How Active Asset Management Can Boost Real Estate Fund Returns - Nicola Wealth

How Active Asset Management Can Boost Real Estate Fund Returns


By Nicola Wealth Real Estate

When a suburban Chicago office building now owned by Nicola Wealth’s Nicola U.S. Real Estate LP opened more than 20 years ago, it featured a waterfall in the lobby. “At the time that was the height of elegance,” says Liz Firer-Gillespie, Director of Asset Management, Real Estate. But more recently it came to feel dated and inappropriate for the mix of tenants in the building, prompting a renovation that’s nearing completion.

Now there’s a tenant amenity lounge near the entrance and in the place of the fountain is a massive television screen that, most days, shows building information updates, local news and traffic reports. But during March Madness, the entire screen was given over to live coverage of the college basketball tournament. At the start of the tournament, the landlord held a tenant appreciation event, serving up finger food to hundreds of assembled workers in what had become a lively gathering place.  The last phase of the renovation will feature the addition of a full-service Starbucks kiosk to the lobby café.

Following the disruption of the start of COVID-19, when many companies reconsidered their work-from-home policies, “we wanted to make it a place where, if you’re coming in to work, it’s a place you want to be at,” Firer-Gillespie explains.

This kind of proactive asset management has proven to be an important contributor to the positive risk-adjusted returns of Nicola’s U.S. and Canadian Real Estate funds. Every month the asset management team meets to review a portion of the portfolio, such that every property gets scrutinized at least twice a year. Team members examine the key performance indicators, the lease expiry profile of the tenants, and the debt cycle for the asset. They ask themselves: Is this a building we would buy today? Would selling it be accretive to the fund’s net asset value? Should the property be repositioned?

The Nicola Canadian Real Estate LP and Nicola U.S. Real Estate LP hold a diverse mix of residential, office and industrial properties and the needs of each are different. From the outset, Nicola’s acquisition team targets buildings with a solid tenant profile and strong, cash-flowing fundamentals. “We’re looking for singles and doubles, not the big flashy, glass boxes,” Firer-Gillespie notes. “We’re going for good, steady performers.”

Her team’s task is to maintain full occupancy, minimize tenant turnover and limit the downtime between tenants as much as possible. As for all landlords, the first twelve months of the pandemic posed a serious challenge. The team responded by working with tenants to understand what was going to help them keep their businesses going and ultimately restructuring leases or granting rent deferrals where necessary. “We collected 98% of rents. Tenants got through it and paid us back. For us to be successful, we need our tenants to be successful,” Firer-Gillespie says.

The rest of the time asset management is a matter of identifying cost-effective improvements that will keep the buildings competitive in their marketplaces. It might be upgrading the lighting to LED, improving ventilation, refreshing the curb appeal or adjusting the ratio of office to warehouse space. It’s also looking at where additional value can be found.  Is there underutilized space that can be transformed to attract a new kind of tenant at a higher rental rate? Is it possible to install a wireless tower or solar panels on the roof and have new revenue streams?

“It’s a very active management strategy,” Firer-Gillespie says. “We’re constantly looking at these buildings and what we can do to keep them successful over the long run.”

 

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.