary/payroll expense, and an expense for actually using and deploying the technology.

For the big players, the REITs primarily, that’s an expense that you can bear over lots of units. But our industry is massively fragmented. By far the biggest leaser is mom-and-pop. They own more than 80 percent of the rentable space, but with just a few units each. For them, the cost-benefit analysis may not make sense. It might be a “nice to have it” right now, but given the current economic environment, I’m probably not going to spend the money for something that I may not fully understand, and certainly don’t fully believe in, in terms of the faith I have in the technology.

If only 8 or 9 percent are using it, I’m fine with that, because that 8 or 9 percent are going to do very, very well.

Look for Part 2 of our Revenue Manager Q & A with AMLI’s Rich Hughes next week.

Joe Bousquin

Editor’s Note: With this column, I begin my tenure as executive editor at MultifamilyRevenue.com. Given my background covering technology in the apartment industry, I couldn’t be more thrilled to take on this new role. Feel free to check out my bio here.

My goal is to expand MultifamilyRevenue.com’s role as the go-to source for information on the use of revenue management in the apartment industry. Please email me with your questions, thoughts or news: joe@multifamilyrevenue.com.

***

Since the start of the downturn there’s been a lot of focus on how revenue management works in a recession. Proponents argue that revenue management software can keep an apartment portfolio above water, or at least flat, in a down market. Skeptics conjure visions of “black boxes” leading leasing agents off a cliff, into an abyss of perpetually declining rents.

In case studies, interviews, and at recent conferences, a consistent trend has emerged: revenue management has helped mute the pain of the economic downturn, and may already be serving as a springboard toward recovery.

Colonial Properties Trust’s most recent earnings call provided evidence of how revenue management is  impacting the REIT as the rental environment begins to thaw. During a question and answer session on the REIT’s 1Q 2010 call, UBS analyst Dustin Pizzo asked Colonial’s executive brain trust about the feasibility of pushing rents, given the firm’s 96 percent-plus occupancy.

The company’s response? It was going to start testing increases of 7 to 16 percent at select properties, particularly those that had high occupancy rates, and felt comfortable doing so because of the revenue management technology it has implemented.

“We’re not interested in maintaining 96 plus percent occupancy without aggressive rent increases coming in behind that,” Colonial CFO C. Reynolds Thompson said on the call. “We have the pricing system in place, [the Rainmaker Group’s] LRO, and so we have a very good tool that allows us to move very quickly with our rental rates.”

Tom Lowder, Colonial’s CEO, said he anticipated getting a good lift in coming months, based on the firm’s use of revenue management in the past. “Our experience in the last cycle, when we had this kind of demand at our back, was very good,” Lowder said. “We expect to see the same kind of results this time, as we get in that same type of environment.”

Colonial’s example of the impact of revenue management comes on the heels of similar validation at the Apartment Internet Marketing Conference which was held April 28-30 in Huntington Beach, Calif. There, attendees discussed revenue management’s performance during the recession, as well as the technology’s inherent link to marketing initiatives. In a session titled “Marketing for Third-Party Managers,” fee managers discussed the disparity they saw in their portfolios between properties using revenue management, and those that weren’t.

Jennifer Staciokas, vice president of marketing and training at Lincoln Property Company, said in her 130,000 unit portfolio, properties using revenue management outperformed manually priced communities by 4 percent. “Even at properties where you’re seeing a decline, if you look at the market, the market is typically losing more than we are,” Staciokas said. “We continue to see a lift.”

Gail Duke, senior vice president at Sares Regis Multifamily Management, initially a skeptic of what she saw as a “black box” solution, reported a 2 to 3 percent outperformance at revenue managed properties. “I am converted,” Duke told AIM attendees. “I am a born-again revenue manager.” See video of the session here: http://www.apartmentinternetmarketing.com/2010-conference/marketing-third-party/

In a recent white paper, Joshua Tree Consulting President — and MultifamilyRevenue.com Publisher and Editor — Steve Lefkovits took that notion one step further. He wrote about how Englewood, Colo.-based apartment owner Archstone was actually able to get a 1.5 percent revenue lift by pairing its LRO system with the Level One Call Center application. The two-pronged approached allowed Archstone to push rents during the heart of the recession, from January to September of 2009.

“The test results contradict traditional industry thinking, which has held that new or excess demand in fully occupied properties is wasted because the property has no ability to raise rents in a competitive market,” Lefkovits wrote. “These results show conclusively that with sufficiently granular insight from LRO, Archstone was able to turn incremental demand into higher rents and revenue per unit.” Check out the full white paper here: http://www.multifamilyrevenue.com/2010/03/new-white-paper-archstone-test-shows-1-5-revenue-increase/

The role of revenue management in the recession, and Archstone’s use of Level One with LRO, will be explored in depth later this month as part of industry trade journal Multifamily Executive’s Virtual Conference: Tech Trends 2010 and Beyond. The all-Internet confab, originally scheduled for June 21, will now  kick off June 28.

