What Works at Southern Management Corp.

Nov. 4, 2005
Southern Management Corp. Views Deregulation as an Opportunity

In today’s dynamic - and often volatile - utilities market, it pays to be prepared and to think ahead so you’re always ready to give your tenants what they need, when they need it.

Or at least that’s the mantra Alan Molleur follows.

“We have a few very valuable hedge contracts looking out to the future,” says Molleur, director of energy and engineering at Southern Management Corp. in Vienna, VA. “The current market is way higher than our current hedge positions. If we needed to buy anything today, we would be able to blend back into our hedge. Anybody else that is competing in the market is stuck with the current market position. We’re in a much better position.”

Molleur oversees the commodity purchasing of gas and electricity on the deregulated markets for the company’s more than 65 multi-family rental communities (approximately 25,000 apartment homes) and six commercial office centers throughout the Baltimore-Washington region. The company is the largest privately owned residential property management company in the Mid-Atlantic region. Its energy division handles the purchasing. The engineering division then works with the energy group to ensure these commodities are consumed appropriately within the Southern Management organization, overseeing the firm’s 50 central plants, which typically service “a few hundred apartments each,” according to Molleur.

Tenants at Southern Management properties - which Molleur describes as “moderate-income” communities - pay no separate utility bills. The vast majority of properties in the company’s portfolio are master-metered, he explains. “There’s a one-payment issue for many of our tenants. They like to write one check, and everything is taken care of,” Molleur says. “We took that ideology and pushed it through to how we mange our utilities.”

Molleur says most of the multi-family rental industry is dropping the master-meter approach in favor of individual metering. Some jurisdictions, he says, even require that units be individually metered, which has posed challenges for Southern Management Corp. “We fought those issues and won. We did not have to individually meter,” Molleur says.

Molleur says individual metering puts tenants in the thick of the deregulated utilities market - forcing them to make choices about energy providers. Unlike homeowners, multi-family renters don’t have as strong of a buying power with the utilities. “The marketers don’t feel the profitability is there to serve a rental portfolio [with individual meters],” Molleur says. “Tenancy, at best, is 2 years. Turnover rates are usually less than 2 years.”

Master-metered properties give Southern Management more flexibility in how it manages its portfolio. “It’s a daunting task,” Molleur explains. “The data piece of it is the most difficult to construct. You need to be able to sort through the different kinds of meters you have.”

Molleur says his team “looked deeply” at the gas, water, and electric meters in the Southern Management portfolio, examining the different uses per meter. One meter might take care of an entire property. One might only handle the apartment units while another tracks usage for the public areas. At one property, one meter handles domestic hot water while another takes care of gas stoves and laundry services.

“We had to sit down and figure out [which] account was which, out of 500 or 600,” Molleur says. “It gets very complicated.”

But the hard work paid off. “We know more about our loads, how we consume, and when we consume,” he says. “We know exactly how the meters function; what percentages have volatility and what don’t. Having the data puts us in a good position to deal with marketers.”

The dramatic advantage occurs when Southern Management catches the rest of the industry off guard, Molleur points out. “As the utility market increases, those who haven’t bought [yet] buy,” he says. “We’re buying at fixed lower rates. Our numbers are stable.”

Taking the time and risks involved in learning the energy-usage patterns of the company’s entire portfolio has kept the Southern Management energy team on top of the utilities market, even when they encounter potentially devastating roadblocks (in one case, Enron).

Southern Management was 18 months into a 5-year agreement when Enron went down. “We had to immediately respond to that,” Molleur says. “It wasn’t easy, but having the data that we have, we were able to cram a process that usually takes us months to go to market into 7 days. We scrambled and got it done. And, we did very well on the deal.”

Molleur credits the fact that the team had much of the legwork and data already in place. “We’re master-metered. We have central plants. We have the data. We have the expertise. And, we’re able to respond quickly to market conditions,” he says. “You can’t prep at the last minute because you’ll make humongous mistakes. You need to prep well in advance so you can capitalize on it.”

Robin Suttell ([email protected]), based in Cleveland, is contributing editor at Buildings magazine.

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