Asset Management: Financial Analysis - Part 5

As has been described in the various articles in this ‘asset management’ series, there are a number of moving parts in multifamily investing. All of these parts and pieces ultimately affect the bottom line on which a project’s success depends. Strong asset management requires deep financial acumen in order to ensure the various decisions have a positive impact on the profit and loss (P&L) for the property. In this article, we will cover how asset managers must do thorough financial analysis especially in areas of Revenue Optimization and Expense Management and how reviewing the monthly reports is crucial to success. 

Revenue Optimization:

The business plan for a property will lay out the types of strategies to employ on the property such as rental increases on new rehabs, renewal increases, other income initiatives like covered parking, etc. The asset manager not only has to ensure that operational activities are getting done to support these strategies, but also must ensure the results are monitored to hit the projections. Some of the key areas of optimizing revenue include:

• Ensuring that the planned # unit rehabs are being completed monthly
• Managing renovation budget / scope to hit targeted revenue
• Reviewing new rents being achieved, concessions being offered, etc.
• Managing leases and retention based on expiration dates, seasonality, lease length, etc. 
• Analyzing rent roll to identify trends, loss-to-lease, discounts, rental growth, etc.
• Reviewing market surveys to ensure plan in-line with competitors

Expense Management:

Managing expenses is a key part of any business. There is usually a balance that needs to be found with expenses being too thin and constricting growth or too liberal and impacting profits. Asset managers must ensure that expenses are monitored closely as these expenses can get very large quickly if they are not managed correctly. Key areas that need to be considered are:

• Reviewing AP Aging reports regularly
• Reviewing payroll to ensure correct staffing mix, overtime not excessive, etc.
• Reviewing work orders to determine if any property-wide R&M issues
• Reviewing utilities and bill-back processes
• Marketing expense effectiveness in generating traffic/leases
• Managing non-controllable costs such as property taxes and insurance
• Reviewing invoices for late and erroneous fees

Reviewing of Financial Reports:

The financial statements of a property are typically managed and prepared by the management company, whether it is 3rd party or internal to ownership. Though a lot of emphasis is placed on the Trailing 12 month P&L budget to actuals, there are a lot of other statements that comprise a full reporting package and includes the Balance Sheet, Cash Flow Statement, Aging Reports, General Ledger, Capital Improvements Reports, etc. 

Asset managers should be able to thoroughly review the financial statements and identify corrections required to the books and also conduct financial analysis that enables them to make / change decisions to hit projections. Some key areas of focus includes: 

• Budget to actual reviews on all major P&L line items
• Trending analysis on expense line items and revenue trends including delinquency, concessions, loss-to-lease, net rental growth, other income growth, etc.
• A/P and A/R Aging Analysis to review outstanding payments and receipts
• Working capital analysis to ensure cash is managed well to pay recurring monthly bills and debt service
• Managing CapEx Budget and readjusting as needed
• Reviewing below the line non-operating expenses or capital expenditures that are unplanned and can significantly eat into net cash flows
• Assessing whether accruals for large items such as property taxes and insurance are adequate as these can cause major cash flow issues if not properly adjusted
• Conducting lender escrows and reserves analysis
• Reforecasting P&L if needed to ensure projections are met
• Developing a detailed cash flow analysis that supports investor distributions without compromising future cash needs of property

Summary:

The ability to do proper financial analysis is a critical component of an asset manager’s role. The stronger asset managers work closely with the accounting staff preparing the books to set expectations upfront. Usually, upon takeover of a property there are a lot of adjustments to the books but once expectations are set then the review process generally gets better and asset managers can focus on interpreting the results and make decisions rather than on clean-up and adjustments. Asset manager's that can quickly identify trends and make adjustments based on financial analysis can positively impact the bottom line for a property and its investors.

About the Author:

Shane Thomas is co-founder of Catalyst Equity Partners, a Texas-based private equity firm focused on helping busy professionals earn double digit returns through investing in apartments. To learn more, visit www.catequity.com and connect with Shane on LinkedIn and Facebook