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Asset Management

Adopting A Strategic Asset Management Philosophy

Achieving Optimal Execution on Investment Return or Recovery By Ryan Hennessy Success in managing a real estate portfolio is traditionally measured by return on investment or loss recovery. While these measurements can be easily calculated, to truly maximize them requires a comprehensive understanding of critical inputs, the impact of controllable and uncontrollable variables, and prioritizing the decisions that are more crucial to the management or liquidation strategy. Recent history has shown that interest rates hit modern lows and property values rapidly appreciate driven by an extremely aggressive buyer’s pool, amidst a global health pandemic. As we enter a new real estate cycle, we are currently experiencing a cooler real estate market impacted by declines in new purchase loan originations and refinances, and inflation, as the word “recession” continues to be utilized when classifying the state of the economy. As these trends often align with additional opportunity within the real estate owned (REO) and distressed real estate asset classes, adopting a strategic asset management philosophy is imperative. Two Types of Portfolio Owners Portfolio owners can often be classified into one of two categories: those where their strategy dictates their portfolio and those where their portfolio dictates their strategy. The former is often comprised of those with a hyper-focused management strategy within a few key market areas. The strategy box dictates the portfolio as very rarely will an asset be acquired that falls outside of the investment objective. The latter to the aforementioned is often comprised of those with a more global strategy, either investing in national pools of assets or mortgage debt, or financial institutions servicing mortgage debt related to delinquent loans. In this instance, assets will enter the portfolio in various markets with diverse property specifications, condition, and risk or opportunity, requiring a strategy to be determined while the asset is under management and not determined prior to it entering a management or owned status. The paradox of these types of portfolio owners is that they each strive to be the other. Those with a more concentrated strategy often aspire to expand, be it geography, property type or both, while those with a more global approach aspire to have a more local approach as to further maximize opportunity. The Critical Inputs While advancements in technology have made data more attainable and resources more tangible, identifying strategies at an asset level, as well as key drivers that may require a pivot, is not an automated process. As such, maximizing opportunity or mitigating risk requires a flexible process driven by four critical property-level inputs: occupancy, value, intangibles, and geography. Occupancy While the essential data point is tied to status – occupied, occupied by possession, or vacant – leveraging data to better assess the cost implications is a key component of a strategic approach. Through example, a best practice approach when geographically applicable, is to understand projected costs that may be incurred when considering an eviction as this will help determine a breakeven amount to leverage as an offering for relocation assistance (cash for keys). This can be determined by aggregating cost data surrounding state-based attorney fees, trash out/debris removal probability costs, and property taxes incurred during the eviction process based on state-driven timelines. The sum will help determine the relocation assistance vs. eviction breakeven cost to consider within the overall management strategy. Value While value is often analyzed during the acquisition due diligence or mortgage servicing phase, valuation tools that are leveraged are derived from a more cost-effective approach, therefore reliant on general market data, or are assigned to a local professional without sharing insight into the use case of the valuation. In both instances, the impact of a property’s condition on current and potential value is often either unable to be determined or overlooked. Properly assessing all elements that go into determining value, with emphasis on those that can be aggregated through data resources, such as multiple listing service market data, provides the required resource within this variable. Intangibles A component often overlooked are the intangible inputs associated with asset management, namely title, taxes and liens. While a property might be in a marketable state desired by targeted buyers, failure to analyze these items can hinder or prevent a sale to a prospective buyer, especially if the buyer is obtaining financing. Properties acquired via foreclosure sale or assets that migrate to an REO status via foreclosure often have delinquencies or defects associated with them. Building taskings or triggers to obtain title or tax and municipal lien reports will drastically impact management strategy. Geography Diversity in geography causes different considerations in asset management, from the impact weather can cause to the prime windows for “selling seasons.” An additional consideration is the velocity geography can bring when leveraging both rental and liquidation strategies. Understanding the forecast of a portfolio, especially those across diverse geographies, will assist in either expanding or narrowing down management options. As an example, a property located in a one-off market may be ideal for a rental, however, this strategy may not be logical without additional opportunities to bring assets under management in that same geographic. Effectively aggregating data on the above better supports an asset-level decision, which can include repaired sales, as-is sales, auction, conversion to rental, or alternative disposition methods (deed-away, donation, pools sale, etc.). When managing a real estate portfolio, management strategy determination is the tier-one driver that all other supplemental decisions will be made from. For example, if marketing a property, determining an initial list price is a crucial decision but determining this is subsequential to the strategy. While the decision to be aggressive or conservative with pricing will impact projecting marketing time, the variance in price between an aggressive and conservative strategy is nominal given the strategy was already determined. As we enter changes within the real estate market and overall economy, the availability of data, technology platforms and integration with various providers provides information to investors which allows them to make better decision on their portfolio assets while also creating a more competitive

