EVALUATING A PORTFOLIO ACQUISITION

Client Review: Client purchases 14 properties on the West Coast, mostly Class A and B properties with an average size of approximately 48 units each, which 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.

RealtyCom reviewed all 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 subscriber-based revenue share – or had the benefit of any courtesy Television or Internet services from the Providers.

As is common with Service Providers, properties under 100 units are often “undervalued” based solely on their individual property size.  The size of an asset is a critical aspect of the value assessment Service Providers make in evaluating potential contractual relationships with an Owner; a metric which we believe is often flawed.  Traditionally, the size of an asset has the greatest impact for Service Providers when they launch service in new markets.  In this case, the cost of building infrastructure to a small property marginalizes their return, which lends focus to new developments or larger properties.  The incumbent Service Providers use this knowledge to de-value the necessity of writing new contracts for smaller properties since there is virtually no competition, and little risk of losing customers.

The Results: RealtyCom prepared a comprehensive evaluation of the customer usage histories in each of the assets. We prepared a summary that showed all assets owned by this client across different markets with the same provider to argue the need for a portfolio offering. 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 improved telecom agreements.  RealtyCom was able to show that statistically the properties out-performed customer usage rates compared to larger communities within the same market areas. 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 centralized leasing effort.

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 property expense for common areas televisions and fitness equipment, and finally, increased the value of the portfolio by over $1.2M.