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Improving REIT ROI through IT efficiencies

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Improving REIT ROI through ITFor real estate investment trusts (REITs), there are now numerous niche IT options aimed at improving specific internal processes and functionality. Individually, these solutions can help improve performance, but how they work together is a bigger question. Finding the right mix of systems can be a daunting task.

Most REITs already use a wide range of IT applications for discrete tasks like document management, bookkeeping and common area maintenance (CAM), and multiple products may be necessary to enable business processes. Any resulting process inefficiencies can lead to lost ROI that could be retained through more effective technology use.

REITs are looking to evaluate their current systems and sift through the options in order to leverage the right technology to maximize asset value and, ultimately, shareholder value. Improved systems can help achieve this in two important ways:
  1. Optimizing decision-making. Efficient systems are critical for REIT managers looking to make the right investment decisions. By focusing on separate solutions to smaller-picture needs, many REITs have been ignoring the bigger picture on tools they need to efficiently collect organization-wide data for management decision-making. A significant amount can be spent on collecting data from multiple sources that may or may not be reliable or up-to-date.
  2. Increasing operational efficiency. Systems must be effectively leveraged for REIT managers to manage and optimize operating costs across the organization, especially those related to leases and tenants. The bonus is that when an organization gets these back-end operations right, front-end decision-making gets easier. To operate more efficiently, REITs that want to drive strategic value will need IT-generated real-time data, data analytics, efficient workflow and document management.

“It’s not uncommon for us to see dozens of systems cobbled together at a large REIT. Understanding what these systems do and then leveraging their capabilities in a more efficient way can improve operations across the organization.”
— Chris Amato
National Real Estate Advisory Services Leader
Grant Thornton LLP
Advantages of better systems
REIT management needs to be confident in its ability to run the business effectively. Multiple departments within a REIT need data that is consistently reliable across the organization. This has improved with IT advances, but the ability to provide consistent information across all REIT departments is often still a major issue due to the number of systems being used for different purposes.

REITs that effectively utilize technology have a significant advantage in today’s market. A REIT’s cash flows are directly related to lease agreements and other supporting documentation between its entities and tenants. Faster, more reliable data generated by these analytics supports better decisions on numerous issues. Unlocking this accurate data enables managers to react more quickly to market changes and investment opportunities. It also may give them an inherent strategic advantage relative to any peers still relying on outdated systems.

REIT managers need the data from their systems to come together to define a single version of the truth to gain business advantage. This may translate to implementing new or expanded systems, or it may mean developing a better way to find and fully utilize task-specific software. Further complicating matters is the fact that there is a high volume and volatility of business transactions (e.g., a REIT has thousands of leases and may have many properties coming online or offline at any given time), which translates to a high number of reporting deliverables.

ROI and technology
The real estate market has steadily improved over the past few years, and REITs are competing more intensely than ever. Improving ROI is critically important in a more competitive market. Solid ROI is important in attracting investors, and it can be a differentiator in how and what REITs communicate to tenants, investors and the public.

Driven by technology, improved ROI can provide competitive advantage by improving decision-making capabilities. In addition, key results can include:

  • Improved communication capabilities
  • Reduced operating costs
  • Increased shareholder value
  • Improved return on existing or new assets
  • Resource cost savings through more efficient resource allocation (doing more with fewer people)



CASE STUDY
REIT business process redesigned via technology boost

THE CHALLENGE
One of the largest publicly held REITs in the U.S. called in Grant Thornton LLP when it lost confidence in its pro rata accruals and pro rata billings process for CAM, property taxes, utilities and other shared expenses. Improving operations was a critical success factor because employees were spending a significant amount of time manually processing these billings through Excel spreadsheets. Additionally, what-if analyses for budgeting and forecasting occupancy calculations were also being done manually. Without a way to effectively consolidate information across the portfolio, data integrity was ultimately at risk.

For the project, management objectives were to:

  • Improve the accuracy and efficiency of tenant pro rata billings when calculating recoveries and accruals
  • Facilitate data analytics and forecasting through accurate system setup
  • Develop strong business processes to ensure data integrity
  • Significantly reduce the time to settle and bill pro rata expenses for tenants

The Grant Thornton team began by developing an overall strategy and a tactical plan for designing and building the processes, application configuration, custom reports, and data conversion and validation tools necessary to implement a leading real estate ERP tool. To supplement the out-of-the-box functionality and boost its calculations capabilities, we helped implement two additional third party calculation tools.

WHAT THE TEAM DID
The Grant Thornton team identified gaps between the modules’ standard functionality and client requirements, and formulated a plan for filling the gaps with either program customizations or utilization of the third party tools. They provided project management and oversight for the implementation, leading the design, build, test and rollout of each of the processes, including interfaces and custom reports. The team also conducted extensive end-user training.

