ICSC Webinar

CRE Adapts to Changing Times

By Luis Estrada on Jul 17, 2020 in Events, News

In an ICSC webinar held in late June, Brian Sutherland, Yardi industry principal, moderated a panel discussion about how current economic and social challenges are forcing commercial operators to adapt to a changing market. They discussed the importance of AR management and evaluating tenant risk to accurately project future revenue and overcome the effects of the pandemic.

Panel of experts:

Gary Shaw – President, Arcadia Management

Christine Mastandrea – EVP, Whitestone REIT

Sutherland: On the Yardi side, in mid-March, we shifted 7,000 employees to work from home basically overnight. Can you talk about how you transitioned early in the response to the pandemic?

Mastandrea: Within a very short timeframe we moved into a radical simplification mode. We expanded our meeting times to include more team members to be involved for consistency of communication all the way to the front-line ranks. We organized our team around four functions: client engagement, vendor management, stress testing and inner workforce. We moved our workforce offsite and we’ve gone from Zoom meeting to Zoom meeting. Client engagement is where we spent most of our time and we oriented about 80% of our workforce toward client engagement. We made sure we had our “four As”: alignment, assignment, accountability and then autonomy. We funneled all requests through one person in our legal department and made sure we had this process smoothed out over time. One major key was daily posting of cash collection and making sure everyone has an understanding of where we are and where we’re missing collection. We stopped mass emailing and instead got in contact on the phone with everyone we could, to understand who’s open and who isn’t, who is considered essential business and started discussing [Paycheck Protection Program] (PPP) funding.

Shaw: We moved everything to the cloud in about 2004-2005. From [accounts payable], document management to vendor management, we worked in the cloud, and the reason I mention that is because we think about worst case scenarios and we didn’t necessarily have pandemic plans in place. For us, it was a thought of “What would happen if this building burned down and we had to continue to operate?” and we based organizational responses off that. Like Christine said, we had to understand who’s operating and who wasn’t, and because we are across the country, there are many different jurisdictions and it’s a very difficult task to get executive orders for collections or evictions while having compassion for mom and pops and their situation. We were not prepared for understanding the classification of our tenants. We had a general idea of what we manage and what types of businesses they are, but we needed to mobilize ASAP and get the North American industry classification system in our database. That way we can do notifications immediately based off market, essential business, jurisdiction and other factors.

Sutherland: Understanding tenants and industry classification is so important. How would you evaluate tenant risk?  

Mastandrea: We saw that “big” had more risk associated than “small.” We saw diversity in small, while we saw big as having more risk due to volatility in cash flow with such an impact on your portfolio, and small is a bit more flexible. We look at risk in the sense of resiliency and how robust they are, what resources do they have and how much do they engage in the community, how well do they understand and engage with customers? Local business has been very quick to be flexible and adjust to circumstances. We know 80% of our tenants are 3,000 square feet or less so we’ve engaged with them on that to see how they’re going to survive, how well can they tinker and how well they understand their lease. I think we look at risk differently than most.

Sutherland: How are things from a collection standpoint and how has it evolved in the last few months? 

Shaw: It has been surprisingly better than I thought it would be. As a fee manager, we work for individual institutions and a few REITs as well, so there are many client profiles. There are different approaches on how to continue the collection process. Maybe some owners didn’t have much debt or any debt at all and we saw that many owners were completely compassionate. We’re at 75% collections for the month, about 6% ahead of where we were this time last month. We have about 3,000 tenants overall and some of the national tenants quite honestly were a bit more difficult to deal with initially. I thought it was going to be much harder on the community businesses, but they have been extremely resilient.

Mastandrea: In our case it’s gone a bit backwards (technology-wise), but that’s not a bad thing. We each have our war rooms in all our locations (throughout Texas and Arizona). In there, they’ve got everything on whiteboards with every tenant written out with tracking communication and where they stand with payments. About 20-40% of the customers are up for grabs right now because we’ve never seen lower switching costs. We’ve been actively working with clients to make sure what they’re offering is highly visible, using banners and signage and offering availability. In some cases, low tech works.

Sutherland: After an initial wave of rent requests and accommodations, what are you hearing now and is the first wave past us?  

Shaw: Early on we used a very simple tool to create a form so we could aggregate into one central location and divide and conquer conversations regarding deferrals and PPP. Overall, requests have slowed down right now and we’re stable. Grocery, apparel, discount retailers are examples of clients who are doing fantastic.

Sutherland: In terms of executive engagement, how did that work for your team with your leadership? 

Mastandrea: When you’re practicing radical simplicity, communication improves. Our challenge was making sure were speaking to our shareholders and making sure they were aware of our processes. Our deferral letter, for example, has gone from a 4-pager to a 2-page simple document. There has to be no confusion about these agreements [to] make sure we keep processes moving or you’ll have more complexity and then how do you deal with these negotiations internally? Even our CFO was talking to some of our clients. They have to understand what the frontlines are going through to be able to get closer in our communications. Greater empathy and greater understanding came across and it’s been a real silver lining to all this.

Sutherland: What was the general approach regarding conversations about deferrals and AR management?  

Shaw: We did not want to step on a rake at first by reacting too quickly. We had to politely remind clients that there may be a problem if you modify these leases without vendor consent. It comes down to investment objective. A client may have inherited a piece of real estate from a family legacy for example, and they rely on us to manage that, while we also have clients in very large corporate institutions that have very large asset management needs, so our job was to remind clients of the potential pitfalls of acting too fast. There is a strategy of applying the security deposit in the event we felt the client could file for bankruptcy, but if you have an executive order from the state saying that you can’t evict or lock a tenant out then all of these discussions could be moot. We have a job to provide as many opportunities and options as possible for the client to make the best decision for their asset.

Mastandrea: Early on, we were putting tenants in different buckets, aligning them, aligning probability of payment and that helped us bridge where we’d be and what we were able to defer. When you have so many decisions to make you have to know what you have to work with. We were able to start defining plans and start taking deferral amounts with a process. The frontline team had to be able to make a quick agreement and get them into the system. We have less than 10% deferrals right now.

Sutherland: We keep hearing about accelerated IT. How does that resonate with you? 

Shaw: We’ve been pushing the tenant portal in [Yardi] CommercialCafe for years now, but this actually gave us an opportunity to take a deeper dive into VendorCafe, reaching out to vendors to register for electronic payments and explaining the benefits of the portal. This is going to be extremely valuable for all managers. We hadn’t taken a hardline approach with the portal, but we’ve reached out now and expressed that if you want to get paid faster, you need to sign up. It’s going to streamline everything. We’re looking at adopting strategies where if the vendor wants to get paid daily, we’ll run the credit cards daily, if they want to get paid weekly, we’ll run the payment electronically. If they want a paper check, they’re going to get one payment a month.

Mastandrea: I’m happy with ACH, but our goal is to move toward more effective, faster payments in a better, more efficient way. In regard to managers running around collecting checks, I couldn’t believe how much we were still doing that. We’re looking forward to more advanced platforms, but we have to know who are the early adopters and who will be engaged in our organization and then onboarding [them], but beware of [the] challenges of taking too much on at once.

Sutherland: What is a typical deferral period for you and are you charging late fees?  

Shaw: We assess the fee, and in the event the tenant is able to work through the situation, we have the ability to go back on fees. For deferral periods, we have some who do a month at a time, some are paying back after six months.

Mastandrea: We structure the deferral around tenant and need. Most of what we’ve been able to accomplish is deferrals within this year. It remains to be seen how the rest of the year plays out, however.