Chris Wood, MFE’s senior editor, will moderate a panel titled “Adopting and Optimizing Revenue Management Systems in the Recession.” Wood touts the session as a kind of Celebrity Deathmatch between apartment revenue management heavy weights, with one of LRO’s most prominent users pairing off against the top brass at RealPage’s YieldStar division.

“It’s going to be a no-holds-barred face off between two of the go-to industry experts on revenue management: Donald Davidoff, Group Vice President of Strategic Systems at Archstone, and Janine Steiner Jovanovic, President of YieldStar over at RealPage,” Wood writes in an email. “We’ll be talking about how Archstone has juiced up LRO with Level One Call Center, as well as overall industry adoption. We’ll also get pretty in-depth on how pricing and demand algorithms responded (or did not) to the recession. Donald and Janine are going to touch on their own adoption and migration tips, and we’ll wind it up by talking about the merging of technology and marketing and the ability for revenue management to serve as a broader corporate strategy tool and not just a pricing box.”

Find more info about the session here: http://mfevirtualconf.com/

What do you think? What experiences have you had with revenue management during the recession, and what do you see now that the climate is starting to turn? Email me at joe@multifamilyrevenue.com, or post your thoughts to the Apartment Pricing Professionals Group on LinkedIn.

According to units, each week, Garver calls and incorporates community managers on pricing decisions by confirming the accuracy of the program data and adjusts any part of the program that property managers think are not competitive with others’ rates, or not appropriate for the current market place.

Dave Woodward, CEO of the Laramar Group, attributes their high occupancy rates (high 90s across the board!) to the use of both the LRO system and a pricing manager. “You can’t buy the software, flip a switch and assume it will work,” he says. “We’ve heard of companies that take this black-and-white approach, but it doesn’t allow on-site community staff to have ownership of the system. We’ve taken an approach to empower the field and let them have a say in the pricing.”

Garver echoes Woodward saying a successful implementation requires buy-in from property staff. “We didn’t want property managers left out of the process – they are experts who live in this every day,” she says.”

Read on about Garver and Laramar’s integration of the site staff in their expanding corporate initiative to stay on top in their markets at the following link: Priceless Input

Rich Anderson, Senior Equity Analyst at BMO Capital Markets once sarcastically asked Camden Property Trust CEO Ric Campo if Camden execs kneeled and bowed to the revenue management terminal each morning.  (Don’t take our word for it, the exact exchange is quoted below.)

Since then, Anderson hasn’t lost his humorous edge, but he has come around and produced a very thoughtful and comprehensive report on revenue management in multifamily which is a very concise summary of the value proposition, as well as his insights into its impact on the business.  The report includes great data on the revenue lift that revenue-managed properties have experienced.  We think Anderson’s report deserves notice from the industry, and from investors as it contains important insights into operational value creation.  He summarizes his view with:

“The bottom line is that we think multifamily revenue management, in
connection with a hands-on approach, is proving itself a worthy tool for the
industry – with revenue lift averaging something north of 1% depending on
how it is measured. And the more it is used, the better and more efficient the
overall business of apartments will become. In some cases it is a push –
using revenue management to set rents results in no meaningful upside. This
happens about 30% of the time, and is mainly a function of strong in-place
property management personnel. But the problem is, good employees tend to
leave (assuming 60%+ employee turnover) whereas revenue management
does not. So even in those cases where revenue lift from the software is
marginal, it still makes sense to consider utilizing revenue management.”

We will excerpt Anderson’s report from time to time and discuss additional elements of it.  For now, it’s available for you to download and enjoy in its entirety at the link below.

BMO Revenue Management Summary

And here’s the original sarcastic exchange from Camden’s Q3 2007 analyst conference call:

Rich Anderson – BMO Capital Markets

Hi, good morning still for you guys. I guess, the first question is I listen to this and it is like Yield Star has been around for two years, has two years of history, and we’re really hanging our hat on something that doesn’t have the history that you guys have, as real estate professionals.
So, I mean is there a chance that it could be wrong?

Richard Campo

Rich, that is a very interesting question.

Rich Anderson – BMO Capital Markets

I’m picturing you guys going to work every morning and like kneeling in front of the Yield Star terminal and bowing to it or something.

Richard Campo

No, look, Yield Star is a tool, okay? It has to be managed by people. And people have to ask the question every day, on-site manager, your district managers and we have Yield Star pricing specialists that deal with issues that come up, and so it is in fact a tool, not a panacea.

It is not on autopilot. It is managed every single day by the people running their properties. The different in the past was you didn’t have an ability to forecast and you didn’t have an ability to run all of the numbers that Yield Star runs.

What it does simply is forecast and figure out all of the permutations that you need to understand as you’re marketing, as you’re running a property.

