The Four R’s: Survival Tactics for Owners of Real Estate
- Mar 08, 2009
Every day, headlines announce the crumbling of yet another once-iconic partner. Bankruptcies are flourishing, and the ultra-complex financial structures of recent deals are quickly unraveling. The situation is made more difficult because there is no familiar context. The “go-to” investment banks are gone, double-digit unemployment is a global issue, foreign capital has either evaporated or become extremely cautious, tenants are contracting at a frightening rate, construction has stopped mid-crane and there are simply no transactions. Real estate companies and other businesses with substantial real estate holdings–such as retailers, hotel companies, healthcare entities and other orporations–are challenged by an unprecedented need to look beyond the real estate deal. This is an extremely difficult proposition for real estate companies, as for the first time in many years they must shift their focus from deal flow to operations and asset management. That requires a different set of people, processes and skills to succeed. For a smooth transition, every company must immediately understand its resources and be able to recalibrate them quickly to respond to both crises and opportunities as the market changes. As part of the development of a strategic plan to manage risk during financial crisis, they must create and implement innovative strategies that reduce costs, streamline processes and optimize enterprise and portfolio value. Top considerations include proactive organizational and management team restructuring, operating and capital cost containment, improving operating margins, technology integration, working capital improvement, brand identity, communication and reduction of business risk. Companies can produce immediate enterprise-wide results by creating an urgent business and real estate strategic plan to optimize operations and align real estate with business goals. To simplify this strategy, such companies should follow the four R’s. Specifically, they should:Reduce. Companies should make it a priority to rightsize operations by aligning processes, people and the organization. This is often the most painful part of an optimization program, as it requires an objective look at the entire organization. Discovering and then curing bottlenecks, redundancy and inefficiencies in business process and workflow can result in immediate cost containment. In addition to the significant improvement to business process, optimization efforts to reduce redundancy in the workforce often produce payroll reductions of as much as 35 percent, benefit load reductions of between 15 and 25 percent, and general and administrative reductions of 15 to 30 percent or more. Once the organization has streamlined operations, policies and procedures, it should evaluate how it might need to change its culture and management approach. It should take a serious look at how it is enforcing policies, such as travel and entertainment spending, to determine whether the culture and management’s approach set a tone for resource conservation and responsible spending. Realign. But cost-effective, well-organized operations are only half of the machine. The power of integrating origination, accounting and portfolio management technology platforms has long been overlooked by the real estate industry. Even today, extremely complicated financial models and reporting are often managed via in-house Excel spreadsheets. A unified technology platform is an important factor in optimization that is necessary to achieve lasting value. Aligning technology across multiple business units that use the same data eliminates redundancies in information and effort. Decision-making becomes more streamlined, and management benefits from truly reliable, timely and useful information. Revalue. The biggest questions on the minds of every investor, owner and operator are, “What are my assets worth?” and “How can I recapitalize?” The dearth of transactions in the marketplace is creating a vacuum for valuations, which typically hinge on competitive projects. Owners are looking for alternatives that provide a valuation baseline from which they can optimize their real estate assets and portfolio values. They need market feasibility studies, ideas for alternative uses for their assets and repositioning strategies to better revalue their assets today. With vacancy climbing and investment sales at a near standstill, it is also crucial to institute cost containment and operating strategies at the property level, as that will help preserve value and position assets as best in class. Tenant retention programs, customer service enhancements, regular hold/sell analyses and credit profiling, preventive maintenance programs, tax strategies and capital budgeting are all fundamental to a solid asset management program. Recapitalize. Every real estate owner, operator and investor has a buy and a sell side, and today, a coordinated, proactive organization and portfolio optimization effort is a must before approaching the market for fresh capital. In these trying times, bringing every shred of value to the table is necessary to substantiate your ability to manage your own and your investors’ risk. Companies that can accomplish this will be among the first to attract investment dollars in the next market cycle. As you consider your evolving industry profile, you should not become paralyzed by the financial crisis. This is a good opportunity not only to optimize but to investigate new merger-and-acquisition opportunities while pricing for operating companies is still low. Take advantage of core strengths to attract or redirect capital to initiate a stock buyback program as part of a go-private strategy. Structure new funds to benefit from distressed debt pools and distressed assets in core product types and markets. Identify acquisitions that take advantage of the consolidation of operating companies and their assets. In short, as we look to the future and learn from the past, remember the fundamental four R’s: reduce, realign, revalue and recapitalize.Elizabeth Kulik is a senior managing director at The Schonbraun McCann Group, the real estate and financial advisory practice of FTI Consulting Inc.Log on to CPN Radio on Friday to hear her further discussion of this topic.