It’s a nervous time for the CFO of a publicly traded real estate investment trust. Her quarterly call with analysts is fast approaching, and she anticipates a rough grilling. The original guidance from the annual forecast had lease spreads at 9%, but at mid-year they’re closer to 4%. The analysts will want to know how that happened and what she plans to do about it. She needs the latest and best guidance, not stale news, and the clock is ticking…
Can that CFO get the forecast information she needs to still the butterflies in her stomach and leave the Wall Street folks smiling? Yes, if she adopts the right strategy and tools. Demands for better guidance from REITs have sparked a trend toward more frequent forecasts—along with software platforms capable of delivering them.
Evolving Forecasting Expectations
The first step to preparing better guidance for analysts is recognizing that REITs can no longer wait until quarter-end to get ready. With revenue assumptions, vacancies, the deal pipeline and other dynamic elements constantly changing, estimates presented in the traditional quarterly or annual reporting periods can be obsolete almost as soon as they’re made.
Rapidly changing assumptions are just one factor changing forecasting expectations. Another is the time and labor involved in compiling data and transferring it between multiple systems and spreadsheets. Along with the risk of degrading the data, which is prevalent with such transfers, those involved in preparing the forecast reach a cutoff point at which no further data can be introduced. This “blackout” period can lock out data covering weeks or even months of a forecast period. As a result, actuals can differ from forecasts. Even if the plus-or-minus is a small percentage, in a forecast involving hundreds of millions of dollars that’s a lot of money that might or might not exist, and investors might question the integrity of the forecast.
For reasons of efficiency, accuracy and compliance, our hypothetical CFO might consider a shorter forecast period—perhaps monthly. But if monthly is possible, then why not daily, and on a rolling basis to boot? After all, reforecasts that accommodate exceptions that pop up daily would be more accurate. Plus, because rolling forecasts always cover the same amount of time, and would eliminate the blackout period as well. The key is capturing and factoring in revenue, vacancies, upcoming unit expirations, per-square-foot market values and other assumptions as they change.
The Daily Difference
Instead of accruing a quarterly backlog of space-level exceptions that need new assumptions, why not force the action? When a unit becomes vacant, or an early termination becomes likely, why shouldn’t the property manager proactively update the market leasing assumptions or enter a speculative lease? With the right software system, these and other factors can be displayed as tasks on a dashboard. An efficient visual presentation makes it easy for the manager to check off each item as it’s dealt with so the dashboard inbox is empty by the time the analysts call happens. And, with a rolling forecast updated daily, the CFO can always take a peek at those forecasted lease spread trends.
The concept of a “task dashboard” for daily budgeting exceptions is one that is gaining traction in the REIT world. And the advantages extend beyond enhancing the CFO’s view. Quarterly revenue forecasting can bog down a huge part of the company each period, so distributing the work at a weekly or daily basis could steady the workforce.
However, there is a catch. Running daily revenue forecasts is possible only if key budgeting inputs are consolidated and clean and ideally in a single database. Contract leases, real-time deal pipeline data, debt, up-to-date construction budgets, and nightly consolidated financials all need to be accessible to the forecast engine. A platform that connects property management, investment management and accounting can yield huge benefits to budget and forecast accuracy and cycle time.
The Payoff for REITs
The benefits of daily reforecasting and rolling forecasts include better portfolio oversight, easier preparation for calls with analysts, and more accurate guidance. Instead of staff scrambling to draw together vacancy, deal pipeline and revenue information, the integrated investment management platform automatically draws it into a complete and credible presentation.
I have discussed the benefits of a single connected platform many times in this space. Budgeting with data drawn directly from master lease agreements in a property management system, incorporating financial information with CRM data, creating an integrated front office with a single point of entry for capital calls and distributions, seamlessly pulling in debt and CAPEX at the push of a button—all help property management and investment companies in all vertical markets use their resources more efficiently, satisfy clients and meet compliance requirements.
With REITs listed on the New York Stock Exchange approaching a combined market value of nearly $1 trillion, and given our country’s passion for real estate, this market segment receives more analyst attention than most. It is a bellwether industry, and its forecast matters to more than just stockholders: REITs provide key insight into our country’s economic health. In observing the evolution of REITs over the years, and from my regular conversations with REIT stakeholders—including CFOs facing the same dilemma as the one portrayed in this article—I strongly believe that this segment of the investment community will embrace an integrated platform model in its quest for superior returns and new investors.
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