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Yardi Systems on why data drives debt decision-making

Yardi Systems’ Chris Barbier considers how access to information can help investors manage risk in turbulent economic times

This article is sponsored by Yardi Systems

Rapidly-evolving market dynamics, coupled with a heightened perception of risk, are driving two emerging trends within the real estate data management sphere, argues Chris Barbier, industry principal, investment management, at property management software provider Yardi Systems: a growing need for integrated technology platforms that enable the same kind of reporting and analysis for real estate debt as managers are already accustomed to utilize for equity investments; and increased demand from institutional investors for managers to provide them with detailed and up-to-the-minute data analysis that allows them to gauge their exposure to risk in the light of current events.

What is driving the need for supporting technologies in the real estate debt segment?

Because of where we are in the market cycle there is an aversion to risk. Everybody thinks there is a correction coming, and maybe coronavirus will be the mechanism through which that happens. Investors are concerned about risk exposure, so they want to be able to analyze their portfolios in greater depth.

Meanwhile many of our clients are increasing their allocations to debt strategies, because asset prices in most markets are very high, so taking a debt as opposed to an equity position is a lower-risk alternative. We have seen a tremendous surge in the number of debt funds managed by our real estate clients as debt is increasingly treated as an asset within their portfolios. Now we are seeing them putting in place the systems and reporting around that.

Some managers are using existing legacy systems for managing debt that is old and dated, or they have built their own custom systems for managing debt, while others – some larger than you would think – are still using Excel. Now that debt is becoming a larger part of portfolios, needs for analysis, accounting and reporting have become more complex, so it is becoming clear that older technology is no longer adequate. Moreover, managers are not in the software business, so they do not want to spend time and money maintaining legacy systems, and many would like to achieve efficiencies by consolidating into as few technology platforms as possible.

However, most managers are not primarily investors in debt, and capital providers see real estate debt investments as an asset class that sits alongside real estate equity, so they want a technology solution where the two are aligned so that they can compare and analyze them side by side with a similar level of detail. Our lender clients are telling us that being able to track the underlying real estate collateral, the covenants that are in place, and how those assets are performing relative to whatever kind of position they took on the debt, is becoming a more critical analysis than it was previously.

How do the changes taking place in the debt sphere sit within the wider context of the evolution of data usage in real estate?

We have seen an increasing number of institutional investors and private equity fund managers seeking to make greater use of operational data on both the debt and equity side. They frequently look to feed that operational data together with financial data into a single consolidated technology platform so that it can support data-led business initiatives.
The dynamics of markets are shifting quickly, so investors are becoming more inquisitive about what is driving returns and value. A financial or fund report that is 30 or 40 days old is no longer useful in a lot of cases. They are looking for real-time information about specific things they are hearing in the news.

For example, they read about a retailer going bankrupt or closing stores and want to know immediately what that means for their portfolio if they are invested in a fund with a retail component to it. What impact will that have on returns? How much risk is there? And if they are a debt investor, they will want to know whether the underlying collateral for their loan is impacted by the reduction in value and cashflow that might come with the loss of a large anchor tenant.

If the fund manager has that information at their fingertips, then they can prepare in advance to respond to that type of question. They can also go a step further and set out what they are doing about it. Who might be able to step in and take that vacant space? For fund and asset managers, being able to access data is critical to getting ahead of the questions that investors might raise.

In the past, investors and fund managers were removed from that broader set of data and higher level of detail. They were getting a monthly report from their operating partner in PDF containing data that may already have been stale.

Formerly the operating model adopted by most institutions was to leave property management to their operating partners, who would provide them with periodic reports, while the investor or fund manager concentrated on the financial results. Now, while they are still not necessarily involved in day-to-day operations, they can access the operational information they need to make key decisions around what drives revenue and risk.

Being able to access asset-level operational information can help support managers in developing their business models. For example, some of our clients have invested in commercial real estate funds for many years but are only now beginning to enter the multifamily space at scale. Holding and managing property for the long term in that sector produces a different set of operational metrics, and if their various operating partners are providing data on the manager’s platform, they can conduct their own analysis of that data set to inform their decisions in that space.

We have seen an increasing trend in the last 18 months toward institutions wanting their various operating partners to process data on a common platform. That allows them access to the data, and also ensures data governance and integrity. They can look at two office buildings on different continents managed by different operators and know that they will be able to look at the same set of data for both.

Some of our investor clients also care about providing a consistent brand experience throughout their properties even though they are the institutional owner and not the operator, and having a consistent set of performance data helps them to achieve that. Meanwhile there are efficiencies to be gained by having all that data in one place and not having to aggregate it by pulling it from disparate sources.

What will be the next step change for the use of data in the sector?

Once investors have a consistent and comprehensive single source of data, they can begin to design and make use of new analytical tools. The next wave of things to come is the concept of prescriptive predictive analytics. Real estate investors are beginning to think about how they can leverage artificial intelligence and machine learning to analyze their past investments in both debt and equity, together with the outcomes of those decisions, to help them make better choices in the future.

A couple of our clients are already starting to experiment with that technology, and that is part of the reason why they want control over all aspects of their data. Until now real estate has tended to be a very backward-looking industry compared with equity markets, and we are just starting to think more prospectively than retrospectively, and to consider how we leverage data to help us do that. That is driving further consolidation in data management platforms because the more systems you have, the harder it is to standardize data for use in predictive technologies.

Yardi has been developing a real estate debt management platform. What have you learned from that process?

We have built a real estate debt investment management system that can be added on as an optional component to our investment management suite. That went live with our first set of clients in December last year.

The feedback we got from the beta testing was that there is a need for an accounting solution for clients that want to service their own loans, that sits alongside a solution for managing real estate debt and equity investments on a single platform. The debt is the asset instead of the property and the debt management solution provides the tracking for all the information around the debt instrument.

Some clients want to be in the business of servicing the loans themselves, billing borrowers and taking the servicing fees. Others prefer to outsource the servicing, but still want that data available to them on the system so that they can analyze it, identify critical dates, and do the necessary reporting.

On the debt side we are seeing that there is an accounting piece, which is needed by the accountants, and then there is a transparency piece, which is needed by the asset and fund managers who are responsible for managing the debt portfolio and understanding the risks and critical dates.

We are in controlled release of that product with our first half dozen clients and we are expanding the product’s functionality as new use cases emerge. We are also starting to see interest from some borrowers too, because within the technology platform they can place the data on the property that they own and operate alongside the data on whatever loans are secured against it. That could allow them better visibility of loan covenants and what triggers them so that they are better attuned to critical dates and can manage those covenants more effectively.