This article is sponsored by RealPage
The spring of 2020 saw managers and investors scrambling to assess the effect of the pandemic on their tenants and on the cashflow from their assets. Now the dust has settled, many are beginning to think more deeply and systematically about the value of data in this crisis, and how it could be harnessed to protect their investors in the next one, Damien Georges, senior vice-president and general manager for investment management at RealPage, tells PERE.
Has the pandemic highlighted the importance of data?
Managers now realize that having comprehensive and accurate data about their assets is critical. The asset managers that have performed well in this period were able to analyze each tenant’s business and work out whether there was something they could do to help.
In the US, for example, we’re now onto the third round of the federal Paycheck Protection Program, and we’ve been working with managers that have been tracking how much PPP money tenants have been getting so they can add that to their analysis of whether a tenant will be able to pay rent. We’ve also been working with our customers to gather information that we would traditionally not expect to collect: for example, does a restaurant have a feasible take-out model? If so, it will probably be able to continue paying.
Managers need detailed information to renegotiate on a tenant-by-tenant basis everything that is going to drive value across their portfolio. We see many managers renegotiating tenant break clauses in return for offering their tenants rental holidays. By negotiating longer terms, they’re looking to generate more value in the leases. Every single tenant needs to have a discussion with their landlord right now, whether they are overperforming or underperforming. If the detailed lease and tenant data is not in a system, it’s impossible for managers to have all the information they need to make those conversations productive.
What are the challenges to effective data-gathering?
It’s not easy to implement a data platform as an investment manager. Collecting lease and property information seems simple. But it’s ridiculously complicated because of the terms of the relationships between investors, managers and operators.
Commercial leases are constructed in a way that makes it very complicated to understand all the nuances of the future cashflow. Breaking that down and putting it into a system has often been done very poorly. Much of the time, managers will take enough information from the lease to invoice the tenant without understanding all the options, covenants and restrictions around that lease, which could lead to an impact on the cashflow and the value of the asset in the long term.
Managers are now beginning to understand the importance of data to maximizing value. However, they may not have access to the lease itself, which may be with an operating partner. We work with a lot of public pension funds and sovereign wealth investors. At their level, $250 billion of equity real estate probably translates to more than $1 trillion when you include leverage and part-ownership. Those big investors are asking their managers for detailed asset and tenant-level information because they can see massive risk and they want to know exactly what’s going on. But they may have dozens of asset managers, each of which is working with dozens of property managers.
Getting accurate data from the property management level right up to the investor is extremely complicated even for simple information.
We find investors struggle to list all the assets they’re invested in, let alone understand the cashflow and lease terms. That information also needs to be collected on a timely basis, not 12 months later. If investors are to make decisions proactively, they need a monthly update and the ability to analyze historic trends.
Is the real estate sector good enough at sharing information?
Timely and accurate information sharing is a struggle in our industry. It shouldn’t be. We do not share information well. In too many cases, players hide behind partnership agreements to give out as little information as possible. The pandemic should show everyone that it’s a good thing to share information in the real estate community. We are focused on creating partnerships with other technology platforms to build an ecosystem of information, so that when things like covid-19 happen, the information is available to make the right decisions, particularly for the big investors.
The Open Standards Consortium for Real Estate is trying to push that agenda, but the industry’s been slow to pick up on those standards and use them to transfer information between systems. We have a fiduciary responsibility to do so, because ultimately the investors in big real estate platforms are pensioners. We’re helping people in their retirement and sometimes we lose sight of that.
How can managers harness data to enhance value?
If you have the information available then you can systematize it. You can put it into a cashflow forecasting and valuation tool. You’re then able to do your sensitivity and scenario analysis, based on various assumptions, to see what the impact on cashflow and value will be. If you have accurate historical leasing information, you can put it into a system, couple it with market knowledge, make leasing assumptions, and then at the portfolio level start thinking about value creation.
Market rents are all over the place right now; you can’t really forecast them. Instead, managers want to try hundreds of scenarios as to what will happen over the next five years. In this environment, stochastic at-risk models make sense, but without the base level information managers cannot do that forecast effectively.
It’s not about the system; it’s about getting accurate information on a timely basis about the portfolio, then putting it in a system and automating cashflow forecasting, risk assessment and valuation, both at an asset and portfolio level. That allows the manager to provide a forward-looking analysis based on all the risks, both macro and micro, to that asset. That’s what investors want, and what they should be asking for.
The biggest, most sophisticated investors like ADIA have been thinking about this a long time and are already asking those questions.
What will a successful approach to data management look like in the future?
Investors are understanding that they cannot just collect this data themselves. Whether they have us do it or a rival company, they need a dedicated process for getting that information into their environment. That means agreeing on definitions, then pushing that data-gathering exercise out to potentially hundreds of different partners, and then orchestrating the process of bringing that back into their environment. If managers are not already doing that, they are not being fair to their investors.
The next stage is putting consistent and timely information in front of senior managers so they can make the right decisions at a portfolio, fund or asset level. If you look at the dealflow now, there are players taking the opportunity to buy up assets, just as they did in 2008.
Those with capital to deploy at this time understand the value of data and how it enables them to be nimble. Many of them invested in data platforms up to 10 or 15 years ago. Vehicles without an enterprise-level strategic data program are finding they cannot now engineer one. It has to be part of their business model to collect accurate information across the portfolio from the time they start investing capital. For them, the best approach is to put that data platform in place now, so that in the next crisis they can pivot to whatever they need to do to solve their business problems. Our role is to help the industry solve the data problem and provide better analysis.
Adjusting the mix
Data analysis and modeling will enable managers to be more fleet-footed in a future characterized by mixed-use and repurposing, says Damien Georges
“We’ve seen a paradigm shift – a rethinking of how real estate assets operate. There’s a lot to be said for a mixed-use model within any asset. We’ve seen that if managers can be nimble and change the use of their space, they have a better chance of optimizing value.
Covid, for example, has really challenged the pure co-working model, but a mix of co-working and regular office space with a bit of retail and some multifamily or storage space still makes a lot of sense. The long-term leases support the cashflow and the owner has short-term space to maximize the gain when the market is good. In many cases, we’ve seen those assets outperform single-use properties. Having the ability to assess what is the optimal asset class cashflow for that space at that time and to adjust the mix of uses accordingly is imperative.
We’ve also seen US managers adapting their space to take advantage of the fact that multifamily is outperforming retail or offices. RealPage provides a mixed-use forecasting and valuation tool that allows managers to adjust the mix and model the cashflow for the entire asset.
Investors can no longer afford to have systems that lock them into being, say, office owners. And managers that have been able to evolve and change are those that have been doing okay amid all the perturbation we’ve seen in the market. Lenders are tracking this as well. If landlords are able to model a scenario that keeps them in compliance with their debt covenants, that can prevent the risk of default.
Managers also have to look at capital expenditure as part of the analysis. Assessing the effect of capex on the future valuation of the asset is very important. We see a lot of people still trying to do that in Excel. But it’s imperative now to put that into a system because of the scale of it. These are no longer one-off projects. Managers are likely to be redetermining the use of large parts of their portfolios.”