OUTCOMES
The outcome for the client was greatly reduced cycle times for numerous processes — in particular, true-up billings and accrual generation. Calculations are now tailored and automated, departments are working together more effectively, and there has been a vast data integrity improvement resulting from consolidating to a single system of record. Reporting abilities are enhanced with strategic analytical capabilities, pro rata expense share accuracy is significantly increased, and time to settle — now taking days instead of weeks — is best in class. Manual spreadsheets went into the recycling bin for good, and the company is managing its properties with efficiencies provided by leveraging current technology.

According to the REIT’s senior director of lease accounting: “We estimate that we are saving about 50 minutes per lease on about 1,500 leases per year. That alone is over 30 weeks of staff savings per year. It’s huge for us.”




Emerging IT capabilities resources
Many REITs have serious questions about adopting the right systems and getting the right results from them. A number of issues have emerged that pose significant challenges — for example, as systems have expanded to handle growth, the IT infrastructure has become cluttered and lacks reliability for many REITs, plus the systems may potentially be difficult to integrate. For others, there has been a lack of investment in any type of modern IT systems, and these REITs are using paper files and very basic technology. For still others, the competitive advantage of serving tenants with upgraded support software has been lost.

While the real estate industry was experiencing challenges during the economic crisis, the IT industry has continued to move forward, and there are new or improved products that can improve REIT processes significantly. Larger REITs may have more advanced systems in place, but midlevel and smaller organizations may not. If jumping into a full-scale systems upgrade is not the answer for these organizations yet, there are intermediate solutions that can address many needs.

Choosing systems with industry-specific capabilities
For those REITs that are considering implementing new systems or upgrading existing ones, there are numerous products on the market that can help you achieve your goals. The key factor for REITs is whether the system has real estate-specific and/or property management-specific capabilities, and, whether it can be integrated directly with the organization’s general ledger for real-time accounting functionality.

In industry-specific applications, key information can be collected, organized, and identified for financial processes and taxes. Here’s an example: In real estate management, the process of billing tenants a pro rata share of operating expenses related to a property or building can be complex. Property management systems will help collect and categorize such things as CAM, expense pass-through, rebills, escalations, triple net and building operating costs. These expenses can also include utilities, taxes, insurance, maintenance, cleaning, advertising and promotions. If you have been collecting and analyzing this information from paper files or multiple systems, it may be worth taking a fresh look. As an alternative, if you are considering implementing a comprehensive (ERP) solution, it’s important that they offer (or are developing) specific functionality to enhance REIT capabilities.

Another innovation worth considering is cloud-based REIT management software. These products came on the scene a few years ago, and we’ve seen their number dramatically increase over that time. Many REITs have been reluctant to give up their IT infrastructures, but the cloud may be an opportunity for REITs to streamline their operations. Cloud-based systems can provide:

  • A flexible model for accessing technology and data to deliver services
  • Extremely reliable and scalable services
  • Cost benefits and ease of ownership
  • The ability to expand or contract as business needs dictate

For those interested in evaluating the cloud’s capabilities, we’ve developed informative articles as part of our Silver Lining cloud computing information series that can help you decide whether the cloud is right for your organization.

Other IT options include business intelligence (BI) analytics for REITs. These sophisticated products provide enhanced, real-time data analysis and reporting for REITs through packaged BI solutions or, alternatively, by developing a custom data warehouse and dashboards.




Recent accounting changes
Upcoming FASB revenue recognition changes will affect REITs. For example, the “existing sales of real estate” guidance will be eliminated, which may result in accelerated revenue (or gains). Under the new guidance recognition, revenue and costs will be decoupled for construction-type contracts and an entity must determine the method that most appropriately measures progress toward complete satisfaction of a performance obligation. For more information, see our real estate specific revenue recognition discussion.

As a result of the legislation:
  • Internal controls will require updating, if not comprehensive overhauling, to reflect changes in accounting policies and processes.
  • Processes may need to be developed or updated to incorporate new management judgments.
  • Systems may need updating to capture new data used for accounting and additional disclosures.
  • Revenue recognition process and policy documentation will require updating.

Any software company whose product you use must be nimble in reacting to, and developing, functionality changes to keep REITs compliant with accounting regulations. If your system is underscaled or potentially obsolete, it is critical to add the functionality to address these types of regulatory changes as they occur.




How REITs can get ahead now
Staying on top of advances in IT is extremely important for REITs that want to gain a competitive edge. IT development is a fairly cyclical process, and generally systems will reach some form of obsolescence about every three years — so the IT planning process should be ongoing. Those that wait for a yearly review may find themselves at a disadvantage.

