Maximize Real Estate Fund Performance:


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Maximize Real Estate Fund Performance:

  1. 1. Maximize Real Estate Fund Performance: Proactive Management Spurs Profitability and Growth Point of View
  2. 2. Executive Summary: Real Estate Portfolio Managers Face Increased Pressure to Perform Competition for capital in the real estate fund business is fierce, making the pressure to produce returns more intense than ever before. The extraordinary growth of asset management portfolios, opportunity funds and REITS indicates that real estate is an increasingly popular investment vehicle. Real estate companies are finding that antiquated, fragmented information systems and manual reporting processes are woefully inadequate to keep up the pace in this market. In addition, business processes are often inconsistent at the property level, adding to the confusion. This information deficit prevents managers from maximizing returns, threatening fund performance and credibility with investors. The Information Deficit Hampers Performance Without high-quality, detailed information, managers can’t reap the full potential of assets under management, nor can they capitalize on future “best in class” investment opportunities. Worse yet, inaccessible or faulty information raises the risk of non-compliance with industry standards such as NCREIF and AIMR. Manual processes are costly, too: the cost of the time and resources required increases operating expenses and impacts the organization’s ability to meet growth targets. That’s why it’s crucial for fund managers to have ready access to financial and operational information across the portfolio, along with sophisticated analytical capabilities. Integrated information systems and financial analysis software are critical for effectively managing their extensive, diverse portfolios and maintaining competitive advantage. Consistent Processes and Real-Time Information Enhance Returns With real-time access to information and deeper visibility into detail, fund managers have an accurate, in- depth view of asset performance. They can quickly and easily evaluate individual assets or potential acquisitions in terms of the impact on a portfolio, and make strategic decisions regarding the handling of those assets. Standardized processes, accessible information and up-to-date analytical tools help fund managers radically improve their abilities to: • Manage assets and portfolios optimally. • Make better acquisition and disposition decisions. • Capitalize on “best in class” investment opportunities. • Maintain a competitive advantage and attract new capital. To truly maximize portfolio performance, real estate portfolio managers need real-time information and visibility into data across multiple systems. Business processes must be streamlined and made consistent across all operations. Only then can real estate fund managers provide truly effective decisions, consistently improve returns, and attract new capital. People, Processes and Technology Create Value Technology supports integrated information flow and analytical tools, enabling streamlined processes to flow seamlessly across the enterprise. Standard processes and real-time information allow the organization’s people—from fund managers to property managers—to consistently create more value. RealFoundations specializes in helping real estate businesses run better through people, processes and technology. RealFoundations builds targeted real estate fund management solutions to ensure optimum portfolio performance. As a management and technology consultancy focused exclusively on real estate, RealFoundations understands the demands faced by real estate fund managers to perform, and knows how to apply tools and technology to help them meet investor expectations. 1
  3. 3. Introduction: Time for a Change Competition for investor funding is growing in the real estate capital markets, and the ability to maximize portfolio performance and investor returns is critical for continued profitability and growth. Real estate portfolio investments are growing in popularity, which not only attracts new capital but also new competition for that capital. For example, opportunistic real estate funds have raised more than $100 billion in equity commitments since 1990. Real estate is predicted to outperform both stocks and bonds in 2005, with the following forecasted returns: • Opportunistic Real Estate = 15.1% (up from 14.2% in 2004) • Value-Added = 12.9% (up from 12.2% in 2004) • Core Real Estate with Leverage = 11.2% (up from 10.9% in 2004) • Mortgage-Backed Securities = 9.9% (up from 9.5% in 2004) • Commercial Mortgages = 6.8% (up from 6.4% in 2004) The capital markets sector is challenged to maintain rates of return that investors demand while simultaneously meeting accountability and compliance requirements. Real estate managers within the capital market sector have traditionally been resistant to investing in new technology and still lags behind other industries. Portfolios worth billions of dollars are managed using obsolete technologies, manual processes, fragmented data sources, and offline tools for analysis and reporting. And, because this sector is seen as a late adopter of new technology, software vendors have been slow to develop integrated, industry-specific solutions. However, competition in the marketplace is driving the need for streamlined processes and