Steve Small, Executive Vice President, AMLI Residential

Does revenue management work?  Steve Small of AMLI says yes.  At the 2008 AIM Conference, AMLI Executive Vice President Steve Small presented a case study of the impact of revenue management on  AMLI’s NOI growth performance relative to its REIT peers.  (Data was taken prior to the company’s purchase by Morgan Stanley.)

• According to a Wachovia Securities study performed annually, in 2000 AMLI ranked ninth among its peers in revenue growth.  After implementing revenue management and other optimization techniques it ranked first in the REIT peer group from 2003 until the company went private in 2006.

• At the same conference, Small presented a 2006-2007 analysis of AMLI’s NOI growth by market relative to the NCREIF index.   AMLI outperformed the NCREIF index in every one of its markets by 30 to 105 basis points of NOI growth during the period of the second quarter of 2006 through the first quarter of 2007.  AMLI’s markets were:  Atlanta, Austin, Chicago, Dallas, Denver, Florida, Houston, Kansas, New Jersey, Seattle and Southern California.

The complete slide presentation may be found online on the AIM Conference site.

Rent price volatility is considered a negative by those seeking predictable price forecasts and budgets. We worry that frequent price changes may cause renters to push back or try to game the system.

On the flip side, revenue management maximizes total yield. Total return is more important than achieving the highest rent rate or price and budget stability. Additionally, anecdotal experience shows that consumers understand receiving different offers once the RM methodology is explained.

Below is a cogent, clear explanation of how Camden Property Trust expects its Yieldstar pricing system to work for Camden. In it, Camden President Keith Oden addresses the price volatility they expect, and why they consider it desirable.

Excerpt from Camden Property Trust Q3 2007 Earnings Call Transcript:

November 02, 2007

(Formatting added, and minor clarification edits have been made to clean up typos)

Keith Oden, President, Camden Property Trust

The Yieldstar system attempts to provide the best possible fit between underlying market conditions and the market-clearing price for our rental inventory at any point in time. In order to accomplish this, it is very much a forward-looking system, and at any time, any given time is attempting to anticipate market conditions five to six months out and make minor mid-course adjustments well in advance of forecast horizons, attempting to avoid price volatility in the future.

In a purely theoretical sense, the results we would expect to see from this tool applied to our communities are as follows:

• As markets begin to recover, and pricing power improves, the forward-looking nature of the pricing engine would raise rents sooner than our competitors.

• At some point out in the future, as evidenced of the market improvement as apparent, the competition will respond and raise rents as well. When market conditions begin to deteriorate, the reverse will happen. Our forward-looking model will begin moderating rent increases prior to our competitors.

Interestingly, the facts seem to support the theory. Beginning in the third quarter of 2005 Camden’s revenue growth was at the top of the sector and this continued through the first quarter of 2007. In fact from the first quarter of ‘05 through the second quarter of 2007, Camden’s cumulative revenue increase was second highest of all publicly reporting multi-family companies. So we achieved larger rental increases and we got them sooner than our competitors

Beginning in the third quarter of this year our revenue slowed relative to our peers, which is consistent with a revenue management tool that is attempting to get ahead of the curve of a slowing market. So, it will be interesting to see what happens in the next two quarters regarding the revenue growth rate of us, and our competitors.

“How much can a revenue management system improve net yield in an apartment company?”

For years observers have asked that question, only to realize that there is no way to isolate the effects of a single initiative in a world where a multitude of factors impact a company’s decisions on a daily basis.

Industry executives cite revenue management as an important tool that provides transparency, consistency, and an easier way to calculate “the right price” than doing it manually. It’s one of several tools that REITs can use to drive results – and they typically are used simultaneously. For example, if marketing, onsite sales and the rental units themselves are in a bad place, then there won’t be much a yield management platform can do in isolation.

In his company’s second-quarter 2008 analyst call, Eric Bolton, CEO of Mid-America Apartment Communities, cites his company’s financial improvements as part of a larger program that includes revenue management and other operational and financial changes.

Mid-America Apartment Communities Inc. Q2 2008 Earnings Call Transcript Excerpt

August 1, 2008

Eric Bolton, Chief Executive Officer

[excerpt]… the strength of our operating platform will help to ensure that Mid-America’s portfolio continues to generate solid performance. We’re confident that our yield management system implemented last year, recent changes in programs for collecting delinquent rent and upgrades made at the start of the year to our inventory management programs were all combined to deliver results that outperform market norms.

As an example you’ll note that same-store physical occupancy at quarter end was down slightly by 30 basis points in the second quarter, as compared to the same point last year, but effective occupancy which is the more meaningful measurement of vacancy loss as it accounts for a vacancy from turnover that occurs during the month actually improved by 64 basis points in the second quarter.

As a result of this increase in the effective occupancy, same-store vacancy loss declined by nearly 9% in the second quarter as compared to last year. This is the direct result of lower resident turnover and our proactive inventory management system, which reduced the number of days vacancy to 24 days as compared to 29 days in the second quarter of last year.