Evaluating a Portfolio Acquisition
Client Review: Client purchases 14 properties on the West Coast, mostly small Class A properties with an average size of approximately 48 units each, that were added to their existing three properties in the same region, each just over 100 units.
The Work: RealtyCom was asked by our client to evaluate the service offerings for residents and to determine if there were revenue opportunities for any of the assets. In addition, RealtyCom was to determine if telecom contracts of any type would increase asset value.
First, RealtyCom reviewed all of the existing agreements across the 17 assets. Eight of the properties had telecom agreements in place, six with over 5 years of term remaining and two with 2 years of term remaining. The other nine assets had no Service or Marketing agreements in place, and none of the properties were receiving any on-going subscriber based revenue share – or had the benefit of any courtesy services from the Providers.
As is common across the Service Provider landscape, RealtyCom found the properties to be “under-valued” by the Providers based solely on their individual property size. The size of an asset is a critical aspect of the value equation Providers make in evaluating potential contractual relationships with an Owner, that metric is often flawed. Traditionally the size of an asset has the greatest impact for Service Providers as they launch service in new markets. In this case, the cost of building infrastructure to a small property often marginalizes their return which lends focus on new developments, or on larger properties. The incumbent Service Providers use this knowledge in some markets to devalue the necessity of writing contracts for smaller properties as there is virtually no competition and they have little risk of losing customers.
The Results: RealtyCom prepared a comprehensive evaluation of the customer usage histories in each of the assets. In addition, we worked with the management team to determine how the projects were operated and marketed to potential residents.
Armed with our findings, RealtyCom made the case to the Service Provider that the properties not only needed, but deserved enhanced telecom agreements. RealtyCom was able to show that statistically the properties performed better in terms of customer usage rates and buying power than other larger communities within the market area. We argued that the Owner and management company operated, maintained and, most importantly, marketed the services to all 14 of the properties similar to a single asset – with a combined leasing office.
RealtyCom was successful in its bid to entice the Service Provider to treat the properties as a single transaction of over 1,000 units, giving them the rationale they felt they needed to underwrite an above-market deal for our client. The new telecom agreements RealtyCom was able to negotiate replaced the existing long term agreements, added valuable courtesy services to remove the property expense forcommon areas televisions and fitness center equipment, and finally, increased the value of the portfolio by over $1M.