Why Top-Performing REITs Look Beyond Physical Assets

By Elizabeth DeHoff

Real estate investment trusts (REITs) are often viewed by investors as the collection of assets in their portfolio: shopping centers, multifamily housing, office buildings, data centers and the like. However, as the REIT industry has evolved and become more institutional, management and overall business platforms have become important differentiators between good and great companies. The cyclical nature of the real estate market means asset values might win the day in good times, but when the market falters – as it inevitably does – it is management, business platform and a steady leadership hand that save the day. REITs that lose sight of those almost inevitably underperform.

This was the topic of the first session of NAREIT’s 10th annual HR Forum, titled “Creating Value in the Real Estate Business Organization.” The roundtable, moderated by Terra Search Partners Founder & Managing Partner Matt Slepin, discussed the value of the business platform, particularly in terms of human capital and corporate culture, and tried to articulate the impact of these factors on long-term performance.

When the modern REIT era began in the early 1990s, it touched off a fundamental shift from collection-of-assets to ongoing business enterprises. “The ability to create career paths and create sustainable organizations transformed the real estate industry,” said Camden Property Trust President Keith Oden.

As a result, REITs needed to build workplaces people wanted to be part of as well as businesses that operated efficiently and strategically. Those qualities can be difficult to measure, but many investors look at REITs’ financial metrics for clues, particularly net operating income and funds from operations.

Thomas Toomey, president and CEO of UDR Inc., said his company’s cash flow margin tells investors all they need to know, especially when compared to industry averages. “We believe operations is a value creator, and it’s driven by culture and people and the tools you give them,” Toomey said. “Close to 10% of our value is actually the way we conduct our business.”

The importance of building good corporate culture extends far beyond headquarters, especially for REITs that employ on-site property managers scattered across geographically diverse portfolios. Toomey says it’s vital to ensure that every employee – from the C-suite to the maintenance staff – feels like a valued member of the team.

Oden believes human capital matters as much as any other asset, and points to Camden Property Trust’s lengthy tenure on the Fortune 100 “Best Companies to Work For” list – much of it in the top 10 – as proof of Camden’s dedication to investing in employees. “We’re committed to promotions from within,” Oden said. “Tenured employees stay because they value the culture.“

Once a good corporate culture is established, the panelists agreed REITs must work hard to maintain it. Oden said his company relies on annual surveys conducted by an outside firm to gauge employee sentiment and solicit ideas for improvement. Executives zero in on three or four of the most practical suggestions each year and work to implement them.

Dedicated employees, a positive culture and a solid business plan are indispensable to REIT success. The selection of the physical assets in a REIT will always be important, but the development of a world-class operating platform and managing the people who work for a REIT are critical business differentiators that can never be overlooked.