Working as an Investment Analyst for a real estate firm with approximately 6,000 units under ownership, I wear a lot of hats. While my primary responsibilities lie in underwriting, structuring and financing new deals for the firm, I also take on a number of responsibilities that typically fall under the asset management umbrella. While I don't pretend to be anything close to an expert on the subject, I do recognize the importance of the role itself and the asset manager's ability to create value.
What Is Real Estate Portfolio / Asset Management
Once an asset is acquired, asset managers take the reigns. Their responsibilities will vary from firm-to-firm, but generally speaking they will oversee the entire investment life cycle of a property, from acquisition and through disposition. This might include: managing revenues and expenses to achieve maximum NOI, reviewing/negotiating contracts and other documents, preparing monthly/quarterly asset management reports and other ad-hoc reports for team members, investors or lenders. An asset management will also help develop a business plan for the property (and execute on it with the team), create property-level budgets/forecasts and have an in-depth understanding of local market fundamentals. In short, the asset manager will be an expert on the day-to-day operations of an asset and also the long-term investment strategy, though the actual execution of that strategy will likely be done by others.
Searching for "Asset Manager" jobs on SelectLeaders, all of the listings reference some, if not all, of the above-mentioned responsibilities. Depending on the firm, some of the responsibilities mentioned above might fall to others groups, but revenue and expense management will undoubtedly fall in the lap of the asset manager. As they should; a properties value is generally derived from its actual or potential NOI, thus making the monitoring and management of revenue/expensive imperative for the creation of value. For now, I'll focus exclusively on those two items and how you can quickly create your own asset management reports, no matter the size of your property, to effectively track its performance.
Why Manage Revenue / Expenses?
Accounting software, whether QuickBooks or Yardi, can provide owner/operators with variance reports and trended financials. While valuable, it's simply a data-dump of financial information that does little to share the story behind the numbers. These reports, while valuable and typically included in monthly reporting packages, do nothing to tell the story. What's more, those responsible for the day-to-day operations of the property or others within the organization may not be financially savvy, so being able to take the financials and tell a story about a property's importance is an imperative skill set for asset managers.
While a reduction of expenses is obviously every managers goal, it's difficult to make broad improvements without a real benchmark. Benchmarking against your own properties is most ideal, but one can also use the NAA's Survey of Operating Expenses to compare your properties expense profile relative to those in the market.
Are expenses out of line vs. other properties? If so, why and what can be done?
Before getting that far, I've always preferred to visualize financial performance with charts rather than looking at a month-to-month budget comparison. My reasoning is twofold. Foremost, a stock budget comparison will typically show just current month and the YTD period, thus offering no color on the trend. Second, those within the organization who may not be as financially savvy can easily recognize whether a certain category is above/below budget. To be sure, the first chart below doesn't really tell you anything, but it does allow you to communicate the story more effectively once you have the background information.
For example, in a quarterly portfolio review, you can quickly point to the first chart below and indicate in a single bullet point the following:
"YTD Maintenance Expense at the property is $1,522 over-budget due to unforeseen plumbing and HVAC repairs. Property manager indicates necessary repairs we made and no further extraordinary costs should be realized."
The real benefit of aggregating the above data is the ability to benchmark your properties against one another (or the market), therefor allowing the asset manager to quickly identify items worth investigating. For example, the chart below shows an average turnover expense of $221/unit across the portfolio, ranging from $111/unit to $354/unit.
Certainly, various factors impact that cost - the age of the property, it's location and the resident base (Class A/B/C), but for now lets assume these are all 2015-built class A properties in downtown Chicago. Through discussions with on-site teams and a more in-depth review of category expenses line-items, an asset manager might be able to report to the executive team the following:
"Property 7 per unit turnover expenses are $354, primarily driven by painting costs which are $160 per move-out higher than the portfolio average. On site staff should make sure that only partial paints are completed for each unit turn."
Why It Matters?
Lets assume for a moment that Property 7 is a 433 unit tower that in today's market would trade for a 5.5% cap rate. Bringing expenses in-line with the portfolio average would create significant value:
$354 - $221 = $133/unit savings
$133/unit savings * 433 units * 50% annual turnover = $28,794 of annual savings
$28,794 / 5.5% cap rate = $523,527 of value creation.
An asset manager can pay for themselves several times over simply through the effective management of of expenses. Is it always this easy? No. Will buyers pay you for running a lean property? Maybe. But alas, the asset manager plays an important role in identifying opportunities such as the one listed above and ultimately driving an improvement in the financial performance.
In a later post, I'll share how I look at the revenue side of property management. It's more fun than expenses, but plays an equal role in the creation of value.
Thanks for reading.
Masters in CRE