Altus Insight February

The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor

Date: February 28, 2019
FR: Forrest Jinks
RE: Big thing are Big things, but sometimes so are little things

 

If you would have asked anyone in our organization about our asset management expertise last summer, we probably all would have responded that we were above average but with considerable room to improve. We watched numbers, visited the properties regularly, made to sure make the necessary investments to the asset, and more than anything else, we really cared (which is not nearly as common in the industry as should be expected). It was from this position that we made the BIG decision to replace the property manager at five of our properties. One of the properties was a top of class performer and another was performing better than the market. A third was roughly average and the remaining two were performing, but below market. Unable to replace the company on just the poorly operating properties and thinking that first three properties still had room for improvement, we pulled the trigger. It was a big decision.

Our business has lots of big decisions. We only buy 4 – 8 properties a year. With that small of a sample size we need our decisions to be correct. Every decision to buy rather than pass, is a BIG decision.

The same holds true with our team. We have eight people on payroll (and are currently hiring three more). Each hiring decision has a dramatic impact on the business, both in terms of the new hires’ ability to provide more value to the company than their compensation (such is needed to produce profit), and each individual’s impact on the culture and teamwork of the company.

Decisions on financing, negotiating structured investment opportunities with individual investors (usually 1031s), presenting offers to sellers…there are a lot of activities within the business that could be considered big things.

But, in nearly all such cases, those big things are comprised of lots of preceding little things. When we are buying a property each piece of the due diligence and analysis is a little thing that directly impacts the big thing. Writing the job description, interviewing, coaching, leading, etc. could all be viewed as little individual actions, but they are the building blocks of creating a strong team, a very big thing.

And when it comes to asset management nearly everything is little things, but each little thing is the building block for the performance of the property. This is especially true with multi-family properties where there are lots and lots of tenants, each one with their own opinions, preferences, and lives. Losing one of those tenants is natural and normal. Losing a multitude of tenants can create big issues.

As many might know, the property management changeover has turned into a considerable challenge with occupancies being hit hard at all the properties. The immediate internal response was to doubt ourselves in having made the BIG decision, but as time went on and the true condition of the property management services rendered became clearer, there was no question we made the right BIG decision. But could we have made different and better small decisions leading up to the decision to replace the property manager, that would have reduced the impact of the property management change? Or possibly by being acting different months/years in advance eliminated the need for the change altogether?

Knowing that little things matter, but acknowledging not all little things matter, how are the little things differentiated so that the right levers are pulled to maximize the performance of the property? I can’t say we have all the answers, but over the past several months we have redefined what is important to us, how we expect our properties to be managed, and different ways of measuring property performance.

  1. At our properties, the people that rent from us are the customers. Most (a huge percentage) owners and property managers view tenants as headaches. They aren’t totally wrong. Customers can be headaches at time. But they are also the source of revenue. Great customer service trumps good customer service and good customer service trumps average customer service. We need our properties to be great. With the slow-moving nature of rental agreements and leases, there is no immediate feedback or benefit from providing the high level of customer service. But in the long run it should pay off in spades through resident referrals and reduced unit turn over.
  2. Little things set the tone for how a property will be run and maintained. While it might be obvious that trash should be picked up from the premises often, it needs to be an obsession. Little repairs need to be made right away. When people see things in dis-repair they will treat them with less respect than if they see things well maintained. Little things aren’t just for the care of the facilities. It extends even into the vernacular used by the staff. “Resident” comes across a lot more respectful than “tenant”. “Lease anniversary” has a completely different intent than “lease expiration”.
  3. Resident work orders must be addressed in an expedited fashion. For us, this means within 24 hours. It is not reasonable that all repairs can be done that quickly, but the apartment needs to be visited to determine the extent of the issue, parts ordered, and the resident communicated with, so they know the on-site team is taking the issue seriously and moving to resolve it.
  4. We must spend money to make money. The onsite staff drives the performance of the property so, if we try to higher the least expensive onsite staff, we are likely to get the least benefit from that hire. Along the same lines, incentives should be aligned with the specific performance desired. On one of the properties where the property management was changed, the on-site manager was incentivized to produce leases, but not incentivized on occupancy or collections. As a result, she had her team executing leases with applicants that quite obviously didn’t meet the minimum leasing standards. The important inputs on a property really boil down to total revenue collected and expenses that are managed well. On the expense side, this doesn’t mean that money isn’t spent. It is important to spend money in the right places for the long-term benefit of the revenue stream and the quality of the property.
  5. Build community. For us this is the gold standard of successful asset management, but gold medals are hard to achieve. Like so many other aspects of asset management, there isn’t a set of specific actions that will create the community desired. Some initiatives that can help are: Resident retention events, sponsoring work days with local non-profits, providing on-site credit repair classes or student tutoring, etc. These sorts of efforts can go a long way toward creating a community to which tenants feel connected, but each property has to be dealt with differently. This component is more art than science.
  6. Training, training, training. Customer service definitely starts with the right attitude, but great customer service also requires training. Sales, which is the next step of customer service, requires more intensive training. Customer service training is not specific to the leasing agents and/or on-site managers, but also needs to include the maintenance staff since they have considerable interaction with the residents.
  7. Measure what matters. Nearly all asset managers track occupancy and standard financials (though we have discovered that shockingly few asset managers really dig into the financials). Some track work order completion and forward-looking occupancy. We certain did and still do. But while those measurements (and specifically the financials) tell a story about the success (or lack thereof) of the property, they don’t explain what inputs are creating the outcomes. We have developed four different non-financial measurements that we hope will better do the trick. These specifically focus on revenue efficiency (occupancy, rent rates, and collections into a single KPI), resident retention, work order responsiveness, and resident quality. Not only do we think these KPIs will allow us to track property performance over time, we believe they will allow us to compare property performance between properties in our portfolio and even other properties in the market place. Because of the variances in property types/management functions/etc., this can be hard to do using traditional financial measurements. Over the coming months investors in the specific investment entities will start to see these measurements included with the quarterly reporting. We are currently working backward through the financial data to create the historical track record to be used as a baseline.

 There is nothing earth shattering here. It is all about little things that we think improve performance and value, but those marginal improvements add up to big things. Increasing collected revenue by 5% can lead to a 10% increase in net operating income. That 10% increase in NOI means a 10% increase in value of the property. That in turn usually increases the project return on investment by somewhere in the neighborhood of 33% (dependent on the percentage of invested equity). Little things turn into Big things.

We are under no illusions that to go from good asset managers to great asset managers will be easy to accomplish. Our journey will result in situations like the issue we are dealing with on the property manager changeover. Those situations are highly stressful on the team and can make us want to pull back from pursuing the long-term goals. But excelling at anything requires hard work and sacrifice. We are committed to the journey.   

 

Happy Investing.

Forrest Jinks

Altus Equity Group, LP

off: 707/932-5887

fax: 707/544-2972

www.altusequity.com

 

About the Author: Forrest Jinks is a managing director of Altus Equity Group, LP and licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.