Blueprint for Success: Maximize Asset Value

Recently, we released a white paper entitled Blueprint for Success: the 5 Steps to Digitizing Building Operations and Improving Returns at Scale.

We’ve already covered digitizing your asset and using data to improve productivity and increase NOI. Now, we’re going to talk about leveraging the same data when it comes time to sell your asset.

Future occupancy rates and rental increases can be predicted within a reasonable band. However, mechanical and infrastructure risks are very hard to predict, often making them the number one concern for buyers.

In this video, Albert Liu, Enertiv’s Head of Finance, explains how a data-driven approach to assessing CapEx risks can generate cap rate compression by empowering the seller to demonstrate transparency into the building and verify the property condition assessment.

Video Transcript

Hi, I’m Albert Liu, Head of Finance at Enertiv and this is the final installment of our Blueprint for Success videos.

We’ve already covered digitizing your asset and using data to improve productivity and increase NOI. Now, we’re going to talk about leveraging the same data when it comes time to sell your asset.

With the amount of capital chasing deals, cap rates have compressed. To make money on the reversion, there needs to be a case for multiple expansion. By reducing the recurring OpEx line item, repairs and maintenance, and CapEx reserve, owner-operators can create unlevered and levered asset value through savings above and below the line.

Our goal today is to make it easy for asset managers to benchmark their portfolio from an operational perspective to attain higher multiples when it comes time to sell.

So, why hasn’t this been done effectively before?

To start, for many owners, expenses are an afterthought, as revenues have remained consistent and property values have risen. But, with an increasingly competitive market, where over $300 billion of dry powder chases fewer and fewer deals, cap rate compression has left owners scrambling for alpha in the face of macro headwinds.

One area of focus has been CapEx reserves. Typically, an institutional owner would think: “I want to buy this building, and I think it’s worth X, but I can only bid Y, because I’m guessing that in the next 5 years, I’m guessing that I’m going to need to replace some HVAC units and repair XYZ.

This line of thinking is commonplace and mostly speculative, oftentimes leaving risk-averse buyers out of the deals.

Now, if only there were a way to build out a framework to quantify CapEx reserve reduction across asset types. Owner-operators would be well equipped to quantify value creation on the backend at their respective cap rates.

With factors other than rent coming into focus, what else can owners do to better understand their portfolio and sell their buildings? Well, if you invest in long-term holds, you’re going to want predictions of equipment useful life to better forecast replacements and smooth out CapEx to ensure consistent cash flow.

If you’re holding period is shorter, you’re going to want to prioritize CapEx investments that fit into your strategy.

When selling the asset, property condition assessments, created by experienced engineers, are often created to identify short-term capital needs and long-term capital expenses. But it goes without saying that human error and oversight can be costly.

By utilizing a data-driven approach to assess back-of-house mechanical and infrastructure risks in the asset, the uncertainty around transactions can be laid bare. Even in a vacuum, cap rate compression can generate significant multiples on asset disposition.

And that’s it for the Blueprint for Success videos. We hope you can apply these lessons to your portfolio. If there are any questions, we’re always here to help.