Improved the Performance of a Large U.S. Pension Fund’s CRE Portfolio Through Valuation, Appraisal Review, Consulting and Independent Fiduciary Services

In 2009, amid a swiftly shifting real estate landscape, a leading U.S. pension fund decided it needed an independent valuation and consulting firm to review its commercial real estate portfolio.

The fund owned office, industrial, retail, apartment and other properties, including both separate accounts and joint venture (JV) assets. The goal was to find a third party to provide checks and balances, and verify whether the valuations reported to the fund were reasonable or not compared to similar assets in same markets. In addition, the fund sought a technology and process solution that would provide both a 30,000-foot view of its portfolio and the granular detail to make meaningful asset-level decisions. Ultimately, the fund wanted to achieve greater transparency to drive value and improve reporting to its investors.

Solution & Outcome

A faster, smarter, data-driven solution to manage a global real estate portfolio.

In 2009, the pension fund awarded the valuation management business to SitusAMC, which began work in the first quarter on 88 separate account assets valued at $4.1 billion. Pleased with the early results, the client quickly expanded the engagement to include its joint venture assets, which reflected an additional 307 properties with a combined gross asset value of $18.8 billion.

SitusAMC also recommended the fund increase the frequency of its external appraisals, from once every three years to an annual process. SitusAMC reviews the internal valuations that are done by the investment managers the other three quarters of the year. This process provides a better handle on both the assets and their markets, and ensures timely identification of issues that could impact values. Meanwhile, SitusAMC has leveraged its internal teams to keep pace with the fund’s dynamic and rapid investment activity, which included 796 acquisitions and 876 dispositions between 2010 and 2019. As of Q2 2019, the assignment had grown to $40.5B in gross asset value and 445 assets, and SitusAMC now presents quarterly results to the fund on the real estate portfolio performance.

In 2012, SitusAMC moved the client’s assets to its online Valuation Management System (VMS). The proprietary tool allows investment managers who use Argus to populate their executive summaries with a range of different valuation assumptions, such as cash flows and investment rates, with the click of a button. In addition, VMS automatically imports other key data, such as market leasing assumptions used for rents, vacancies, tenant improvement assumptions and projected capital expenses, saving significant time and eliminating the possibility of human error from manual key-entries. SitusAMC also reviews the property debt that investment managers report to VMS to calculate the fund’s overall equity position. During the engagement, the pension fund began investing in real estate assets outside the U.S., requiring SitusAMC to retrofit the VMS to accommodate foreign currencies and report all values in U.S. dollars based on exchange rates on the last date of the quarter.

The client renewed the engagement in 2015 with additional consulting services. Optimizing the VMS tool, SitusAMC analysts can build more than a dozen custom and ad hoc reports that give fund managers an instant snapshot of assets and empower them to strategically plan and benchmark against investment objectives. For example, SitusAMC creating a weighting tool that allows the client to project capital available to invest over the next four to six quarters based on assets it plans to acquire and sell. Fund managers can visualize the percentage breakdown of each property type compared to their benchmark allocation, and quickly calculate the impact of a billion-dollar office acquisition on the entire portfolio.

In addition, SitusAMC acts as an independent fiduciary, reviewing buyouts of assets from joint ventures that the fund wants to retain in its portfolio. SitusAMC examines the values and partnership agreements to calculate incentive fee payments at buyout, identifying errors that have saved the pension fund hundreds of thousands of dollars. SitusAMC also assists with annual external audits, building a portal in the VMS that allows auditors to select a specific number of assets to review from a particular time period.