Making a Habit of Best Practice
Keystone Asset Management Finds Solutions in Every Real Estate Scenario.
By Carole VanSickle Ellis
Keystone Asset Management has been on the path to big things from its very inception. Founded in 1995 in Philadelphia, Pennsylvania, Keystone started out, as CEO Ryan Hennessy describes it, as “a real estate company in ‘Philly’ handling distressed bank-owned assets for lenders including Fannie Mae, Freddie Mac, HUD, and various financial institutions.” Keystone is a family company; Hennessy’s mother, Jane Hennessy, and a then-partner realized in the mid-1990s that there was a need in the market for an asset management company specializing in distressed assets and REO (real estate owned) properties. Soon, business was booming, and the two added a valuation unit to handle broker price opinions and other facets of valuation. “By 1997, they had a national platform,” Hennessy said proudly.
From there, the company continued to grow and expand to meet investor needs. Today, Keystone offers a vast range of services from property valuation to REO asset management to property preservation to property tax consulting and insurance. “There are so many things that go into a successful plan for each asset in a portfolio. As investors encounter diverse scenarios across their portfolio, we can help them formulate best practices, commonsense solutions, asset protection strategies, and even brand protection and building processes,” explained Jim Jacquelin, the company’s Director of Operations. The company combines decades of experience and deep-dive economic analytics to create custom management strategies for large real estate portfolios.
“Effective, profitable asset management requires constant monitoring and evaluation of assets, strategies, and analytics. Our service and quality remain the same, but we adapt to our asset owners to reprioritize strategically and analytically to meet their specific goals and needs,” Hennessy said. Keystone employs a vast array of experts in a wide variety of fields including field services, performance and execution and an economic arm. This combination approach has served the company well, particularly since the end of the Great Recession when institutional investors entered the housing market in full force and began dealing with the kaleidoscopic and intricate details of single-family residential real estate. As the face of institutional investing and high-volume portfolio owners has changed over the past decade, Keystone has evolved to keep up with the changing and diverse needs of these major real estate players.
Fitting All the Pieces Together
Because Keystone is a national company catering to clients with vast geographic spread in their portfolios, nearly every service sector within the corporate structure is equipped to identify bellwether signs of a changing economy and respond appropriately. However, Hennessy said, that positioning, while starkly apparent today, has been serving Keystone clients well for decades.
“We know that markets are cyclical, and certain types of investor behavior in certain sectors are also predictable. Combining those two facets of knowledge gives us a head start on the rest of the field when it comes to adjusting asset strategy,” Hennessy said. By working closely with clients to identify what type of investment strategies are most comfortable for them and what types of assets they want to leverage, the company can create the best position for each asset in the portfolio. For example, when a new “file” or asset enters the process, occupancy is the first piece of the equation. This is particularly important at present when the COVID-19 pandemic creates unusual issues with tenancy, leasing, rent payments, and evictions.
“There are a lot of factors that go into working on a property with a tenant to create a positive outcome for everyone involved,” said Jacquelin. “Even if there is no one residing in the property, there are certain liabilities we protect against like securing the property against the elements, preventing break-ins and squatting, and preventing anyone from getting hurt while on the property.” Even before COVID-19, each state and local government had different rules, laws, and codes for these issues. Failing to address the logistical “fine print” could be catastrophic from both a legal and financial standpoint, particularly for high-volume investors who might be particularly attractive targets for litigation and bad publicity. “We have to handle all of those angles before we dive into figuring out what strategy will be the best fit for that property,” Jacquelin said.
Getting in the Best Position for 2020 and 2021
Thanks to Keystone’s extensive work with high-volume portfolios and owners with a diverse set of goals, Hennessy has been able to identify certain investing characteristics and types of investor over the years. Embracing certain strategic tendencies can position any investor, regardless of the volume of properties they currently own, in a prime position to emerge from the current economic downturn better off than they went in.
“You must know who you are as a real estate investor and be flexible,” Hennessy said. “Does your strategy dictate your portfolio or, through pool acquisition, does your portfolio dictate your strategy?” In 2020 and 2021, the latter type may have an innate advantage over the former due to rising competition in the single-family marketplace. “We have a unique ability to aggregate critical data points surrounding the four core inputs on asset decisioning: geography, occupancy, valuation and intangibles—title, HOA, taxes. Ultimately, correctly aggregating data on these inputs paint a true picture on management philosophy and optimal disposition paths,” Hennessy added.
“If you are the type to strategically acquire a specific type of property, then you should take a close look at your ‘buy boxes’ to see how they are affecting your long-term goals right now,” Hennessy said. “It might make sense to stretch the box or diversify a little bit.” On the other hand, most institutional investors tend to be acquirers first and strategize second, mainly because they tend to acquire in bulk. In this case, the portfolio itself will dictate strategy and, ideally, each asset will have a unique strategy that makes the most of that asset while protecting the interests of the new owner from every angle.
“Institutional players tend to look at things at a much larger perspective. When they buy, they get a ‘mixed bag’ of assets that need to be evaluated,” Hennessy said. Keystone’s curation of those properties on a granular level is the key to understanding how the asset manager serves its clients. “While it’s imperative from a liability standpoint to have a process to pay property taxes, and the homeowners’ association, prevent code violations and address safety issues, managers must approach this with a proceeds perspective to ensure that the asset holds adequate value or potential to incur carrying costs that come with longer holding times,” he added.
Managing Market Analysis on a Micro Level
If an investor is going to “go big” in real estate but also bring in the kind of “micro-level management” Hennessy and Jacquelin describe as essential to effective asset management, that investor is going to require some data analysis along the way. While Jacquelin and Hennessy both have teams in place for this, they also look to regional, trusted parties for insight into national and local trends. Stephanie Mclane, who serves as the CEO of AREMCO, Inc., a real estate management company specializing in mortgage default services, including property preservation, is one such resource. Property preservation is a prime industry where identifying early signs of shifting consumer preferences and industry trends are key to forecast and projections because it is literally the business dealing with the aftermath of buyer and seller behaviors. Mclane’s work in field services and the REO market has enabled her to observe current market evolutions up close.
“One of the major trends we are seeing in 2020 is that big servicing shops and private equity firms are buying, investing in improvements and holding their real estate assets,” Mclane said. Historically, these institutional investors have preferred to liquidate large REO portfolios; most investors will be familiar with the phrase “banks do not want to own homes” from educational materials dating from the mid-2000s onward. However, Mclane said, that preference has been changing.
“The institutional investors are holding those REO assets and turning them into rentals. In the past, you expected the REO market to boom after a downturn or crisis. This time, a lot of those packages that would have been sold off are being set up as rental properties,” she said.
The ongoing wave of mortgage defaults and coronavirus-related moratoriums will likely compound this trend. Although most analysts agree there will not be a “foreclosure tsunami” like the nation experienced during the housing crisis of the mid-2000s thanks to the massive amount of home equity that has built up in the market, housing acquisitions are likely to trend toward bulk-buying when those properties that go into delinquency or foreclosure are finally released in 2021 or beyond.
“There are a lot more properties in default right now than there have been in the recent past. The amount of properties that are officially in default or in foreclosure nationwide could skyrocket when the moratoriums lift,” Mclane said. She noted that the issue is not just with owner-occupied properties but also tenant-occupied and vacant properties that are not going through the traditional delinquency and foreclosure processes due to COVID-related issues such as court closures and or mandated holds related to the pandemic. “Those properties are the ones most likely to need proper maintenance and management right now and that are not getting it. The investors who ultimately acquire them need a plan for how they will bring them back.”
Mclane also discussed the facts behind what many in the media are describing as an “urban exodus” response to COVID-19 restrictions and lockdowns. “We are seeing populations exit certain areas of the country because they no longer have to go to work in a physical office every day and folks have the freedom to work from home from any location,” she said. “That is affecting the cost of labor that institutional investors pay for property preservation because there is a lot of competition from the retail home-renovation sector right now compounding the issues with rising costs of materials.”
