Merging Traffic

Real Estate Asset Performance

By Joel Nelson on Feb 20, 2018 in News

In September 2016, real estate became the 11^th Global Industry Classification Standard sector.  Morgan Stanley Capital International Inc. and S&P Dow Jones Indices, which maintain the standardized classification system for equities, described the action as reflecting the “growing importance of real estate in the world’s equity markets” and “the position of real estate as a distinct asset class and a foundational building block of a modern portfolio, rather than an alternative.”

The GICS classification means real estate asset performance is no longer blended into a larger financial picture but stands fully accountable on its own merits.  This has prompted many companies to capitalize on real estate’s status as an increasingly viable asset class.  For example, Cousins Properties Inc. completed the spinoff of Parkway Inc. into an independent REIT in October 2016.  In March 2017, shopping center owner, operator and developer Regency Centers Corporation merged with Equity One Inc. to form a $16 billion company.  Government Properties Income Trust acquired First Potomac Realty Trust for $1.4 billion later that year.

Alex Stanton, Yardi’s industry principal for commercial, offers insight into best practices for participating in the growing mergers and acquisitions trend. The following are his thoughts on how to prepare:

The increasingly common exchanges of real estate following the GICS designation aren’t the exclusive province of the big players; it’s happening with medium and small real estate companies as well, including enterprises that are family owned and operated.

Mergers and acquisitions hold high potential to benefit shareholders, staff and customers of the newly created entity—but only if the organizations involved put the right strategy and assets in place.  Here are some ways to do that.

Put People First

A company may be privately owned and dreaming of being a REIT, or planning to open funds or diversify into a different asset class.  In any case, the right people with the attitude and experience that complement your direction, asset class and strategy are critical to success.

Securing and retaining talent isn’t easy—turnover in the industry, especially at the property level, is high, and the specialized skillsets required for real estate investment and property management add to the challenge of acquiring and retaining staff.  Family-owned companies have the added challenge of ensuring that their business endures through generational changes.  Fortunately, all these factors can be mitigated with proper investments in recruitment, training and succession planning.

Enact Proper Processes

Publicly traded REITs and private owners/operators alike can benefit from documented processes and procedures that streamline auditing, internal operations and external partnerships and allow the business to flex, scale and contract without adversely impacting the team.  Operations most in need of rigorous process documentation include accounts payable and receivable, legal, budgeting, fixed asset management, vendor onboarding, and investor and management reporting.

Some companies, especially smaller ones with fewer resources, might be tempted to forgo the labor involved in documenting processes.  That’s a shortsighted approach that can create problems in the long run.  All companies, even those not required to have accountability at the Sarbanes-Oxley level, are well served with best-in-class procedures and documentation.

Install the Right Technology

Every real estate organization needs to be laser-focused on what separates them from the competition and invest heavily in those areas.  That’s why a technology platform that can take the business in the desired direction is the third crucial asset for navigating the new era of real estate management.

An operating platform capable of evolving with a business and that’s easy for staff and stakeholders to use, even after a merger or acquisition, can be a key competitive differentiator.  An integrated platform that synchronizes investor reporting, investment accounting and asset management with property management, accounting and ancillary operations provides a detailed view of portfolio performance without potentially unreliable and disjointed interfaces.  Full asset management and financial reporting to investors, combined with drilldown clear to the asset and tenant levels, lowers risk at the operational level, a key consideration for investors, regulators and potential suitors.

An investment and property management platform that drives efficiency by automating business processes provides a higher level of service to partners, tenants and investors.  Drilldown to the tenant level is easy because underlying asset operations share a database with investor reporting, portfolio reporting and investment accounting, and investor relations.  And cloud solutions keep real estate organizations out of the IT business, promote lean operations and enable greater attention to core responsibilities.

This kind of advanced technology also impacts recruitment and retention, as educated candidates likely will shun organizations that are stuck in the past.

Careful planning is crucial to success in a fast-changing business environment.  Building a great team, implementing processes for efficiency and scale and installing an adaptable platform will help real estate companies decide whether joining the mergers and acquisitions trend is the right move.