Asset prices can deviate from intrinsic values for different reasons. These dislocations may stem from, among other reasons, the owner’s inability to (a) stabilize the asset and/or otherwise operate it in an efficient manner; (b) fund necessary capital and tenant improvements and/or leasing commissions; or (c) refinance the existing loan when it comes due as a result of the perceived weakness in the owner’s sponsorship of the asset or from difficulties in the broader financing environment, in each case causing a diminution in value not reflective of the underlying asset or its marketplace. Other times, these dislocations exist because the capital markets are mispricing a certain aspect of the asset, such as the tenant roster or its physical condition, and/or the fundamentals underpinning its submarket. Our investment underwriting begins with the belief that the target property is a quality asset, that its underperformance can be turned around and that substantial value can be created and sustained.
After determining asset value from the standpoint of replacement cost, comparable properties and cash flows, we undertake a rigorous analysis of in-place leases, property condition and other qualitative factors and overlay it with a broader, macro-level analysis of the market, submarket and broader economic and real estate environment. When pursuing investments, we incorporate our views of the current and future economic environment, assessment of the risk-reward profile derived from the asset’s underwriting, including taking into account relative valuation, supply and demand fundamentals, financing environment and overall liquidity in the marketplace. Each prospective investment undergoes a rigorous underwriting process in order to determine the risk-return profile of the opportunity and the appropriate pricing and structure for the prospective investment.
There are two primary components to our value enhancement strategy. First, our asset management platform is geared towards operating an asset at a competitive price per square foot without a commensurate diminution in quality of space and services provided to our tenants. By handling the asset management functionalities in-house and across a sizable portfolio, we are able to achieve significant operational and financial efficiencies. These capabilities allow us to pass along the savings to our tenants, giving us a competitive edge in the marketplace when attracting and retaining tenants. Second, the majority of the assets we target and acquire need to undergo a capital improvement program in order for leasing velocity to be generated. We take a disciplined approach to enhancing the aesthetic appeal and operational performance of the asset, taking into account its submarket, the competitive landscape and the broader macro environment.
Our team of leasing, property management and construction management professionals evaluate the condition of the property and the competitive set of assets in the marketplace and devise a program that is consistent with the underlying investment objectives. The program sets forth in detail the scope of the capital improvements and the cost and timing required to implement each improvement and the effects on leasing, whether it be through an increase in net absorption and/or rental rates. Upon the closing of the acquisition, our property management and construction management team value engineers the capital improvement program devised during the underwriting of the asset and implements each improvement systemically, while the leasing team markets the asset to the brokerage community and the broader marketplace. By being able to develop and roll out the value enhancement strategy in-house, we are able to apply best practices to every property we acquire.
We believe that the cyclical nature of the real estate industry necessitates that a disposition plan be developed and be put in place at the time an investment is made and the value enhancement strategy is created. Our disposition plan takes into account the scope, timing and duration of the value enhancement strategy, as well as our assumptions relating to the condition of the capital and real estate markets at the time it is presumed we will exit from an investment. A focus on extensive research is a defining characteristic of our company and the assumptions relating to the disposition of an asset are formulated based on an in-depth analysis of all applicable data and information. While the disposition plan ultimately drives many of the key decisions affecting the operation of, and investment in, the property, it serves as the starting point, not end point, of the analysis to take an asset to market.
We are cognizant that the real estate business is increasingly dynamic in nature and that a certain level of flexibility needs to be afforded. Capital markets are ever changing and investor sentiment is fluid so operational latitude must be observed to achieve the most optimal financial outcome. The decision to exit an investment may be modified, in part as a result of the performance of the asset itself and in part due to ever changing market conditions. Having the capacity to monitor the portfolio in-house provides us with real time analysis and ability to make decisions in an informed and integrated manner. In addition to routine reporting, we provide to our clients with up to date information about the profile and performance of the asset, the competitive landscape and the state of the local real estate market so that we can take a disciplined and facts-based approach to disposing of the asset, including factoring in the asset’s maturity and where we are in the real estate cycle.