REITs that want to start improving operational efficiency now should strategize smaller, tech-enabled changes that can be identified and implemented quickly. These tools can be leveraged to enhance:

  • Resource efficiency. This can be achieved through organizational structure improvements that focus on value-added activities, which can be related to back-office tasks like accounts payable or lease administration or front office decision-making. An entirely new ERP system may not be necessary to achieve real results; it might be as simple as looking at a new accounting program or process study. Any investment should have the potential to help resources work faster, with less headcount.
  • Business process improvements. Making structural improvements can help REITs improve efficiency throughout the organization. It may have been a few years since they took a hard look at their workflow and processes, and some simple changes can save time and money.
  • Cost efficiency. IT can reduce costs across the organization by using technology tools to reduce or eliminate redundancies and help employees work better and smarter.

Tip: R&D tax credits
In certain cases, IT investments can qualify for an R&D tax credit. Some potential benefits include reduced effective tax rates (federal and state, if applicable), increased earnings per share, increased cash flows, and the ability to fund future or additional research activities. Grant Thornton tax professionals will be happy to discuss it with you.
What technology investments can do for REITs
The single biggest reason to invest in technology is improved data management. Accurate, easily accessible data means that the tools to analyze your business in a productive way are at your fingertips. Those that operate without meaningful data are really operating in the dark in many respects. Operational efficiency can be vastly improved through collecting and analyzing the right data, plus accurate data helps reduce the risk in many business decisions by aligning what the organization is doing with what can be proven the market needs or wants. For example, this type of data can help a REIT assess the local market’s customer base and deliver the appropriate asset.

Data is also integral to management success, which is directly tied to maximizing shareholder value. It can help CEOs make decisions regarding potential deals, making buy/hold/sell decisions, analyzing what property attributes mean in various markets, and much more. Data can also help CFOs make decisions regarding operating costs, sales, ROI and provide input for many other types of financial decisions.

“In the end, wise investments in technology are the ones that allow resources to analyze data rather than just gather it.”
— Chris Amato
National Real Estate Advisory Services Leader
Grant Thornton LLP
Besides data, there are many other advantages available to those REITs that upgrade their IT environments. Whatever your reason is for considering new or updated technology, think about the following:

  • Public perception. Those REITs that upgrade their technology and present an updated, professional face to the market will be noticed and inspire customer confidence.
  • Mobility. Advanced technology now allows real estate companies to make deals, sign leases and more through the touch of a btton on a smartphone.
  • Virtual access. Advanced systems allow customers, employees and partners to access important information conveniently from wherever they are.
  • Geographic. Technology allows dealmakers to view properties across the street or the world.
  • Marketing. Quick access to information can help customers make informed decisions quickly — before the deal is lost to a competitor.
  • Back-office improvements. Myriad tasks can be simplified or eliminated through the proper use of technology, providing quicker, more accurate service within the organization and in dealings with customers.
  • Cost management and reporting. Accurate, easily accessible cost data can assist auditors and give management critical information on cost/ benefit decisions.
  • Paperwork reduction. Systems can allow tenants/ vendors to use systems for tasks that would have previously been done on paper. Examples include invoicing, payments, lease applications, purchase orders and more.



CASE STUDY
Building a shared services organization

THE CHALLENGE
A major REIT was performing many processes manually and had a large staff devoted to various functions. Grant Thornton was brought in to analyze the organization’s processes and implement agreed-upon solutions.

WHAT THE TEAM DID
The Grant Thornton team identified an opportunity for the REIT to build an in-house shared services organization where all processes were automated. This approach would generate more reliable data and give the client the ability to share data much more quickly.

OUTCOMES
As a result, the client was able to streamline its operations and reduce its departmental headcount by more than 50%, saving them millions of dollars.




Conclusion
In today’s market, real estate companies are seeing that they must compete at a higher level, with technology as a key strategy. For REITs and owner-operators, the movement toward focusing on internal operations is can pay off in a big way. REITs realizing the benefits of operational automation are lean, more agile and more informed than their peers. These REITs are experiencing a compression of the decision-making time frame and swifter access to information through improved automation.

If you are looking at ways to increase efficiency and gain competitive advantage, now is the time to move forward. Grant Thornton works with many REITs and other organizations to select, implement or upgrade systems, and fully integrate industry-specific capabilities.

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Contact
Chris Amato
Partner
National Real Estate Leader
Advisory Services
T +1 312 602 8010
E chris.amato@us.gt.com

Greg Davis
Managing Director
Business Advisory Services
Technology Solutions
T +1 913 272 2720
E greg.davis@us.gt.com