For some time now you may have heard CRE consultants and service/technology providers refer to corporate real estate as the “2nd or 3rd largest asset on a company’s balance sheet” to justify the need for value-add advisory services, energy efficiency initiatives or investment in technology.
But, until now, have you ever really looked at the details? The facts will alarm you and quite likely challenge you to take a closer look at your own assets to see how they might be managed more effectively.
Below is a chart highlighting the real estate value of 11 companies in the “Fortune 500” (#1 – #10 and #500 as a comparison) listing them based on the percentage of net assets (less depreciation and operating expense) of their ‘Property Plant and Equipment’ (PP&E) on total assets. The source information was gathered through an informal review of the balance sheets of these company’s 10-K SEC filings for 2009.
|FORTUNE 500 – Ranking Based on Percentage of Net Property Plant and Equipment Assets|
|Fortune 500 Ranking* All Figures Stated in Millions+|
|Rank*||Company||Property, Plant and Equipment (PP&E)|
|Revenue+||Profit+||TL Assets+||% of Total||Net PP&E+||MSF|
|5||Bank of America||$150,450||$6,276||$2,223,299||0.70%||$15,500||125.60|
|9||J.P. Morgan Chase||$115,632||$11,728||$2,031,989||0.55%||$11,118||80.60|
While real estate does not formally appear in the financial statements as its own line item, it is included in the PP&E section which refers to fixed assets, also known as non-current assets (financial institutions refer to PP&E as Premises). These are items of value which the organization has bought and will use for an extended period of time. PP&E fixed assets normally include: land and buildings; motor vehicles; furniture; office equipment; computers; fixtures/fittings; and plant machinery and often receive favorable tax treatment (depreciation allowance) over short-term assets.
Our hypothesis is that a company can create a significant impact to its financial performance and enhance total assets when they:
- Reduce operating expenses through lower occupancy cost initiatives;
- Decrease the size of the CRE portfolio through collocation, space efficiency, use of alternative workplace strategies and dispose of non-core assets; and,
- Gain greater energy efficiency of facilities through effective sustainability initiatives.
In taking a closer look at the featured companies its not too surprising that the three petroleum producers (Chevron, Conoco Phillips and ExxonMobil) have a substantial percentage (58.6, 57.48 and 53.21) due to their reliance on upstream facilities, refineries and retail locations (ExxonMobil cited a portfolio of 27,000).
The #1 Fortune 500 company (ranked by revenue), Wal-Mart, was #2 in our rankings (58.31%) boasting a portfolio of 959 MSF comprised of 4,258 stores in the US and 3,615 stores internationally with plans to add another 715 in 2010. Not only is Wal-Mart the largest US company by revenue but, based on the sheer size and scale of their portfolio of retail locations and distribution centers, they are one of the US’ largest operators of real estate.
Manufacturers (Ford #7 – 12.43%, HP #8 – 9.81% and GE #9 – 8.85%) are heavily reliant on plants, warehouses, and engineering facilities (Ford – 211; HP – 45% owned, 55% leased; and GE – 235 US, 240 Int’l) which have a significant concentration of equipment yet, need to be managed efficiently to maintain high value, low operating costs and less impact on the cost of goods sold.
AT&T also has a heavy reliance on PP&E in providing their wire line (84% of total) and wireless (16%) services. Their PP&E total is made of up of central office equipment (34%); network access lines (32%); furniture, office equipment and vehicles (18%); with land and buildings (11%) making up the balance. Even Fortune’s #500 ranked company, Blockbuster, was in the middle of our pack (16.19%) because they are a retailer with a portfolio made up of 20 MSF and 5,279 properties.
The two banking institutions (Bank of America and JPMorgan Chase) ranked #10 and #11 in our analysis because their total assets are measured in the trillions of dollars based on the amount of bank deposits. While their PP&E percentage of the total is less than 1%, they are each owners and operators of vast portfolios of retail locations (Bank of America has 27,779 locations and 125 MSF) and Class A CBD offices buildings (JPMC 80.6 MSF). In addition, these companies specifically cited ‘occupancy’ in the filings of $4.9B for B of A and $3.6B for JPMC.
While it may be argued that the traditional definition of corporate real estate is “real property held and/or used by a business enterprise or organization for its own operational purposes and typically includes a corporate headquarters and a number of branch offices, and perhaps also various manufacturing and retail sites” and is only a portion of plant, property and equipment, it is vitally important to manage the assets in the most cost effective and efficient manner possible as they house the critical operations of their organizations as well as serve as the office components essential for the productivity of the human capital who is charged to run the overall enterprises.
Once organizations realize the significant investment they’ve made in their real estate portfolio as a component of the overall PP&E it’s a fairly easy stretch to recognize that a methodical, technological and strategic approach needs to be applied to carefully manage an asset class that can have a significant impact on their total assets and, in turn, financial performance.
Moreover, the ROI justification for advisory services, cost reduction initiatives and information system investments may be an easier call when you consider how they can materially impact the value of the CRE portfolio.
We’d be interested to know, “how does your organization view strategically managing corporate real estate as a component of PP&E and a vital part of your company’s success?”