Mclane said institutional investors are working around these issues by looking for markets that are stable, and individual investors can do the same. However, the definition of “stable” has expanded and changed since March of this year. Economies that are likely to remain stable and pandemic-resistant may showcase indicators like a strong military presence in the local economy with the associated federally-budgeted payrolls, commercial properties with paying tenants in place, and industries active in essential services or that can keep employees both safe and employed while there is still risk of COVID-19 infection.
“A lot of people do not know that a great indicator about the stability of a local economy is whether or not mom-and-pop businesses are open. Are the retail stores and restaurants still operating? If you start seeing those shops shut down, something is making the market unstable,” Mclane said.
Real Estate Strategists at Heart
At the end of the day, Hennessy said, Keystone exists to help clients make the most of their assets. “We are really real estate strategists at heart,” he explained. “We have the ability to execute on multiple levels but remain enough of a boutique firm that we can still examine a group of assets and refine a strategy to fit each one—all while protecting the client’s interests.” This frees up investors to focus on acquiring more properties and assets for their portfolios, relying on the asset management service to help convert those properties, which are often distressed, into productive, functional investments.
“We offer diverse perspective on your portfolio,” Hennessy concluded. “We’re always looking for that optimal path for each piece of real estate.”
Sidebar 1:
Keystone Profile
Founded: 1995
Awards: Philadelphia Business Journal’s Top 25 Businesses
Diversity Pledge: Keystone’s corporate diversity statement includes a pledge to promote “the inclusion and utilization of minority, women, disadvantaged, and small-business enterprises (MWDSBEs), as well as veteran-owned businesses and service-disabled veteran-owned businesses.
Technology: Keystone uses a proprietary operating platform to provide an integrated, secure platform for all users to manage diverse workflow with situational flexibility. The company continues to invest in its web-based technology to create an absolute record of services and workflow within a portfolio.
Sidebar 2:
AREMCO Profile
Founded: 2018
About Us: AREMCO was founded by mortgage default industry and real estate experts with over 50 years combined experience to partner with the industry to engage in providing solutions to our clients to complement their growth and future success.
Our Pledge: Our customers are our partners. We conscientiously work with them to achieve the highest quality results.
Technology: AREMCO uses a data-driven operating platform with integrated application technology to assist clients with preservation, inspection and various default servicing needs, creating unparalleled optics and vantage points for clients and their portfolio.
Sidebar 3:
Looking at Risk from Every Angle
When an investor acquires a distressed asset, there are usually unavoidable risks that come with that process. For example, in many states you cannot enter an inhabited property prior to acquisition even if the property comes with a tenant. Once the transaction has concluded, the investor must figure out how to work with everyone still associated with the property—possibly lien holders and residents—to put the investment in a position to generate the best results possible. That is where Keystone comes in, CEO Ryan Hennessy explained.
“You’re responsible for a lot of things when you acquire any asset. There might be tax delinquencies or title issues. You may know there is upside but be unable to get inside to determine just how you will access that upside. In some cases, you may have to go through an extensive eviction timeline. Every one of those risk factors adds uncertainty to the equation,” he said.
Hennessy said that for Keystone clients, who tend to operate on a massive scale, there is a point at which the risk outweighs reward on individual properties, and they opt to sell. Interestingly, that can be the best time for an individual investor to step into the process and acquire the property because, he explained, individual investors tend to have different types of connections and flexibility to ameliorate risks that institutional investors cannot leverage.
“An individual investor can often chip away at different costs and risks that institutional investors would incur if they kept the property,” Hennessy said. “We figure out when it makes sense to ‘roll the dice’ and when someone else would be better suited to do that.”
The same process that Keystone analysts apply when they evaluate individual assets can be applied to market evaluations as well. Institutional investors get “stuck” in their markets sometimes because the gamble associated with moving into a new market, acquiring new contacts, and creating new, customized strategies is just too great. “You can know a market is attractive and comparable to the market in which you are already active and still not be able to make the leap,” Hennessy said. “Sometimes investors just need partners like Keystone to go with them into these markets and help them leverage technology and resources to build a near replica of their operations in the original market.”
