Americans aren't buying homes like they used to. They're renting more. That's good news to landlords like Philadelphia-based Resource Real Estate, which has been buying up troubled apartment complexes in working-class neighborhoods in places like Memphis (home to Fed Ex) and Albuquerque (near US military and Energy Department labs), across the South and West, fixing and filling vacant units for service and factory workers.
Resource Real Estate is an arm of father-and-son energy-and-finance moguls Edward and Jonathan Cohen's publicly-traded Resource America Inc. The Cohens have a long track record of buying mundane assets cheap, holding them for years, and selling high. Another Cohen company, Atlas Pipeline Corp., and its natural-gas assets in Pennsylvania and other states, was just purchased by Chevron for $4.3 billion in cash and debt.
Resource owns more than 100 properties and mortgages, and controls 18,000 apartments, many of them purchased at discount prices from "distressed" owners who owe more than the buildings are worth, says Kevin M. Finkel, director of acquisitions.
"Our history is buying distresssed," he told me. "By the time we get involved, the asset may have gone two or three years with nobody taking care of it," apartments lying vacant, trees falling in the parking lot, and un-evicted criminals making life tough for working tenants. They buy the overpriced loans from banks at a discount, take title from the borrowers, and get to work.
There's a lot more apartments coming on the market as overpriced loans from the mid-2000s come due in the next few years, said Resource chief executive Alan F. Feldman. "We like bankruptcy. It adds complexity, and that scares away the (publicly-traded real estate companies) and folks with a short attention span."
Resource buys in the South and West, but rarely in Philadelphia or New York. (It also avoided Las Vegas and Phoenix in the boom years.) “This part of the country is too pricey,” Feldman said.
What does a nationwide chain like Resource gain over local operators? In Houston and other big apartment markets, rentals are "very competitive," Finkel says. "Just like hotels added Continental breakfasts and became a more customer-oriented business, multifamily apartments are undergoing that conversion. Renters expect more than just you pick up their rent check and fix their toilet." So Resource hires salespeople who can talk sports and clothing with young would-be tenants, keeps common areas looking sharp, and markets newly-painted units to tenants of dumpy neighboring complexes.
Oddly, Philadelphia and New York tenants don't expect improved service, Finkel added. He blamed the tighter apartment supply here, which favors landlords over tenants.
Low-wage workers can't pay rising rents. So how does Resource make money? Buy cheap, fix and fill vacant units quickly. "We have to fix or refinance it in a year, two years, three years." The profit comes mostly from managing clients' investments, and boosting property values. Fixing is cheaper than building, Feldman says: "Ed Cohen has installed in all of us the idea that, if you don't develop (new units), you avoid nine out of 10 bad experiences. We focus on cash-flow and assets."
You make it sound simple, I said. "It's not rocket science," agreed Feldman, comparing the buy cheap-fix-rent mentality to the complicated mortgage-repackaging investment strategies of a few years back: "Rocket science is what has bankrupted other companies."