Financing Focus

Mining Gold

Improvements in energy performance boost the bottom line.

During the 140.6-mile Ironman event, competitors can either follow or ignore guidance about the importance of nutrition to maximize their performance. Those who follow this advice have a performance advantage throughout the competition.

Similarly, research from the likes of BDO and NAREIT  finds that Real Estate Investment Trusts are facing performance risks, potential market volatility, and heightened attention from investors after outpacing the Standard & Poor's 500 during  most of 2016.

REIT fund managers can either follow or ignore guidance on the financial opportunity that commercial building energy retrofits offer to maximize earnings and sustain a competitive advantage. Ignoring guidance presents major performance risks.

Consider, for example, how managers who prioritize investments in energy retrofits in the near-term can strengthen their position against potential challenges from activist investors targeting REITs. They can reduce scrutiny from investors following the addition of real estate to the S&P on Aug. 31, 2016.

Simply put, REIT fund managers who implement building energy retrofits across their portfolios will be positioned for greater stability and value. Those who overlook this opportunity will increase the likelihood of underperformance.

Investors should strongly encourage managers to prioritize energy retrofit investments to improve portfolio performance. According to a 2015 University of Cambridge study, REITs with higher Global Real Estate Sustainability Benchmark scores outperform their peers on their returns in investment.

Improving Performance

In good times and bad, REIT fund managers function as risk managers. As REIT managers assess risk mitigation strategies, energy retrofits should rise to the top of the list because they deliver reliable and compelling returns. Energy retrofits provide REIT managers with the opportunity to increase the value of both individual buildings and entire portfolios.

Since energy costs are a major operating expense for existing buildings - accounting for between 20 to 30 percent of operating budgets - energy use reductions save money to the bottom line. More efficient equipment and operations deliver cost savings and provide a direct boost to a building's net operating income.

In addition, the full value proposition of sustainable building performance is often overlooked. To capture value and avoid falling behind competitors, REIT managers may leverage rating and certification systems such as U.S. Green Building Council's LEED and Energy Star. Receiving these certifications demonstrates the quality of their buildings to current and prospective tenants.

U.S. commercial buildings are estimated to have at least $11 billion of latent value and are ripe for investment. This estimate is based on the $70 billion in untapped U.S. commercial building energy retrofits identified by a 2012 Rockefeller Foundation study and analysis based on SNL Financial, NAREIT, and CoStar data. The Rockefeller study shows REITs account for about 15 percent of the U.S. commercial building stock. This latent value will also grow as building systems age, and REITs expand their reach into commercial properties.

Saving Energy

For investors, energy performance provides a proxy for sound REIT management. Investments in portfolio-wide energy retrofits are an effective approach to mitigate investment performance risks across different market conditions. REIT managers who prioritize energy retrofit investments become more trustworthy stewards of investors' funds. They demonstrate deeper understanding of the full spectrum of value-creation opportunities.

Also, investors value REIT managers that prioritize energy retrofit investments over time to capture strong, predictable returns. These investors will share in the latent multi-billion-dollar prize. The GRESB annual survey offers guidance for what attributes to seek in REIT managers.

The pace of new solutions is accelerating the transition to high-performance buildings. REITs investors should ask themselves a simple question: Is the goal to lead the pack or simply hang on at the back as the pace quickens?

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Iain Campbell

Iain Campbell is managing director at Rocky Mountain  Institute and a participant in Ironman competitions. Contact him at


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