From There to Here

Committed to the Vision

“Once you’re in, it’s hard to break out.” “What a long, strange trip it’s been.” Those two phrases have stuck with me throughout my career. Granted, one is more of a cliché and the other is a lyric from the famous Grateful Dead song “Truckin’.” But they are both relevant as I reflect on my default mortgage and distressed real estate journey, which began when I was about 7 years old. Real estate has been a theme throughout my life. As the son of a contractor and a real estate agent who focused on selling properties for banks and GSEs, real estate was a livelihood. I have early memories of sitting in the car during inspections or walking through older vacant properties. And my chores and/or punishment for misdeeds were to file or scan BPOs, documents and pictures into the office computer or pick up nails and shingles at a construction site. Hindsight being 20/20, these activities taught me about project and task management as well as the personal value of building something tangible, whether a business operation or a remodel. Deciding to Bite My interest in creative problem-solving and number patterns led me to learn about business and analytics in high-school. Given my early ties to the industry, this is also when I learned that Fannie Mae—a name I’d heard often growing up—is not a person but rather a government conservatorship. After graduating college, I was at a crossroads of wanting to pursue a business venture or continue my education, perhaps earning an MBA and teaching at the high school or college level. While I was exploring graduate programs around the Philadelphia area, a former Keystone Asset Management manager contacted me, seeking assistance in expanding vendor management practices. My initial response was to decline because I wanted to dive into other areas. After several back-and-forth correspondences, I agreed to assist in vendor management—cementing the “no looking back” hold this industry has on you. As I dove into asset management and valuation, we worked to ensure stronger oversight of the third-party industry partners (e.g., real estate brokers and agents) we engaged.  The initial “hook” for me was leveraging the analytical side of aggregating performance data, building stronger evaluation reports on industry partners, exploring the logistics of contractual agreements and aiding in creating and holding various trainings. The “reel” that brought me in was engaging and presenting developments with current and prospective clients and business partners. In true trial-by-fire fashion, I gained exposure to this part of the industry by participating in industry events and traveling to client and affiliate offices. Opportunity Everywhere I am beyond fortunate to have had this exposure at an early point through an established firm such as Keystone Asset Management. They expected a level of professional maturity from me and I worked hard to meet that expectation. As I worked my way through the company, I gained experience coordinating and integrating business and product lines for new projections and contracts, collaborating on industry patterns and trends for corporate development and positioning, and identifying and procuring various growth opportunities. Beyond what any classroom environment could teach, these opportunities provided a wealth of education and a concrete foundation to understand business, entity structures, legalese and the key administrative and leadership requirements needed to maintain a successful foundation, regardless of the ebbs and flows of the industry. We are part of a very cyclical industry. We’ve seen waves of consolidations and expansions in both mortgage and real estate. These have ranged from the housingbubble burst, which yielded a drastic regulatory influence on compliance, to investors looking to leverage enhanced technology, resources, government first-look programs and a combination of debt and equity to expand their investment footprint. We’ve also seen increased influence from large-scale purchases of loan and asset pools engaging special and subservicers to mitigate debt or implement a strategic disposition alternative that maximizes return and/or mitigates loss. Navigating these cycles as well as facing other challenges and pivotal growth points require you to constantly evaluate where your services fit within the industry. Keystone Asset Management was one of the first national firms to support asset management and disposition, as well as valuation alternatives to appraisals. It also has a history of working with top-tier banks and regional institutions by helping to conceptualize Fannie Mae’s AMP program. Although Keystone built its reputation and foundation on these early opportunities, they also provide leverage for proactively identifying and seizing additional opportunities amid industry fluctuations. For example, we have adjusted to the market and migrated into acting more as real estate strategists that determine optimal disposition avenues based on value and key inputs. The Benefits of Being “All In” The experience I’ve gained at Keystone has provided professional growth I’ll forever be grateful for. The networks I’ve been able to build have produced some great friendships and growth opportunities. Likewise, I’ve been able to build and maintain a core team of trusted colleagues and partners that drive our business. I’ve developed the confidence to be flexible, even if it requires reinvention, yet remain true to the initial purpose of my journey: maintaining focus and ensuring adaptability to new opportunities. Finally, what I struggle with the most is continuously listening to colleagues—there is definitely more to learn than to share. In addition to affording me professional growth and advancement, this industry has offered personal growth. I entered it at a young age and was often referred to as “the baby.” I was introduced to the woman who is now my wife on a business trip tied to this industry. I’ve also had the good fortune to diversify into related businesses and projects. As I continue my journey, I make a point to remember that operating in real estate means that I am working with one of the few tangible investment opportunities that everyone shares a common interest in. And there is opportunity for all of us.

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