By: Jon, with input from the team at www.argusvaluation.com
What do financial analysts do in real estate? While in real estate there are a variety of roles a financial analyst can serve, this post will focus on that of a financial analyst in an owner/operator role, which is where several members of our team at www.argusvaluation.com have experience.
Analysts for owner/operators typically have two primary roles: sourcing and evaluating acquisitions, and maintaining budgets for the company’s portfolio of properties. While in the “good times” a few years ago, most analysts would say their time was split 75%/25% in favor of new acquisitions, these days the ratio has reversed with the majority of the time being spent handling property budgets (with items such as dealing with tenancy issues (high vacancy and requests for abatements from in-place tenants) and financial health issues (which can include conversations with lenders and servicers)).
In this post I’ll give a quick overview of both acquisition and budgeting, and what tools and skills are necessary for both. To begin with acquisitions, typically an analyst will get many brokerage blast emails which consist of Offering Memoranda describing a property’s attributes including a market and location overview, demographic data, and information on comparable properties (both in terms of tenant rents and cap rates on sales), as well as an Argus file.
The role of the analyst is to evaluate this information, audit the Argus file for mistakes, and then apply their own underwriting to the deal (which may include adjusting operating expenses, changing the market rent and other lease turnover assumptions, or adjusting the management fee and structural reserve expense) to get a sense of the potential returns in purchasing the property. Argus is pretty much the industry standard in this sense, as it greatly facilitates modeling out the property cash flows and also is typically required by lenders when assuming financing or getting new debt.
Once this is understood, the information is used to substantiate negotiations on the purchase price for the deal. During due diligence, the analyst will really scrub the numbers in depth by making sure the Argus file reflects all rental and reimbursement information per the leases, as well as doing more research to determine market characteristics such as comparable rents, occupancies, etc. All of this is critical in terms of validating the numbers, and thus the modeled returns for the property.
The other role an analyst plays is in keeping up to date operating budgets for properties. The game doesn’t end once you make an acquisition – in fact, that’s when the real work starts. While Argus is great for acquisitions, for budgets I prefer using Excel. When you’re building a budget in Excel you can create as many details pages as you need, and then create summary pages which are useful for showing specific information to different stakeholders. For instance, a detailed list of expenses is important when talking with property managers, but if you’re in a meeting with the principal typically you’re going to want to show how cash flow looks on a general level instead of getting too detail oriented.
In order to keep budgets up to date, a financial model must be built. There are a variety of ways to do this, but typically we use a template we’ve put together which shows build-ups to monthly rent per tenant, and then separately showing reimbursements. The trick here is to have a good relationship with your property manager so you can know what’s going on at the property, and if he thinks any expenses will run higher/lower on a given month. Budgets will typically get reviewed quarterly to ensure they reflect current conditions at the property and that most importantly free cash flow is being calculated accurately.
Documents an analyst will encounter to review in this process are rent rolls, lease expiration schedules, collections/arrears reports (to make sure tenants are actually paying what they’re supposed to), and expense reports. During quarterly reviews, comparisons of the budget versus the actual Profit & Loss statement show where differences occurred, and should be studied to see if budget revisions should be made looking forward.
A big problem in today’s economy involves abatements (rent reductions). With huge vacancies at properties, landlords are being forced to give in to tenant requests for large abatements in order to keep them in-place at the property. An analyst is responsible for keeping up to speed on what abatements are in-place at the property, because this obviously can create large swings in anticipated versus actual collections in rent. This can get a bit cumbersome at properties with tons of tenants, and for this reason I recommend keeping detailed notes in your files.
In addition to standard operations at the property, the budgeted cash flow plays an important role in determining if the property can sustain itself and if necessary pay for any renovations or redevelopment work. Many properties today are operating at cash flow losses, and then run into trouble offering build-out packages to attract new tenants because of a lack of cash in the bank. It is to prevent, or at least manage, issues like this that an analyst must have a firm grasp of how the numbers look at a property – and this is achieved by being careful and thorough when budgeting.
The two main tools we discussed that an analyst should know are Argus and Excel. Both are integral to an analyst’s daily responsibilities, and one must be comfortable with both to ensure that all projections for a property are handled properly. If you’re not familiar with either of these programs, visit www.argusvaluation.com or email us at argusvaluation@gmail.com to learn more about the training courses we offer. Also, if you have any general questions about this post please feel free to email us too. Good luck in your real estate career.
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