January 31, 2017

#eiMasterClass – Unlocking & Creating Value from Corporate Real Estate Portfolios

Dolapo Omidire

This 2-part article on Corporate Real Estate Solutions is part of the #eiMasterClass series. This edition was written by Adenekan Adeniran, Principal at FRISIA Partners.

The infographic below provides a brief summary.

#eiMasterClass - Unlocking & Creating Value from Corporate Real Estate Portfolios
#eiMasterClass – Unlocking & Creating Value from Corporate Real Estate Portfolios

Part I:  Preparing for Unlocking & Creating Value from Corporate Real Estate Portfolios

The key objective of corporate organisations such as banks, FMCGs, and telecommunication firms typically involves creating and capturing value from their core business.  Many corporate entities require real estate in order to run their core business efficiently. These corporate entities often invest heavily, amassing vast real estate portfolios and unintentionally tying down capital in a non-core business area.

The real estate portfolios owned and occupied by many corporate entities represents capital tied down in non-core business.  Capital that is not being ‘worked’ to optimise return on capital employed or return on equity or capital that is not being utilised within the entity’s core business to create and capture value.

There are number reasons some corporates opt for owning vast real estate portfolios, and these typically include retaining full control and flexibility over land and buildings that are occupied; reluctance to negotiate with landlords; and simply not having an understanding of the implications on core business of owning a substantial real estate portfolio.

The thrust of this article is how a corporate entity can evaluate their real estate portfolio to enable them put the significant amounts of capital in these portfolios to good use, without negatively affecting the use of the portfolio and their core business..  In a nutshell, how can a corporate entity optimise and align its real estate and business strategy efficiently, in a cost-effective manner?

Options Analysis

The key to any corporate occupier maximising the returns and flexibility from its real estate portfolio is to regularly undertake a review of the portfolio and conduct options analyses.

An options analysis would allow a corporate occupier to consider its two primary options for owned properties – Do Nothing or Unlock Value.

The ‘Do Nothing’ option is one to which serious consideration should be given, and could be appropriate where the property is unique or requires regular redevelopment to suit the needs of the business.

Consideration should be given to the strength of a corporate occupiers profit and loss account and the timing for any transaction.  A transfer of real estate ownership typically introduces a new cost item to a corporate entity / occupier and it is essential that any rents payable are affordable for the entity both in the short and long term.

Timing of any option is critical – if an option is decided to be best, then its timing should be considered in the context of the property market, financing conditions, industry sector and corporate occupier specific issues.  The state of the real estate market may mean that real estate values are less than optimal, which in turns means the size of the transaction contemplated would be lower than initially anticipated.  These factors could to a reduced transaction impact on the corporate entity’s balance sheet.  With these factors considered, it may well be the case that the ‘do nothing’ option would be the best option until the timing is right.

To ‘Unlock Value’, the first step is to determine which method or choice of unlocking value best meets a corporate occupier’s needs and achieves their real estate portfolio objectives.

Unlocking Value is a combination of real estate and financial structuring.  It is the process of releasing idle capital tied up in real estate assets in order to optimise a corporate entity’s use of its assets for re-investment in the core business.  It delivers its greatest benefits where returns from re-investing the (unlocked) capital into core business / identified projects are higher (than the return on the capital prior to unlocking value) i.e value creation.  When focussed on the right assets, it also aligns the real estate portfolio to support, rather than hinder, the corporate business strategy.

Unlocking Value methods include asset-backed finance, traditional sale and leaseback, structured sale and leaseback, real estate securities (for example, a real estate investment trust) and propco/opco transactions.  Other unlocking value methods include development agreements and joint ventures.

One example of the unlocking value method is a traditional and / or structured sale and leaseback transaction and it stands out as one of the best for a typical corporate occupier to achieve both balance sheet optimisation and release capital. This process is achieved by transferring property ownership to a specialist property investor who then leases the property back to the occupier thus enabling them to focus on their core business.  A structured sale and leaseback has the added advantage of incorporating flexibility specifically to match the corporate occupier’s needs.

Once the decision has been made to unlock value from a real estate portfolio in the means best suited to the occupier, the key consideration should be selecting the portfolio for the transaction i.e. which assets should be within the unlocking value portfolio?

Portfolio Determination & Analysis

An objective of unlocking value is aligning the real estate portfolio with the corporate business strategy.  The intention is to retain the ability to control key ‘core’ assets over the longer term, and if possible provide flexibility to exit non-key assets at appropriate points in time with surplus assets being disposed immediately. This alignment (of real estate and business strategy) essentially determines the occupational strategy and therefore the real estate portfolio, which would be the subject of unlocking value.

Following portfolio determination, detailed portfolio analysis should be undertaken to reflect the corporate occupier’s (occupational) strategy; determine the attractiveness of the portfolio to prospective investors / landlords; and, inter alia, ability to raise long-term finance on the portfolio.

With the options analysis concluded, an unlocking value option determined, portfolio determination and portfolio analysis finalised, the next step is to structure the transaction ensuring it meets most, if not all, of the corporate occupier’s real estate and business strategy objectives.

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