Metrics for Responsible Property Investing

Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio 2009 ULI Fall Council Forum RPI Metrics Panel Webinar Presentation October 28, 2009 (9:00 AM PST) Jean Rogers, Arup Lisa Michelle Galley, Galley Eco Capital David Wood, Responsible Property Investing Center, Boston College

Agenda • What is responsible property investing (RPI) • Metrics imperative • Background to the RPI Council project • Metrics and structure • Use cases • Road test • The Panel • The Paper

The Big Picture for Real Estate • National economic downturn • Energy (in) security • Weakened consumer fundamentals • Climate response

Responsible Property Investing Responsible Property Investing facilitates a more comprehensive engagement between investors, their properties, and tenants by “taking into account social, ethical, and environmental factors in the selection, retention and realization of investment, and the responsible use of rights (…) that are attached to such investments1.” _________________________ 1 Mansley, definition of Responsible Property Investing

Ten elements of responsible property investing • Energy Conservation • Environmental Protection • Voluntary Certifications • Public Transport Oriented Developments • Urban Revitalization and Adaptability • Health and Safety • Worker Well-Being • Corporate Citizenship • Social Equity and Community Development • Local Citizenship Source: UNEP-FI Property Working Group

Context for Responsible Property Investing • State of the industry • Need for • Other metrics efforts and how this ties in

Why RPI metrics? Institutional Fund Acquisition Asset Divestiture investors managers Development management What makes this What is the How are assets Is it time to capture fund manager sustainability performing in terms value from Commit to “green”? performance of this of sustainability? Is sustainable assets in responsible investment? performance the marketplace? property How is this fund improving as a investment manager seizing Does this investment Will value decline whole? opportunities and respond to risks and through increased addressing opportunities? What opportunities regulation and other challenges, while have been tapped? drivers in the How can the Will this acquisition meeting fiduciary market? commitment be improve the What risks remain? duty? demonstrated? sustainability Will net zero Which asset classes performance of the buildings render outperform on portfolio as a whole, some assets sustainability? or require additional obsolete? investment? Can traditional financial metrics answer these questions?

Background to the RPI Council Metrics Project • ULI Fall 2008 Meeting called for Metrics Research – Define RPI in and of itself (How is a RPI portfolio different?) – Provide tangible, real world examples of specific metrics – Support investors practicing RPI – Link to Value! • Lisa, Jean and David spearheaded effort • KPIs research – current reporting practices • Spring 2009 – Tentative Proposed Metrics • Road testing – case studies • Presentation at ULI Fall 2009 Meeting • Paper – Draft for Comment

Metrics in Practice • Many property companies are implementing sustainability initiatives on ad-hoc or rolling basis to existing building stock • Few are tracking results at portfolio scale and fewer are reporting back on this performance • Focus for many is on promoting 1-2 showcase green buildings • Investors and stakeholders are unable to identify: – How green is the overall portfolio – Is sustainability performance of the portfolio improving over time? – How does the portfolio’s green performance compare to others (benchmarking)? – What are the sustainability risks of this portfolio?

Defining new performance metrics Key requirements for new RPI metrics: “There is no set of • Must respond to 10 principles, covering broadly accepted environmental and social aspects metrics for evaluating the • Be flexible, recognizing wide range of RPI projects commitment of real • Enable analysis of a single acquisition or a whole estate investors to portfolio principles of RPI.” • Address risks and opportunities Pivo & McNamara, • Focus on high impact, KEY performance indicators International Real Estate Review, 2005 • Minimize burden of data collection and use proxies for performance where applicable • Facilitate tracking and benchmarking performance over time, normalizing results where needed • Be scalable, straightforward and simple

Structure of Metrics • 2 types of KPIs: Acquisition & Portfolio – One building vs. many – Screening vs. monitoring • Issues covered: – Energy Conservation and Carbon Management – Environmental Protection – Urban Revitalization and Adaptability – Smart Growth and Transit Oriented Development – Health and Safety – Worker and Tenant Well Being – Social Equity and Community Development – Local Citizenship – Voluntary Certification – Governance • Characterization data: used to normalize results

Impact on investment return Revenues Operating Expenditures Financing & Value Increase or improvement in: Decrease in: Improvement in: • Tenant retention/renewal rate • Utility expenditure • Market appeal • Vacancy rate • Risk from price volatility • Sales premium • Tenant satisfaction • Maintenance expenditure • Cap rate • Market demand • Insurance costs • Ability to attract capital • Favorable lease terms • Risk profile • Rental premiums Reduction in: • Asset obsolescence and devaluation

From one showcase green building

…to a high performance portfolio of green buildings Exceeding Targets Making Progress

Road Test • Study participants Acquisition – BACFOF Portfolio Management – TIAA-CREF • Review metrics for relevance • Attempt to use in the “real world” • Focus on “doing” and insights: ease of use, materiality, link to value, impact on investment strategy & process • “Must have”, “nice to have”, “don’t go there” • Given 2 weeks and an excel spreadsheet with over 50 metrics to start

What we learned about the metrics • Less is more • Social indicators static (critical during acquisition) • Environmental indicators dynamic (improve over time) • Acquisition and management practices together shape the quality of the RPI portfolio over time • Links to value essential to offset burden of reporting • Metrics help prioritize investments • Help is available

Benefits of RPI metrics Enables investors and property owners to: • Demonstrate fiduciary responsibility • Track performance trends over time • Benchmark performance by asset type and region • Identify outliers: weak performers and best practices • Identify risk exposure at portfolio level • Evaluate links between sustainable performance and financial returns • Assess impact of RPI initiatives at portfolio level and prioritize investments • Inform future acquisition decisions • Improve transparency • Demonstrate real estate-tailored commitment to social responsibility

The RPI metrics panel - November 4, 2009 • David Wood, Director, Responsible Property Investment Center, Boston College • Lisa Michelle Galley, Managing Principal, Galley Eco Capital • Jean Rogers, Principal, Arup • Nicholas Stolatis, Director, Strategic Initiatives, TIAA-CREF • Scott Zengel, Vice President, Bay Area Council Family of Funds

The RPI Metrics Paper – Developing and Maintaining a High Performance Portfolio • Authors: David Wood, Lisa Galley, and Jean Rogers • Draft for Comment available at ULI Fall Meeting on November 4, 2009 • Volatile real estate investment environment • Risks and opportunities • Current practices in reporting • New metrics for a new era – Proposed KPIs • Portfolio characterization • Acquisition, portfolio management, and reporting • Implementation • Case studies

Metrics for Responsible Property Investing

by Galley Eco Capital on Oct 30, 2009

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Metrics for Responsible Property Investing — Presentation Transcript