integrated technology—and is changing the direction of real estate portfolio management. Information Deficit = Risk + Opportunity Today, the lack of standardized operational processes and integrated technology is fast becoming a barrier to maintaining and exceeding performance expectations. Analysis and reporting are often carried out with disparate, legacy systems. Information is either unavailable or inconsistent—and the proliferation of manual processes and offline analytical tools used to process it creates further discrepancies. Imagine the impact of this information deficit on a small portfolio of only a few hundred properties. Across this portfolio, each property has its own discrete information system that is not integrated with the corporate system. In addition, every property manager may operate with a unique set of business processes. Once a month, all the property managers extract data from the individual systems at the properties they manage (i.e., balance sheets, income statements, leasing statistics, etc.) and compile it in Microsoft® Excel® spreadsheets or other offline reporting tools. The property managers then submit their manually complied reports to the portfolio manager. The portfolio manager must then manually consolidate the individual reports before portfolio-level reporting and analysis can be performed. Data integrity issues can arise from this data transfer and consolidation process. Furthermore, these manually intensive processes leave little time for quality data analysis, as a majority of the time is spent on compiling the data for reporting purposes. And, because the time needed to perform all these manual processes adds up, quarterly reports are often not finished for publication until the next quarter. 2
  4. 4. Now imagine the cumulative effect of all these manual processes on a real estate investment fund holding multiple portfolios and a few thousand properties. Under these circumstances, portfolio managers are restricted in their ability to make decisions that impact the performance of the portfolio. They have little or no visibility into the performance of individual assets. The information they do get is old before they get it, and is not consistent across properties. In addition, relying on manual reports pulled from so many disparate systems makes it difficult to comply with NCREIF and AIMR standards. "As real estate managers and advisors But, with standardized processes and integrated technology solutions to support them, portfolio managers have access to real-time activity and for the nation's largest corporations, data (both financial and operational) at the underlying property level as well as at the portfolio level—and any defined levels in between. This we have a responsibility to ensure allows portfolio managers to proactively capitalize on opportunities that that our clients' investments are not optimize the performance of individual assets and the portfolio as a whole. only managed profitably, but also managed intelligently," says the The integration of people, process, and technology promotes operational efficiency and provides detailed, real-time visibility into portfolio assets. managing director of asset services The synergy of these three components allows portfolio managers to for a global real estate brokerage and directly influence the performance of assets, increase profitability, and attract additional capital. services firm. The Cost of the Information Deficit: Time Is Money Unlike mutual fund managers, real estate portfolio managers are in a position to move proactively and create positive results for their funds and portfolios. With streamlined processes and integrated technology, they have the ability to analyze the operating characteristics of individual buildings and take action to increase returns on those assets, which translates to real gains in performance. Disparate systems and inconsistent processes add up to significant operational expenses: manual data compilation and reporting require substantial time and resources. Even greater are the opportunity costs, as today’s business environment moves too fast to allow reliance on untimely information. Portfolio managers cannot continue to successfully manage and grow their portfolios with outdated technology, a lack of integration, and manual processes. 3
  5. 5. Circles of Influence: People, Process, & Technology: Interlocking Interdependencies Emanating from the center of the circle, influencing each relationship, are the activities and processes that ultimately produce the desired results for investors: the expected return or yield on the real estate fund. The groups that are closest to the center have the biggest stake in performance and influence on the returns associated with it. Moving further away from the center, each group possesses deeper, more granular detail, and less direct influence on performance. Fund performance is a function of investors, who are influenced by how well the portfolio is managed by the portfolio managers. Portfolios are the result of asset management, which is a function of property management. Drilling out from the center, each party or group possesses more granular, property- level detail. In the past, traveling further out in the circle of influence to obtain detailed information required touching more and more people directly. Fund managers often confronted increasingly fragmented data and a plethora of time-consuming manual The Relationship between People and Information in Property and Asset Management processes. More and more time and resources were required, with data integrity suffering at each step further away from the center. What portfolio managers need is a solution that allows them to be closer to the center — touching investors and directly influencing fund yields. A solution that would provide a real-time view within each of the real estate assets within a given fund would make the job of improving fund performance not only easier to obtain, but also more accurate. 4
