Two issues topping the C-suite agenda for REIT management teams

How can you use nonfinancial performance reporting and business intelligence to differentiate your business?

Market changes in recent years have led to two emerging challenges in the agenda for real estate investment trust (REIT) management teams. The unprecedented global growth of the REIT market has led to greater competition for investors who are increasingly focused on evaluating REITs for both their financial and nonfinancial performance. And, like all companies, REITs are also operating in a new world where technology is disrupting business models, while also providing opportunities to leverage data to enhance knowledge of the business.

How can you improve your nonfinancial reporting and optimize the use of data to differentiate your business and attract new investors?

Why focus on nonfinancial performance reporting?

The REIT market has witnessed significant growth in the last few years. The signs show that this growth ― and the competition to attract investors ― will continue unabated. With the introduction of real estate as its own industry classification in 2016 REIT management teams have made a conscious effort to attract generalist investors, most notably by evolving their investor communications.

To remain attractive to investors, REITs need to be prepared to report not only their financial but also nonfinancial performance, and demonstrate that they can deliver long-term sustainable results.

A recent investor survey run by EY showed that 97% of respondents conduct either an informal (65%) or a structured, methodical evaluation (32%) of a target company’s nonfinancial disclosures, up from 78% in 2017. Interestingly, 63% of investor respondents said they immediately rule out an investment decision if a company has a risk or history of poor governance practices, also up from 38% in 2017.

While governance is important, the research also shows that 89% of investors believe that generating sustainable returns needs a focus beyond governance to include environmental and social reporting. And, 82% of investors also agree that while environmental and social reporting offer both risks and opportunities, companies have ignored them for too long. The call is almost unanimous for CEOs to lay out an explicit strategy (elevated to board level) each year to address them and their companies long-term value creation.

Investor support for environmental, social and governance issues

REIT management teams are starting to take note and placing greater emphasis on sustainability. Two-third of respondents in the EY 2018 US REIT survey have either started or fully embraced building more sustainable activities into their portfolios, up from 37% in 2016. We’re seeing REITs tap into the growing market for green bonds to finance energy efficiency, renewable energy and other initiatives that boost sustainability and reduce environmental impacts. And what are the benefits? Green bonds can lower risk vs. a benchmark, help achieve nonfinancial objectives across the portfolio and provide excess return versus a benchmark or target.

The message is clear; communicating and reporting environmental, social and governance (ESG) activities are critical if you want to effectively compete for capital with other global sectors who have embraced the importance of ESG reporting.

What are the strategic steps to improvement?

Investors are demanding that reporting on nonfinancial assets reflect a more sophisticated understanding of the link between performance and ESG. This means that, alongside your financial reporting, there should be a coherent and strategic message on how you are seeking to create intangible value that can produce sustainable results. Specifically, the EY investor survey identifies four areas organizations should consider:

1. Establishing a structured materiality analysis process
2. Measuring and reporting social and environmental outcomes
3. Evaluating and reporting long-term value
4. Reporting more comprehensively on all climate risks and engaging with stakeholders, including investors

For an industry now competing for capital among a broader investor base, improving nonfinancial ESG reporting is now a clear way to truly differentiate.

Can business intelligence tools help REITs differentiate themselves from the wider real estate industry?

The use of data analytics is driving transformative changes in industries everywhere. EY’s 2018 REIT survey tells us that 70% of CFOs expect data analytics to provide increased insights into their business and 50% anticipate smart technologies will drive building efficiency and improve the usability of space.

For REITs, as perpetual life vehicles, the benefit of owning and operating assets for long periods provides ample opportunity to invest in business intelligence tools, test them and reap the rewards of developing stronger data analysis. By doing so, there is a clear opportunity to differentiate from the competition.

REIT portfolios generate thousands, if not millions, of data points. The challenge is what, and how, to collect and manage that data. For REITs, getting to a more comprehensive solution involving advanced business analytics is a big investment; the question is where to focus attention.

Organizations need to develop an analytics platform which, among other things, will require:

• Detailed understanding of existing systems and data
• Assessment of technology and data needs
• Definition of data dimensions and metrics
• Infrastructure design and build, including the required data repositories, feeds, reports and analytical capabilities
• Deployment and ongoing support

For many REITs, the value lies in using automation and analytics to solve some day-to-day business challenges, such as gathering accurate data for investor reporting which is often done manually.

Management teams need to start by identifying business problems, considering how processes are interconnected and getting to the root cause of the issues. Ultimately, many pain points can be traced back to data, lack of standardization, and the absence of an effective central data repository and the tools needed to effectively identify the trends and facilitate advanced analytics.

Whether building custom analytics solutions to solve each business challenge or developing a more robust solution built around a central hub, if you haven’t started to invest in a digital agenda, now is the time to consider it. Prepare and invest now so you’re ahead of the curve when it comes to the next cycle.