How the right financial strategy can drive performance and build resilience for real estate companies
Responding to today’s cataclysmic health and economic conditions requires commercial real estate (CRE) companies to make rapid decisions based on accurate, up-to-date information. This informed agility is a strategic need that’s becoming ever more pressing as COVID-19 continues to deepen risks to human life and business performance.
Many CRE companies (and their tenants), for example, are reporting cash-flow problems. They’re not alone; 45% of small businesses responding to a survey conducted in July by MetLife and the U.S. Chamber of Commerce said they were not comfortable with their cash-flow situation – a figure that’s more than twice pre-pandemic levels. There’s good reason for concern, considering that negative cash flow can lower the valuation of properties and ultimately close businesses.
Measuring and mitigating the fallout from COVID-19 within real estate companies will require enterprise-wide access to accurate, timely information and adoption of data analytics to quickly identify and respond to risks, and to evaluate what their next steps should be, from borrowing to streamlining operations.
That’s an enormous challenge, however, because systems, data, financial models, and planning methodologies typically are not standardized and integrated across these businesses. This can lead to information silos across functions and inconsistencies in metrics, forecasts, and financial and operational data, and resolution of variances can be time-consuming and arduous.
What’s needed is a finance strategy that aligns financial and nonfinancial data, encourages collaboration among stakeholders, and connects planning and financial processes.
These strategies should take into account the real estate organization’s unique perspectives, size, organizational operating structure, and financial goals, as well as the maturity of its planning processes and technologies. Businesses that wholly own and operate their assets often focus on operations as a means to maximize the return on investments and curb operating costs. Lean and efficient operations can also help improve margins, and owner-operators often use this revenue to beef up their balance sheets and help grow the business.
Investment managers also prioritize operations, but their real focus lies in maximizing equity and delivering returns to investors. Their aim is to build confidence among investors that they will continue to receive robust returns, even during economic downturns.
An elevated role for real estate CFOs
Due to their unique position as stewards of company assets and performance, real estate CFOs play a key role in aligning business and finance strategies to help drive growth and deliver reports on the company’s financial position and operations. Doing so will require accurate and timely forecasting and financial analysis to monitor the status of revenue, capital, and timing.
Accurate valuation of the business and its underlying assets is always a critical consideration for CFOs. A primary component of valuation, of course, is revenue. As the COVID-19 crisis continues to unfold, revenue – and lease income, in particular – remain uncertain. Accurate revenue forecasts can shine visibility into risks and empower analysts to identify assets that are generating dependable income streams – and are likely to continue doing so in the future. Combined with analytics, revenue forecasts can help predict the short-term course of capital and balance that with medium- and long-term investment strategies.
Investment decisions should be based on an accurate and timely forecasting model and flexible what-if scenarios and predictive analytics. Data-derived planning can help CFOs determine how a cash influx might impact asset value and whether extending debt makes sense vis-à-vis the asset’s projected future value.
An effective capital strategy can also enable finance leaders to make data-driven decisions on the deployment and allocation of capital. Some assets may require additional funding to withstand today’s mercurial market, while others can survive – and even thrive – without extra investments. Consider, as an example, disparate sales performance among retailers during the pandemic. Ecommerce-based food and grocery sales have spiked as virus-wary consumers seek to limit contact with others. Sales of apparel, on the other hand, have slumped as employees continue to work from home and limit social and entertainment outings.
To borrow or not?
Given the current record low interest rates – starting at less than 3% for some business loan products, including conventional and SBA – business loans can be an attractive capital-generation option.
Cash-rich companies, in particular, are likely to find these low-rate loans an irresistible way to pay down existing debt. Businesses with ample cash on hand might also consider investing in or acquiring distressed companies or assets. While this can be an effective strategy, CFOs should carefully weigh the potential downsides. An investment that’s perceived as predatory could run afoul of corporate social-responsibility guidelines and result in reputational damage.
Low-cost loans can be equally attractive to cash-strapped businesses, but, again, certain risks must be considered. Can operations cover additional debt? What is the impact on value of that additional debt? What is the impact on returns? Plus, borrowers face the additional challenge of meeting any lender terms related to use of funds, key financial ratios, salaries, dividend payments, transactions, working capital balances, and more. This suggests that while low-cost debt can be a quick fix, organizations still need to prove operational viability in the long run to support additional lending.
Refinancing presents another opportunity to take advantage of record low rates. Businesses may be able to refinance debt at lower interest rates, which can enable them to pay down existing debts at lower costs while freeing up cash for operations or other investments that drive growth.
Despite low interest rates, borrowing may not be the right choice for all businesses. Companies that are low on cash might consider forgoing borrowing and postponing all investment spending. It’s risky, after all, to continue acquiring assets during a downturn.
Driving organizational efficiencies
Whether locking into a low-interest loan or investing in a new project, CFOs should factor in trust and relationships with partners, vendors, tenants, and lenders when making investment decisions. An investment initiative that boosts trust among these stakeholders can increase tenancy and revenue, and can ultimately help trim operating costs.
Investment spending isn’t the only option. Businesses of all sizes can also consider more operationally focused initiatives to help protect margins, cash, and the value of investments. CFOs should assess discretionary spending to determine if and where costs can be trimmed. It’s also critical to reconsider investments in technologies and processes that are not creating the expected operational efficiencies.
Another option for real estate leaders is adoption of cloud services to more efficiently run and manage business systems and processes such as human resources, finance, IT, and cybersecurity. The “as a service” cloud model can enable organizations to offload certain business functions that are not core competencies.
A unified approach to ending data chaos
Now more than ever, we need to look through the windshield for what’s next, and not at the rearview mirror. Your real estate organization will need an inclusive, up-to-date, enterprise-wide financial planning strategy that integrates planning, forecasting, valuation, and capital sourcing with finance systems and processes. Data should be aggregated and normalized across all functions, and financial planning components should be integrated with corporate finance. A unified strategy can help break down functional silos, improve collaboration, and harmonize financial planning across the organization – and that can help you quickly adapt to marketplace changes of today and build the trust and resilience needed for tomorrow.
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