  6. 6. What Prevents Real Estate Portfolio Managers from Maximizing Performance? The real estate investment sectors’ use of information technology has historically lagged behind other industries—most of this sector continues to use a resource-intensive approach. For example, portfolio managers rely on property managers to provide property-level information on a monthly basis. This method is utilized by a majority of firms in the real estate investment industry to accumulate and manage information at the property level. Real estate portfolio managers in the capital markets sector must deal with fragmented data and manual processes to manage their portfolios, calculate returns, and produce financial reports. Instead of using a single, integrated data source to build reports and perform analyses, they must get crucial property-level operational data, financial information, budgets, and forecasts from individual property managers. Then, the information received from property managers must be manually consolidated. Operational and financial data is managed from multiple, disparate sources and is often manually compiled for reporting purposes. This is a time and resource-intensive process, and worse yet, data integrity can be compromised at each step of this consolidation process. Readily available information is mostly financial in nature, and access to operational information is limited or only available in hard copy documents. In addition, it may take months from data collection to report delivery: by the “When managing large portfolios, time the information is available, it is stale. the asset manager often needs to look at performance by region, Stale Information Limits Performance property type, ownership and What this means is that real estate portfolios are primarily managed from more. Information from several historical information that is less than complete and exact because of the lack of accessibility and timeliness. These issues may prevent portfolio managers from sources can be stored in [a] capitalizing on opportunities “today” because they are not aware of them until centralized database structure, “tomorrow.” Portfolio managers lack real-time visibility into underlying data, and therefore are limited in leveraging that data when making decisions. providing expansive reporting and analysis capability,” says the VP of Furthermore, the outdated technology used by many portfolio managers does not provide compliant performance calculations with industry standards such as marketing at a leading real estate NCREIF and AIMR. These standards are used to evaluate fund performance in the software provider. marketplace. Investors and analysts may rely on these standards to assess real estate fund performance and make sound investment decisions. Reporting in compliance with these standards requires calculating returns based on specific pieces of data combined in detailed computations. For example, NCREIF Income Return is calculated with the following formula: Net Operating Income Beginning Market Value + 1/2 Capital Improvements – 1/2 Partial Sales – 1/3 Net Operating Income 5
  7. 7. ISSUES: DECISION MAKING, REAL TIME VISIBILTY, DATA INTEGRITY Property Mgmt. Asset Mgmt. Portfolio Mgmt. Investment Mgmt. A Unrelated Databases A Reliance on Property A Resource-Intensive A Risk of Non-Compliance by Property Managers With Industry Standards A Data Compilation vs. A Inefficient Data Entry A Lack of Timeliness Data Analysis A Potential Loss of A Multiple Charts of A Manual Data Transfer into A Manual Calculations and Credibility With accounts Multiple Analysis and Reporting from Multiple Investors Report Tools Sources A Hindrance of Capital Growth Leasing Leasing Valuation Lawyers Bankers Lawyers Agents Agents Property QRTLY ASSET O INVESTOR Tenants Manager Da pera A Operational MGMT. forta Reqiona t 1 Data rep uir l o r t ed ing PORTFOLIO Property 1 Quarterly INVESTOR Tenants Manager Information B 2 and Performance Monthly Financial Data PORTFOLIO Property INVESTOR Manager 2 Tenants C 3 Lack of integration, along with the proliferation of manual processes fosters complexity, threatens data integrity and ultimately hinders success with bankers, lawyers and investors. NCREIF also provides guidelines on categorizing assets for reporting purposes (i.e. by geographic region, division, and property type). Complying with these standards using the technology and processes in place creates additional manual, resource-intensive processes. However, current releases of integrated real estate software offer compliant NCREIF and AIMR calculations as a standard feature. With these tools, portfolio managers can benchmark their performance against other portfolios in the industry because these calculations are based on a standard set of requirements. In addition, investors will place greater confidence in the results, knowing that they have been derived according to industry-approved standards. Integrated software solutions have become critically important for real estate companies that manage extensive, diverse portfolios. These solutions give all users involved in the process real-time access to the same, consistent data. 6
  8. 8. Greater access and visibility to operational and financial information enhances the decision-making and analytical capabilities of a portfolio manager, thereby improving returns on investments and enhancing the ability to attract additional capital. Standardized processes, accessible information, and enhanced analytical tools help portfolio managers improve their abilities to: • Achieve growth targets. • Reduce operating expenses due to less need for additional resources. • Realize the full potential from assets currently under management (i.e. returns). • Comply with industry standards such as NCREIF and AIMR. • Maintain credibility with investors. • Sustain their competitive advantage in the marketplace. • Capitalize on future “best in class” investment opportunities. Portfolio managers who want to stay competitive should reassess current processes, technology, and tools that are applied to the collection, management, and reporting of financial and operational information related to their real estate portfolios. Case Study: National Fund Manager Streamlines Processes, Lowers Risk A large national fund manager, employing nearly 50 Property Managers (PMs), managed more than 800 properties across the US. Each property used its own stand-alone version of the company’s property management software. Each month, financial transactions from the unique property-level systems were merged into the corporate system and consolidated by fund. However, operational data was manually transferred from the PMs to the asset managers for analysis. Once the required analysis and formatting was performed, the asset managers transmitted the data to the portfolio accountants to be included in the financial reporting packages. In addition, the PMs and the corporate office used a third party budgeting and forecasting tool. Moreover, the asset managers used a separate, third party valuation tool to analyze and value investments, relying on the PMs for data inputs into the valuation software. Finally, Microsoft® Excel® was used for financial reporting, performance calculations, and analysis. Each quarter, specific reporting packages were prepared by the PMs and portfolio accountants for the corporate office, executive management, asset managers, and investors. In the interim months, asset managers and portfolio accountants had to depend on the PMs for current property-level data. The end result was that the PMs and portfolio accountants had to spend a great deal of time compiling the reports, which left little time for data analysis. When the company analyzed their technology options, the risk associated with keeping their current system and processes became the driving factor in converting to an integrated, real estate software solution. 7
  9. 9. The RealFoundations Solution for Portfolio Management The success of real estate investments and portfolio managers is measured by overall returns. Unfortunately, financially oriented portfolio management firms tend to overlook the importance of operational processes and technology. Firms that view these issues as less important often lack standardization and adequate controls that can directly impact their ability to improve returns. Improving the information flow from the individual assets to the consolidated portfolio level and enhancing the visibility into operational data leads to more proactive management and better returns. RealFoundations helps clients understand and improve key business processes while implementing technology solutions that address information flow, standardization, and reporting challenges. RealFoundations’ proven methodologies and extensive experience in the capital markets sector have helped their clients to: • Improve lender and investor confidence that the information they receive is timely, accurate, consistent and well controlled. • Enhance portfolio managers’ ability to attract capital by supporting investment strategies with a sound operational platform. • Better understand “what they own” and “why they own it.” • Eliminate the use of spreadsheet models with multiple versions by implementing integrated management and analytical tools. • Standardize processes to allow for the management of greater volume without additional resources. RealFoundations has consistently affected change in the industry by helping real estate organizations better leverage their business in three key areas: • People: Re-evaluate roles and responsibilities and the operations involved in an organization. • Process: Streamline processes to generate the greatest efficiency and effectiveness. • Technology: Design the appropriate mix of tools to leverage the processes in support of the operation. RealFoundations examines and analyzes these areas to see where they are out of balance and assesses ways to bring them into balance and create synergies. RealFoundations observes the business issues, not just technology issues: technology is an enabler to solve business problems. Technology supports people and creates operational efficiencies by enabling better processes: better processes save time, money, and resources. 8
  10. 10. Where Should the Organization Be? RealFoundations starts by helping clients define their future state: the vision of where and how these companies want to operate. Then, working closely with clients, RealFoundations helps develop the methodologies to meet those goals. This is how companies can begin to fundamentally change their business. RealFoundations’ solution for portfolio managers improves the information gathering, analysis, and reporting functions, while bringing a higher level of visibility into real estate asset information to drive portfolio performance. This solution has three components: • Assess Collection of Core Business Information: Improve core data collection by using people, process, and technology to streamline analysis and reporting functions. • Leverage Information: Instead of simply accumulating financial information, start applying a “forward thinking, forward view” to the use of information. Leverage people, process, and technology to build meaningful data relationships and create “real-time” information access. Proactively use information from all real estate assets to make decisions that impact revenue streams and the future performance of those assets—and ultimately, the funds they are part of. • Analyze Information: Adjust people, process, and technology to improve the information flow and decision-making capabilities that impact forecasting and performance management. RealFoundations’ Methodology and Approach • Perform current-state assessment of processes, applications, tools, data and reporting landscape. • Evaluate current operations and identify short and long-term opportunities for improvement. • Define a baseline of operational and financial requirements and identify solution alternatives based on those requirements. • Generate a strategic information technology plan based on prioritized improvement opportunities, benefits, investment, and viable solution alternatives. • Establish a framework of leading practices. • Improve and standardize processes across all major business functions. 9
  11. 11. RealFoundations Integrated Solution for Portfolio Management Dashboard Layer Analytics & Dashboard Views Reporting – Performance – Benchmarking 3rd Party Relations Property Mgmt. Asset Mgmt. Portfolio Mgmt. Investment Mgmt. A Collaboration A Lease Administration A Acquisitions & Dispositions A Financial Data Analysis A Investor Reporting A Electronic Information A Billing & Collections A Capital Expenditures A Budgeting & Forecasting A Investor Communications Exchange A Procure-to-Pay A Tenancy A Corporate Operations A Maximizing Returns A Industry & Market Research A Maintenance A Budgeting & Forecasting A Consolidations A Capital Growth A Vendor Mgmt & Relations A Operational Data Analysis A Financial Reporting A Capital Planning & Mgmt. A Deal Facilitation & Structuring A Budgeting & Forecasting A Asset Performance A Yields & Returns A Industry Compliance A Cash Mgmt. A Property Reporting Benchmarking A Industry Standards Solution Layer Integrated System Real-Time – Data Integrity – Operational Efficiency People Process Technology A Defined Responsibilities A Leading Practices A Functional Applications Foundation A Accountability A Standardization A Integration Layer A Capability & Training A Implementation & Use A Adaptation & Proper Use A Workload A Measurability A Flexibility A Scalability/Flexibility A Adaptable to Change A Timely Enhancements Required Foundation Foundation Layer: People, Process, and Technology People, process, and technology form the core of the RealFoundations portfolio management solution. With this foundation, an organization can easily see whether they have the right people and technology resources, and if they are strategically placed in the most productive areas. Analyzing people, processes and technology lets RealFoundations fully understand the specific needs of their clients, and design a complete solution that enables these businesses to manage information better and leverage it effectively. Solution Layer: Understanding What the Solution Does The application of the foundation layer clarifies interdependencies between existing silos of independent property data; the solution layer creates the technology support that allows information to flow easily from one area to another and makes the same data sources available to all in real time. This is referred to as “process optimization” which then facilitates the transfer of detailed property information into the asset , management area and into its related investment portfolios. Dashboard Layer: The End Result An integrated dashboard gives the portfolio manager both a real-time view and complete visibility into all levels and layers of information. With this top-down view, executives can see how information flows between property, portfolio, asset, and investment management functions, allowing them to use their time on more productive analytical activities, rather than gathering and manipulating data. Managers can take more proactive stance in the decision making process. 10
  12. 12. With this more accurate, real-time view of information, portfolio managers can focus on key issues, improve the information collection process, and better leverage that information for analysis. Focus on Key Issues By looking holistically at operational processes—the way information is moved and the systems in place— RealFoundations helps clients optimize performance. Streamlining processes, refining information flow, and implementing integrated, industry-specific technologies all lead to better returns and profitability. Collection of Core Business Information The implementation of standardized, streamlined processes and integrated technology significantly reduces the time and resources required for the data collection process. In addition, the quality and timeliness of the data is improved, along with the flexibility to analyze data in many ways. This ensures data integrity, consistent reporting, and compliance with industry standards. Leverage Information Visibility into real-time operational and financial data enables portfolio managers to directly influence revenue and expense streams. The ability exists to drill down into the supporting data for each transaction to perform analysis. For example, portfolio managers can drill down to the entire inventory of vacant or soon-to-be vacated space, any purchasing activity, and all current building maintenance expenses or anticipated capital expenditures. With the ability to drill down into the supporting data for each transaction, portfolio managers can perform analyses that support better, more timely decisions. The accessibility of detailed, current information allows managers to manage proactively. They can measure operating income and expenses in real-time, make better projections, and assess the performance of underlying assets. Analyze Information Information analysis gives managers the ability to see present reality and project into the future. With information visibility and analytical tools, the managers can discover activities in real time and take proactive steps to create better outcomes. Integrated information and analysis offer a variety of opportunities for process improvements and cost savings. This also aids in dealing with operational and financial details that can detract from financial performance. Real-time information and analytical tools enable proactive decisions that drive financial performance and growth. RealFoundations’ Integrated Solution for Portfolio Management Makes a Difference The ability to effectively manage information—from collection to analytics to reporting—enhances proactive decision-making and facilitates improved performance. Managers can view all information holistically, in real time, and can use this broad perspective to make better decisions. In addition, the solution helps top-level managers improve communication and manage key relationships with investors, banks, lawyers, property managers, tenants, and others. For example, individual property managers do not have the broad visibility into all aspects of the portfolio. Improved information access at all levels combined with standardized, streamlined processes helps portfolio and asset managers effectively interact with property managers. This enables property managers to also be proactive and make informed decisions that will positively impact the bottom line. Portfolio managers can also enhance communication and integration with other third parties, such as investors and the legal and financial communities. 11
  13. 13. With RealFoundations’ Integrated Solution for Portfolio Management, portfolio managers can: • Make decisions knowing that they have access to current, high-quality information. • Improve operational efficiencies and resource effectiveness. • Shift focus from data compilation to data analysis. • Improve overall portfolio management and decision-making. • Attract additional capital, which promotes growth. Conclusion: People + Process + Technology = Increased Profitability and Growth By focusing on people, process, and technology, RealFoundations helps portfolio managers improve overall returns. Technology supports integrated information flow and analytical tools, enabling streamlined processes. Standardized processes and real-time information access allow the organization— from property managers to portfolio managers—to consistently create value. Visibility into underlying assets, information consolidation capabilities, and improved analysis and reporting enhance portfolio managers’ ability to increase performance and attract capital. All this gives portfolio managers significant advantages and benefits: • More time to focus on growing the business, improving performance, and managing key relationships • Better communication and integration with 3rd parties, fund executives and investors • Enhanced ability to attract future investments With effective implementation of efficient process and technology solutions, RealFoundations’ Solution for Portfolio Management helps fund managers directly impact their ability to meet and exceed targeted expectations. About RealFoundations RealFoundations builds targeted real estate fund management solutions to ensure optimum portfolio performance. As a management and technology consultancy focused exclusively on real estate, RealFoundations understands the demands faced by real estate fund managers to perform, and knows how to apply tools and technology to help them meet investor expectations. To find out more about RealFoundations’ Solution for Portfolio Management, contact us today at 646-825-7988, or visit our website: Howard Barash Managing Director New York, New York Kristen Walker Consultant New York, New York New York office phone number 646-825-7988 Copyright C 2006 RealFoundations Inc. All rights reserved. Design copyright C 2006 The Appum Group, Inc. 12