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REIT Makes Efficiency Its Business
When an organization has an energy budget that runs to tens of millions of dollars, saving a couple thousand dollars may not seem like a big deal. But when those savings can be multiplied across a large portfolio the results can have a significant impact on the bottom line.
A case in point is American Financial Realty Trust, known as AFR. By adopting a broad-based strategy that includes an energy command center with a Web-based energy management system, the real estate investment trust (REIT) has slashed nearly $3 million from an energy budget that runs $60 to $70 million a year. That’s roughly a 5 percent savings, a gain achieved in about a year and a half.
Savings like that are all the more impressive given AFR’s portfolio. AFR’s niche is buying branch banks in bulk. What drives the strategy is the ongoing stream of mergers and consolidations in the industry. When banks merge, many branch locations become redundant and are closed. It is these “dark” branches that AFR will buy in bulk.
When AFR first began as a REIT about a decade ago, some feared that the firm’s practice of buying excess bank properties was unwise. At the time, Internet banking was just taking off, and investors thought online banking would replace traditional banks.
“People thought I was a lunatic for buying so many dark branches at once,” says Nick Schorsch, co-founder of AFR.
But the move was a wise one. AFR’s success attracted investors, and the company’s public offering in June 2003 was the second-largest IPO of the year at $804 million.
AFR leases the branch banks it buys to local or regional banks interested in increasing their geographic footprint. The REIT also leases some branches back to the bank from which they were purchased.
This system of re-leasing works because banks get a better ROI by lending their cash rather than having it locked up in real property. So it is better for a banker’s balance sheet — and gives banks greater operational flexibility — when they lease space rather than own it outright.
Because AFR’s annual energy expense is $60 million to $70 million — equivalent to nearly one-quarter of the company’s operating budget — energy became a target for saving money in a portfolio with properties spread through 39 states and the District of Columbia and over 300 markets. According to year-end 2006 financial statements, AFR’s portfolio consisted of 939 bank branches and 424 other buildings.
AFR instituted a focus on energy more than a year and a half ago, and started its Energy Command Center at the organization’s Jenkintown, Penn., headquarters in 2006. Since then, the energy effort has become a key responsibility of Daniel J. DeCarlo and Richard L. Eiseman, both vice presidents of asset management. DeCarlo and Eiseman are responsible for overseeing the performance of large portfolios of real estate and report to Fred Arena, senior vice president of asset management.
The first order of business for the group is the low-hanging fruit, retrofits and organizational changes that would yield the greatest savings. That means the facility team needs to know their buildings’ operational profiles intimately.
“As a real estate investment trust with a geographically and asset-diverse portfolio, operating cost-effectively is our responsibility to investors,” says De Carlo.
“First thing we do is a survey of the property, a triage,” he says. “We tour the building, looking for problems or potential problems.”
The portfolio ranges from small properties to large buildings. The largest buildings in AFR’s portfolio traditionally have their own in-house facility staffs, so those buildings are less apt to be hemorrhaging energy. AFR has found that the small, remote facilities with antiquated equipment and no permanent facilities staff often have the worst energy expenditures on a square-foot basis.
“Get your finger on the pulse of your properties, and selectively target a group of similar ones,” Eiseman says.
By grouping similar buildings, AFR can compare them to find the ones that are the biggest energy wasters. For them, AFR has begun to employ remotely controlled, Web-enabled data-monitoring devices.
Some of the energy wasters were surprising.
“This is particularly true for branch banks with large parking lots,” Eiseman says. “In some instances, parking lot lights have consumed up to 15 percent of the total energy bill for individual properties.”
Antiquated thermostats are another common problem. “We have buildings that are 100 years old and don’t have programmable thermostats,” he says.
AFR began controlling thermostat programming and scheduling in June 2006. Their energy management system (EMS) allows operating schedules and setpoints to be programmed remotely via the Internet. The company’s Energy Command Center operates the system.
The remote capabilities of the system are essential in a portfolio that contains so many buildings. Although individual facilities may be small, savings add up.
Controls in Action
Gulfgate is a 12,600-square-foot building in Sarasota, Fla. A system controls three thermostats responsible for the HVAC equipment in the two-story, multitenant bank branch. For the partial year of operation — approximately three months — the EMS contributed to an 11.4 percent reduction in electric consumption during 2006, for a savings of $2,308.
It’s a similar story at Baypoint, a 16,000 square foot building in Miami that is also a two-story, multitenant bank building. From its Energy Command Center, AFR controls four thermostats in two suites. Precise scheduling and setpoint control, for the partial year of operation — approximately three months — has contributed to an 11.6 percent reduction in electric consumption during 2006 valued at $1,290.
AFR is using the EMS system in 54 of its properties. DeCarlo says that the ability to control HVAC schedules remotely has allowed AFR to match the building’s operating hours to the hours specified in each tenant’s individual lease. If a tenant desires a conditioned space outside of the lease hours, they need to submit a request to the Energy Command Center and are billed back for any service beyond what their contract calls for.
Tackling Utility Bills
To control energy costs, AFR pays close attention to utility bills, looking for anomalies. AFR uses a bill-paying service that helps the organization track costs per utility — usually water, electric and gas costs — on a per-square-foot basis.
AFR has had some success with this method, particularly with water bills. By monitoring the usage every month in targeted groups of buildings, the company identified 91 water leaks in 2006 for a total savings of $139,402.
The facility team and their vendors take red pens to other portions of a utility bill, too. One favorite target is the deposits utility providers require.
The bill-paying service will negotiate with utilities to get deposits back or avoid them altogether. Through negotiations with utilities, AFR was able to save approximately $400,000 in 2006.
Because of the rate of property transfer for AFR, utility deposits can be a particular challenge. The company has found it to be most effective to speak with the utility and either negotiate a contract in which no deposit is required, or negotiate the return of deposits after the customer meets the utilities’ condition for release of the deposit — usually a specified period of months without missed or late payments.
It’s also important to pay close attention to utility rates.
By watching those rates and comparing them to future rates published by utilities, AFR has managed to lock in utility rates at beneficial prices.
One example comes from ComEd’s Illinois territory. New rates published last June exposed 14 AFR sites to increases of approximately 20 percent.
AFR then solicited supply offers from ComEd’s competitors in the territory, and locked in rates from Mid-American Energy, which led to a roughly two percent increase in energy costs. The difference between the two contracts ended up as an additional $303,000 on AFR’s bottom line.
The Value of the Team
DeCarlo says human capital at AFR has been as important as the technology to save energy.
AFR’s Energy Command Center group holds weekly meetings. The company has learned that there are two kinds of people most valuable to the group: Those who know what they do not know and those who see what others are missing, and who can help the facility executives fill in the blanks.
“Human capital is vitally important,” DeCarlo says.
Choosing the Right Tools
Since energy management became a concern for AFR, the company has learned some lessons about using vendors.
“You’ve got to select the right energy management system,” says Greg Frazier, AFR’s former vice president of operations. “Look out for vendors that don’t have a history behind them.
Because firms can overpromise and underdeliver, Frazier recommends that if facility executives decide to choose a lesser-known vendor, they ask for credit and performance references from former or current clients.
He also recommends that if proprietary technology is used, the source code for the technology should be put into an escrow account before the work contract is signed.
Frazier also recommends non-proprietary EMS systems. “Find off-the-shelf products that don’t require special language or coding and therefore reduce dependency upon a specific vendor,” he says.
Loren Snyder is a contributing editor for Building Operating Management. He was formerly managing editor for the magazine.
Finding the Energy Wasters
Among AFR’s portfolio, facility staff at the Energy Command Center has found that there are three types of energy hogs: