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RE Fund Manager Market Validation Discussion Document 1 CONFIDENTIAL AND PROPRIETARY
Real Estate Investment and Funds Management Operational and Infrastructure Challenges Implications for BPO Usage
Discussion Document for Market Validation Interviews
This document is confidential and is intended solely for the use and information of the client to whom it is addressed.
www.frontlinepartners.net
RE Fund Manager Market Validation Discussion Document 2 CONFIDENTIAL AND PROPRIETARY
Table of Contents
Introduction and Discussion Topics 3 Real Estate Investment and Funds Management Market
- Technology and Services Market Overview 5
Results of Real Estate Software Market Validation Interviews 10
Real Estate Investment and Funds Management Market - Operational Challenges and Industry Grievances
15
Implications and Conclusions for Real Estate Investment and Funds Management Back Office / Business Process Outsourcing (“BPO”) Solutions
22
Appendix - Firm Overview, Selected Experience Profiles and Case
Studies
28
Real Estate Investment and Funds Management Operational and Infrastructure Challenges Implications for BPO Usage
RE Fund Manager Market Validation Discussion Document 3 CONFIDENTIAL AND PROPRIETARY
Introduction and Discussion Topics
RE Fund Manager Market Validation Discussion Document 4 CONFIDENTIAL AND PROPRIETARY
Introduction and Discussion Topics FrontLine Partners is engaging with customers and participants in the real estate investment management market regarding the state of back-office support and software solutions
Introduction
Engage in an Information Exchange
that will Promote Education
About Operational Challenges / Industry Grievances / Issues
Assist You in Determining the Right
Way to Move Your Company Forward in Exploring Back-Office and BPO solutions in
the Funds Management Market
Provide an Overview of the RE Fund Manager
Technology and Services Market and
Share Our Views
Understand Your Thoughts and Views
About Back-Office and BPO Solutions and Their Place in Real
Estate Funds Management
Our purpose is to share our view of operational & infrastructure
challenges in the RE fund manager market, discuss state of software and
back-office solutions, and explore potential BPO solutions
RE Fund Manager Market Validation Discussion Document 5 CONFIDENTIAL AND PROPRIETARY
Real Estate Fund Manager Technology and Services Market Overview
» Project Framework and Timeline
» Project Methodology and Approach
» Key Document Section Description
RE Fund Manager Market Validation Discussion Document 6 CONFIDENTIAL AND PROPRIETARY
The market grew approximately 200% in funds (386% on fund size) from 2004 to 2008, but has since plateaued and started to rebuild itself after the financial market back-up in late 2008 and early 2009.
FRONT-END GROWTH DRIVERS
2004 (#)
2005 (#)
2006 (#)
2007 (#)
2008 (#)
2009 (#)
2010 (#)
2011 (#)
2012 (#)
Opportunity NA NA 93 118 153 168 186 191 193
Value-added NA NA 102 158 180 161 119 128 125
Core-plus NA NA 27 45 55 38 26 26 30
High-Yield Debt NA NA 28 44 54 73 67 62 59
Fund of Funds NA NA 7 17 24 26 17 20 22
Total # Funds 159 205 257 382 466 466 415 427 429
Total # Fund
Operators 121 139 206 280 355 361 342 346 359
Aggregate Equity
Goals ($B) $64 $90 $130 $235 $311 $312 $241 $244 $239
Real Estate Fund Management Growth Characteristics (2004-2012)
Source: Real Estate Alert 3/14/2012
RE Fund Manager Market Validation Discussion Document 7 CONFIDENTIAL AND PROPRIETARY
FRONT-END GROWTH HAS SIMPLY OUT-STRIPPED BACK END SUPPORT
Real estate performance has fueled investor demand as a separate asset class and significant queue of capital raised; seeking deployment to manage risk and returns.
Significant growth in number and size of funds, as well as number of fund operators
REITs are increasingly crossing over into the fund management market (either directly by adopting the funds management model or via JV’s and co-investment programs).
Globalization of the owner/operator sector is a key trend in this sector, as exemplified by the latest estimates of 244 REITs in 24 countries.
28 countries are likely to have REITs in the next 24/36 months.
Business Growth Drivers
Currently, software providers can not handle the complex layers of visibility from property level all the way through to fund and investor reporting level.
There is a shortage of software solutions in the market, so there is a high degree of customization to platforms.
Significant industry wide operational and infra-structure challenges are facing the real estate investment management market
Data Standards
Document Management
Operational and Process Hand-offs
Complexity in Accounting and Financial / Investor Reporting
Need for Greater Portfolio Risk Management and Transparency
Gaps in Software and Back-Office Solutions
Front End Growth Has Simply Out-stripped Back End Support Tremendous growth has occurred in the institutional real estate investment management market. However the software and back-office solution providers have failed to keep pace. As a result, too much time, energy and efforts are spent by high priced fund management staff on basic data management, accounting and reporting functions.
RE Fund Manager Market Validation Discussion Document 8 CONFIDENTIAL AND PROPRIETARY
Market Structure and Need for Reporting / Analytics Most real estate investors are at least “arms length” from understanding and predicting the cash flow returns from the underlying asset, and need greater performance analytics and risk management solutions to drive decisions impacting fund / investor returns
Property Managers
REITS (Private, Public)1
Fund Managers
Pension and Asset Funds
What They Do …
Manage properties as owners or as sub-contractors to REITS
Their objective is to operate the building and maximize return at the asset and tenant level
Provide pools of capital to invest in assets (buildings)
Their objective is to make good decisions about which assets to purchase, determine how they should be operated,
and to maximize returns at the portfolio level
Their objective is to place capital that can be invested in real estate to return a predictable range of
cash flows / returns to the portfolio/fund
Place capital with real estate owners
Manage money for retail and institutional investors
Their objective is to determine the correct investment strategy for their investors and place the funds in the correct asset class (stock, bonds,
real estate) to achieve those returns
Who They Are …
Inst
itut
iona
l In
vest
ors
Rea
l Est
ate
Com
pani
es
What They Need …
Emphasis on NOI, tenant lease rollovers typically handled in Argus, Excel
Consolidated tenant and asset data for decision making and reporting to fund managers or Wall Street, plus the ability to model what-if scenarios and forecast at the portfolio and entity level
Consolidated asset cash flows and unit returns from real estate owners plus the ability to model what-if scenarios and forecast at the portfolio / fund level and return / distributions calculators
Consolidated asset cash flows and unit returns from fund managers plus the ability to model what-if scenarios and forecast at the portfolio level, plus comparisons across investments and fund managers
Note: (1) Select REITS may utilize a fund management business model but are still considered real estate companies (e.g., Kimco, HCP)
R/E Fund & Investment Market Structure and Requirements
RE Fund Manager Market Validation Discussion Document 9 CONFIDENTIAL AND PROPRIETARY
Information Requirements – A Large Gap in Where to Focus Real estate companies want to value and project on asset and tenant data, while institutional investors want to value and model on cash flow and investment return basis
Property Managers
REITS (Private, Public)1
Fund Managers
Pension and Asset Funds
Their objective is to operate the building and maximize return at the asset and tenant level
Their objective is to make good decisions about which assets to purchase, determine how they should be operated,
and to maximize returns at the portfolio level
Their objective is to place capital that can be invested in real estate to return a predictable range of
cash flows and returns to the portfolio/fund
Their objective is to determine the correct investment strategy for their investors and place the funds in the correct asset class (stock, bonds,
real estate) to achieve those returns
Real Estate Market Players
Inst
itut
iona
l In
vest
ors
Rea
l Est
ate
Com
pani
es
Note: (1) REITS can look like fund managers but are still considered real estate companies (e.g., Kimco, HCP). (2) Information needs flow upwards while the capital flows down.
Information Needs2
Tenant and Asset Information
Multiple Properties
Owner Owner Owner
Asset Level Information,
Ability to model forward looking
returns and what-if scenarios
Capital Source
Capital Source
Asset and Tenant Driven
Cash Flow & Investment Return Driven
Financial/Return Information,
Ability to model forward looking
returns and what-if scenarios
Capital Source
Market Information Requirements
Ownership / Investment
10 RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL
Results of Real Estate Software Market Validation Interviews
» Project Framework and Timeline
» Project Methodology and Approach
» Key Document Section Description
11 RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL
R/E Software Market Validation Interview Targets In connection with a significant corporate development project in the real estate software market, we conducted a number of high level market validation interviews. We interviewed an average of five to six companies in each market segment.
Role
Ow
ner/
O
pera
tor
Cap
ital
Mar
kets
Company Description
SVP and CIO
Vice President of IT
Former (Retired) CIO
Global CIO
EVP and COO
CTO
Executive Vice President (COO)
Retail Owner Operator
Retail Owner Operator
Multi-family Owner Operator
Retail Owner Operator
Capital Markets Lender Servicer
Investment Manager
Vice President of Technology
Investment Manager
Lender Servicer
CTO Multi-Family Owner Operator
President Investment Manager
SVP Investment Manager
Note: Corporate Real Estate Sector excluded from this summary extract
12 RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL
There is a gap in the real estate software market offering; specifically in the
capital markets, owner/operator, and corporate real estate segments.
Hypothesis Conclusions
Our interview candidates agreed with this hypothesis. Most believed that the gap is
widening; and current players were unlikely to be able to close the gap on their own.
The real estate software gap is more pronounced in business analysis,
intelligence, and integration functionalities.
Respondents in capital markets and owner/operator agreed that there were very
few mature BA and BI products. The respondents all noted issues with integration
& access to data from multiple sources.
Real estate companies are looking for more robust solutions across their business – more than just
point to point solutions.
One of the strongest conclusions from the interviews is the real estate industries desire to have a unified offering that could meet at
least 70 percent of their overall needs.
Market Validation Interview Conclusions Overall, respondents confirmed our hypothesis that the real estate software market is limited in its ability to deliver the required solutions to the market
13 RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL
Key R/E Software Market Validation Interview Quotes
Market/Product Specific
» “There is a lot of data coming from lots of places. No industry standards. Spending lots of time integrating.”
» “Reporting, scenario analysis, modeling and what-if’s are very difficult to do”
» “From a technology perspective, the industry has fallen short of delivery.”
» “If the solution meets our needs we are willing to pay for a one-stop-shop.”
» “The market needs a provider to build a solution to meet our needs”
» “The market is looking for a clear software leader.”
Current Technology Provider Specific
» “We also need real estate technology vendors that are committed to the industry long term.”
» We have lower expectations for generic software providers and higher expectations for real estate market players.”
» Market is full of small players with limited resources & vision”
» “Real estate software companies could do a better job of leading real estate companies.”
» “Current vendors by themselves cannot meet long-term needs of the market“
» “Our technology providers only grow when we grow, this needs to change.”
» “They need stability, focus & capital”
Key Interview Quotes
Overall, interview respondents validated the need for more robust solutions in the real estate software market
RE Fund Manager Market Validation Discussion Document 14 CONFIDENTIAL AND PROPRIETARY
Score Card Summary – Capital Markets (Funding) The top software providers in capital markets (funding) focus on asset management and property accounting but come up short on fund management, deal analysis and investor reporting Capital Markets (Funding) Interview Score Card
» Deal Analysis and Management
» Reporting (JV Partner) Investor Relations
» Asset Funding
» Legal Compliance
» Accounting/Back-office
Market (Functional) Requirements
Technology Overview
Technology Provider Overview
Average Technology Expenditure
$0-10M $11-20M $20+M
Average Degree of Technology Adoption
Limited Follower Leader
» Deal Analysis » Investor Reporting » Asset Management » Accounting/Back-office
Key Technology Challenges
Key Uses of Technology
Top 3 Vendors
» Yardi » MRI » Argus
» Utilization of spreadsheets. » Complex modeling with limited time and
tools. » Increasing investor reporting
requirements and limited technology to provide information at the asset level.
» The market needs more integration between
software components.
» Software providers in the market have limited means to conduct BA and BI. They are mainly focused on offering transaction management.
» The market has limited solutions for work flow and collaboration.
» There is a clear opportunity to provide functionality to the capital markets (funding) segment that current providers do not offer.
Key Conclusions Strengthens » Yardi has a solid financial system for
property management and entity level accounting.
» MRI is best known for its flexibility. » Argus has a good cash flow system.
Weaknesses » The software providers do not have a
global offering. » The software providers do not have
integration capabilities. » Neither software vendor have good real
estate SME resources.
Vendor Analysis
RE Fund Manager Market Validation Discussion Document 15 CONFIDENTIAL AND PROPRIETARY
R/E Investment and Funds Management Market - Operational Challenges and Industry Grievances
» Project Framework and Timeline
» Project Methodology and Approach
» Key Document Section Description
RE Fund Manager Market Validation Discussion Document 16 CONFIDENTIAL AND PROPRIETARY
A bewildering array of evolving industry standards creates challenges for data standards and consistent industry definition sets or benchmarking
Key Operational Challenges and Industry Grievances
Operating Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.)
Data Standards
Operational Challenge Industry Grievances or Issues
There are a variety of evolving industry standards – depending on scope (i.e. accounting, tax, reporting, valuation, etc.); however no uniformly accepted data definition set and consistent benchmarking. Accounting treatments
GAAP, FASB (13, 141, 157, 159, etc.) IFRS
Tax treatments & practices
Standard & influencing bodies
NCREIF, NAREIT, NAREIM INREV, EPRA OSCRE, PISCES ALFI
Valuation mechanisms
Indexes Lease-based DCFs
Performance measures & reporting
NCREIF, etc. AMIR, AMIR Gibson IPD
RE Fund Manager Market Validation Discussion Document 17 CONFIDENTIAL AND PROPRIETARY
Data management challenges pose one of the largest time drains of highly paid fund management talent, suggesting an opportunity for data warehousing and management
Key Grievances and Operational Challenges
Operational Challenges & Industry Grievances (R/E Inv. & Funds Mgmt.)
Operating Challenge Industry Grievances / Issues
Data Management (Collection/Ware-
housing and Mgmt.)
Processes for collections and management of data which worked on small scale are simply inefficient given size of industry
Talented, highly paid real estate personnel spend too much time chasing and inputting data.
Credibility of data used to manage investments and report to investors is too reliant on manual data entry with no (or limited) repeatable controls to assure consistent treatment of the data.
Fund managers and their operating partners use an array of financial reporting and property management systems.
Systems include: MRI, Yardi, CTI, JDE/Peoplesoft, Treesoft and other systems
Fund managers have to extract select information to run high level portfolio reports to measure asset and fund level performance
Collecting and processing information from operating partners is typically inefficient and cumbersome, with little real protocols followed.
Complications / complexity stems from fund manager receiving data from multiple heterogeneous sources (and systems) that don’t use same data process, data requirements and /or data definitions.
Data consolidation and data integrity issues are common
Principally due to manual consolidation of reports to portfolio level reports;
Very little time for quality data analysis as majority of time in compilation
RE Fund Manager Market Validation Discussion Document 18 CONFIDENTIAL AND PROPRIETARY
The back-office support environment is woefully under-equipped for the significant growth in number of funds and assets under management
Key Operational Challenges and Industry Grievances
Operational Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.)
Operational Challenge Industry Grievances / Issues
Lack of integration, along with a proliferation of manual processes foster complexity, threatens data integrity
Manual processes are costly. The cost of the time and resources required increases operating expenses and impacts the organization’s ability to meet growth targets and focus on its core business – delivering financial returns to its investors
Business processes are often inconsistent at the property level Limited to nominal sharing of industry best practices in any meaningfully
coordinated way at the industry level
Operational Processes & Hand-offs
Growth in number and complexity of legal entities based on fund structures and other factors has resulted in varying processes, policies and use of systems across the fund manager organization with increasingly impacts the ability of the organization to effectively report on critical information
Dissimilar and manually intensive accounting, financial reporting and analysis processes for fund operations impact the visibility across the portfolio / fund / firm’s overall holdings. As a result, interaction with and responses to joint venture partners, investors and analysts (if public) is affected.
Complexity in Financial Accounting / Investor Reporting
Portfolio Risk Mgmt. / Reporting / Transparency
The industry must now manage risk – real and perceived – much more aggressively. The loaded people cost (including hiring, training, retention and management) to support the asset (risk) management function has become a large operational expense.
Return pressures over the past few years have caused more demands from investors on the fund manager for greater transparency
RE Fund Manager Market Validation Discussion Document 19 CONFIDENTIAL AND PROPRIETARY
Investor Interface and Reporting
Investor Information Structure / Complexity for Transparency Fund managers must account for varying degrees of ownership and have the ability to aggregate / synthesize data across multiple levels (i.e. investment, fund level, investor level, etc.) to meet increasing investor demands for transparency
Information Structure Consolidated
Investor
Investor
Portfolio
Fund / Separate Account
Investment Level
Property
Building
Investor
Office Bdg. 1 Office Bdg. 2 Premises Industrial Portfolio
1001 1002 1003 1004 1005 1006 1007
Consolidated Properties Fund Activity
Fund & Portfolio
B1 B1 B1
B1 B1 B1 B1 B1 B1
B1 B1 B1 B1
RE Fund Manager Market Validation Discussion Document 20 CONFIDENTIAL AND PROPRIETARY
Investor Interface and Reporting
Investor Information Structure Investors rely on information gathered from the property locations to make critical investment decisions and complete the reporting cycle
Our
Foc
us
Source: Real Foundations, Whitepaper –Maximize Real Estate Fund Performance
RE Fund Manager Market Validation Discussion Document 21 CONFIDENTIAL AND PROPRIETARY
Operational Processes and Multiple Hand-Offs
Property Mgmt.
Unrelated Databases by Property Inefficient Data Entry Multiple Charts of Accounts
Asset Mgmt
Reliance on Property Managers Lack of Timeliness Manual Data Transfer Into Multiple
Analysis and Report Tools
Portfolio Mgmt
Resource-intensive Data compilation vs. Data Analysis Manual Calculations & Reporting
from Multiple Sources
Investment Mgmt
Risk of Non-compliance with Industry Standards
Potential Loss of Credibility with Investors
Hindrance of Capital Growth
Property Manager
A
Property Manager
B
Property Manager
C
Leasing Agents
Valuation Lawyers Bankers Lawyers Leasing Agents
Investor
1
Investor
2
Investor
3
Quarterly Information & Performance
Portfolio
1
Portfolio
2
Tenants
ASSET MGMT.
QRTLY Operational
Data
Monthly Financial Data
Lack of integration, along with a proliferation of manual processes foster complexity and threatens data integrity and reliability
Source: Real Foundations, Whitepaper –Maximize Real Estate Fund Performance
RE Fund Manager Market Validation Discussion Document 22 CONFIDENTIAL AND PROPRIETARY
Implications and Conclusions for Real Estate Fund and Investment Management Back-office BPO solutions
» Project Framework and Timeline
» Project Methodology and Approach
» Key Document Section Description
RE Fund Manager Market Validation Discussion Document 23 CONFIDENTIAL AND PROPRIETARY
Funds Management Value Chain Our initial assessment suggests that portfolio management and finance, investment management and fund administration be considered for back office / BPO solutions
Investment Strategy/
Market Research
» Strategy Formation
» Data collection, storage and integration
» Compilation / interpretation of analysis
» Aggregation / distribution of analytics output
• Purchase of external data
• Size of in-house research team
Capital/ Fund
Formation
» Investor/ partner
acquisition » Fund Formation » Partnership
structures » Relationship
management
• Number of clients, funds and structures
• Size of capital investment
Key Processes
Key Cost
Drivers
Fund Management Value Chain
Operational Infrastructure Support
Acquisition and
Dispositions
» Deal sourcing » Market analysis » Due diligence » Underwriting » Buy – Sell – Hold
analysis » Disposition
marketing
• Number of transactions
• Complexity of investment / type and variety of asset types
• Portfolio turnover
Property Management
» Tenant services delivery
» Tenant relationship Management
» Lease Administration
» Vendor Management
» Facilities Management
» Billing and Collections
» Invoice Management
• Number of portfolios
• Number of investors
• Leverage of operating partners
Property Accounting
» Budget / forecasting
» A/R billing and collections
» A/P / purchasing
» Financial reporting
» Closing
• Number of properties
• Portfolio roll-ups • Degree of
leverage by operating partners
Portfolio Management and Finance
» Business plan management
» Performance monitoring and reporting
» Debt management
» Fund tracking » Return/cash flow
calculations
• Number of portfolios
• Complexity and variability of underlying investments
• Tiering of Funds
Investment Management
» Investment management
» Investor or joint venture reporting
» Investor communications
» Industry compliance » Maximizing returns » Capital planning and
deployment
• Number and complexity of investor requirements
• Fund vs. programmatic vs. separate account
Fund Administration
» Fund accounting
» Statement generation
» Fund statutory and regulatory reporting
» Cash inflow/ ouflow record keeping
• Number of portfolios / funds / partnerships
• Variability in capital call and funding needs
Degree of Inclusion
Indicates primary segments for BPO solutions High Probability Low Probability Med. Probability
RE Fund Manager Market Validation Discussion Document 24 CONFIDENTIAL AND PROPRIETARY
Fund /Portfolio Administration & Reporting
Asset Management Fund Management
Real Estate Investment Management – Functional ‘Environment’
Strategic Research / Fund Setup » Macro Research » Regional Research » Country Research » Product Research » Fund Strategy Dev. » New Fund Approval » New Fund Launch
Sourcing » Market Research » Deal Review » Feasibility Analysis » Underwriting Cash Flow » Sourcing to Fund » LOI / MOU » Deal Package Prep » Investment Approval
(Preliminary)
Post Acquisition » Deal Structuring » Entity Structuring » Asset Mgmt.
Agreement » Engage Svc. Providers » Document Turnover » Asset Takeover » Data Conversion » Asset Mgt. Handoff
Acquisition » Full Due Diligence » Financing » Market Appraisals » Purchase/Sale
Agreement » Investment Approval
Final » Closing
Investment Administration » Investor Relations » Investor Communications » Investor Reporting
Investor Marketing/ Communications » Investor Targeting » Fund Road Show » Investor Recruitment » Investor On-boarding » Event Management » Marketing Mgmt. » Investor Queries » Fund Cross Selling
Asset Management » Business Plan Mgmt. » Performance Monitoring
Property Valuation
» Provider Selection » Data Setup/Validation » Assumption Validation
• Capital Expense • Income • Market • Global
» Property Valuation » Annual Valuation
Finance » Capital Planning » Capital Development » Cash Flow Mgmt. » Cash Forecasting
Debt/Equity Mgmt. » Debt Management » Equity Management » Debt/Equity Reports
What-If Analysis » Assumption Definition &
Refinement » Portfolio/Fund What-If
Analysis Fund Accounting
» Fund Structuring » Fund Accounts Setup » SPV Accounting » Hold Co Accounting » Cash Position Tracking » Capital Call Calc. » NAV Calculations » Fee Calculations » Monthly Closing » Hedge Accounting
Fund Administration » Entity Setup » Capital Call Statement » Capital Acct. Tracking » Tax Compliance » Safe-Keeping » Trustee & Fiduciary
Supervision » Entity Wind Down
Portfolio/Fund Reporting » Monthly Actuals » Asset Mgmt. Report » Quarterly Fund Report » Return/Cash Flow
Analysis » Property Performance
and Metrics Evaluation
Data Movement & Storage » Communications (w/ Data Sources &
Consumers) » Oversight of Inbound & Outbound Data
Fidelity
Investment Selection
Data Refinement » Data Adjustments (within limits)
Data Governance » Data Standard Definition & Maintenance
• Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts
Asset Data Aggregation
KEY: Fund Manager Client Functions
Fund / Portfolio Admin & Reporting
Data Aggregation / Mgmt.
Property Svc. Provider Functions
Property Reporting » Financial Reporting » Ops Reporting » Capital Projects Reporting
Asset Accounting » GAAP Translations » GAAP Adjustments » Ownership/ / Partnership
Entries » Tax Entries
Asset Controlling & Reporting
Dispositions » Hold / Sell Analysis » Bid / Deal Structuring » Disposition Approval » Wind Down
Billing & Collections » Lease Administration » Billing Setup » Monthly Billing » A/R & Collections
Tracking
Leasing » Market/Business Dev » Leases Execution » Lease Renewals » Lease Forecasting
Property / Building Mgmt. » Property Management » Facilities Management
Property Accounting » CAM Reconciliation » Property Accruals » Capital Expenditures » Bank Reconciliations
Accounts Payable » Vendor Setup » Invoice Management » Check Generation
Capital Projects / Development Mgmt. » Design » Bidding & Contracting » Project Management » Construction Accounting & Rptg.
Property Budgeting » Rent Roll Setup » Income & Exp.
Assumptions » Op Expense Budgeting » Cap Expense Budgeting » Budget Approval
Property Operations, Accounting & Budgeting
Fee Establishment » Asset Mgt. Fees » Performance Fees » Development Fees
JV Accounting Oversight / Interface » Financial Reporting
Review » Ops Reporting Review
» Accruals & Allocations » FX Conversions » Other Non-Cash
Adjustments » Month-End Close Potential Additional Real Estate Functions
RE Fund Manager Market Validation Discussion Document 25 CONFIDENTIAL AND PROPRIETARY
Sourcing • Market Research • Deal Review • Feasibility Analysis • Underwriting Cash Flow • Sourcing to Fund • LOI / MOU • Deal Package Prep • Investment Approval (Preliminary)
Post Acquisition • Deal Structuring • Entity Structuring • Asset Mgmt. Agreement • Engage Svc. Providers • Document Turnover • Asset Takeover • Data Conversion • Asset Mgt. Handoff
Acquisition • Full Due Diligence, Financing • Market Appraisals • Purchase/Sale Agreement • Investment Approval Final • Closing
Investment Selection
Dispositions • Hold / Sell Analysis • Bid / Deal Structuring • Disposition Approval • Wind Down
REAL ESTATE INVESTMENT MAAGEMENT – FUNCTIONAL ‘ENVIRONMENT’
Asset Management • Business Plan Mgmt. • Performance Monitoring
Finance • Capital Planning • Capital Development • Cash Flow Mgmt. • Cash Forecasting
Property Valuation • Provider Selection • Data Setup/Validation • Assumption Validation • Capital Expense • Income • Market • Global • Property Valuation • Annual Valuation
Asset Management
Debt/Equity Mgmt. • Debt Management • Equity Management • Debt/Equity Reports
What-If Analysis • Assumption Definition &
Refinement • Portfolio/Fund What-If Analysis
Fund Management
Fund Accounting • Fund Structuring • Fund Accounts Setup • SPV Accounting • Hold Co Accounting • Cash Position Tracking • Capital Call Calc. • NAV Calculations • Fee Calculations • Monthly Closing • Hedge Accounting
Fund /Portfolio Administration & Reporting
Investor Marketing/ Communications • Investor Targeting • Fund Road Show • Investor Recruitment • Investor On-boarding • Event Management • Marketing Mgmt. • Investor Queries • Fund Cross Selling
Strategic Research/ Fund Setup • Macro Research • Regional Research • Country Research • Product Research • Fund Strategy Dev. • New Fund Approval • New Fund Launch
Investor Relations • Investor Communications • Investor Reporting
Fee Establishment • Asset Mgt. Fees • Performance Fees • Development Fees
Fund Administration • Entity Setup • Capital Call Statement • Capital Acct. Tracking • Tax Compliance • Safe-Keeping • Trustee & Fiduciary
Supervision • Entity Wind Down
Portfolio/Fund Reporting • Monthly Actuals • Asset Mgmt. Report • Quarterly Fund Report • Return/Cash Flow Analysis • Property Performance and
Metrics Evaluation
Process Selection for Inclusion in BPO / Back-Office Solutions To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis
RE Fund Manager Market Validation Discussion Document 26 CONFIDENTIAL AND PROPRIETARY
Asset Controlling & Reporting KEY:
Property Operations, Accounting & Budgeting
Fund Manager Functions
Fund / Portfolio Admin & Reporting
Data Aggregation / Mgmt.
Property Svc. Provider Functions
Potential Additional Real Estate Functions
REAL ESTATE INVESTMENT MANAGEMENT – FUNCTIONAL ‘ENVIRONMENT’
• Rent Roll Setup • Income & Exp.
Assumptions • Op Expense
Budgeting • Cap Expense
Budgeting • Budget Approval
Property Budgeting
• CAM Reconciliation
• Property Accruals • Capital
Expenditures • Bank
Reconciliations
Property Accounting
• Lease Administration
• Billing Setup • Monthly Billing • A/R &
Collections Tracking
Billing & Collections
• Vendor Setup • Invoice
Management • Check
Generation
Accounts Payable
• Property Management
• Facilities Management
Property / Building Mgmt.
• Market/ Business Dev
• Leases Execution
• Lease Renewals • Lease
Forecasting
Leasing
• Design • Bidding & Contracting • Project Management • Construction
Accounting & reporting
Capital Projects/ Development Mgmt.
Property Reporting • Financial Reporting • Ops Reporting • Capital Projects Reporting
Asset Accounting • GAAP Translations • GAAP Adjustments • Ownership/ Partnership Entries • Tax Entries
Accruals & Allocations • FX Conversions • Other Non-Cash Adjustments • Month-end Close
JV Accounting Oversight / Interface • Financial Reporting Review • Ops Reporting Review
Data Aggregation / Management
Data Governance • Data Standard Definition & Maintenance • Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts
Data Movement & Storage • Communications (w/ Data Sources & Consumers) • Oversight of Inbound & Outbound Data Fidelity
Data Refinement • Data Adjustments (within limits)
Process Selection for Inclusion in BPO / Back-Office Solutions To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis.
RE Fund Manager Market Validation Discussion Document 27 CONFIDENTIAL AND PROPRIETARY
» On the whole, software providers in real estate are not evolving quickly enough to meet the needs of the money sources (e.g., REITs, fund managers). They view the market from a property management (asset) perspective and not a financial (cash flow) perspective. Additionally, the market is going global and most providers lack the financial resources to go global.
» REITs, funding sources, and investment fund managers require more sophisticated analysis on cash flows. They want to achieve modeling capabilities that exist in equity and fixed income markets. They do not currently have the tools or methodologies to analyze risk, what-if scenarios, portfolio benchmarking and modeling.
» Current software providers are enabling real estate companies to do very basic investor reporting and income distribution. They are not enabling the higher value modeling and portfolio management required by the financial institutions.
» Software providers see the growth in moving from property management to investment/portfolio management in real estate and going global. We believe the real opportunity is providing those services and solutions to the financial services companies and institutional investors.
» We believe a dedicated real estate funds administration / BPO firm focused on this market will enable clients to continue to focus on activities that are higher value, than data collection, management and reporting
Conclusions
Implications and Conclusions for R/E Fund & Investment Mgmt. Real estate software providers have not provided the depth of service required by investors and owners – the software model has not been widely embraced and the market is open to new service based solutions
28 CONFIDENTIAL AND PROPRIETARY
Firm Overview
Select Experience Profiles (BPO/Optimization)
Select Case Studies
Appendix
29 CONFIDENTIAL AND PROPRIETARY
FrontLine Partners - Market Offering and Focus
FrontLine Partners tailors our services to meet the requirements of each of the market segments we support. Each of our customers requires different approaches to building or restructuring their business; some businesses require a consultancy approach while others require a deeper operating partnership. Whatever the requirement, our firm's partners and experts can deliver the required execution and long-term support.
We bring our knowledge and market access to our clients
Business Strategies and Feasibility Research
Business Formation and Launch
Acquisition (Buy Side) Due Diligence
Pre and Post Merger Integration
Troubled Loan / Asset Workouts
Portfolio and Risk Management Reviews
Ser
vice
Offe
ring
Our typical clients are: » Owners / Operators / Developers
» Lenders (Portfolio / Securitized)
» Institutional Investors
» Fund Managers
» Intermediaries
» Service Providers
» Technology Providers
Corporate Entity Level Restructuring
BPO / Operations Diagnostics
Our Services Include …
RE Fund Manager Market Validation Discussion Document 30 CONFIDENTIAL AND PROPRIETARY
FrontLine Experience with BPO / Enterprise Optimization
Client or Employer*
Industry Project Profile Outcome
New Plan Retail REIT
Outsourcing strategy and migration of over 100 retail accounting jobs offshore for a top ten retail REIT
» Formulated outsourcing strategy after considering range of control options (captive, BOT, supplier);
» Identified, evaluated and selected supplier through RFP and competitive bidding process
» Advised on three year supplier contract » Created enterprise cost savings and better A/R collection
New Plan / GRO retail industry JV
Retail REIT industry JV
Planning for industry JV for retail accounting captive
» Conducted initial planning and JV structuring formation for industry JV targeting captive Build – Operate – Transfer model for major Retail REITs
ING R/E R/E Fund Manager
Operational Process Improvement
» Conducted core process improvement across entire real estate fund management platform
Security Capital Group*
Public R/E Investment Company
Developed and oversaw shared service center supporting multiple entities
» Transformed shared services of a global, public real estate company with investments in major real estate operating businesses with over $26 billion in total assets.
Top Five R/E Fund Manager
Real Estate Fund Manager (in process)
Shared service center feasibility for back office fund mgmt. functions
» Subcontractor to consulting firm assisting large real estate fund manager evaluate feasibility and operating migration plans for shared service center
BNY Asset Solutions
Rated Master and Special Servicer
Turn-around rated servicer for Bank of New York
» Turned around BNY servicing subsidiary ($16B of servicing, 90+ institutional accounts, 70+ employees, and six business lines) in one year
Ocwen Financial*
Global BPO Business for Resi Mortgages
Build and manage Global BPO business - Mortgages
» Built and managed Ocwen’s BPO business for mortgage outsourcing to number 2 position in the world
FrontLine Partners – Selected Experience Profiles (BPO/Optimization)
31 31
FrontLine Partners Case Study
For a leading retail REIT, FrontLine Partner Jim Vincent assisted client with BPO strategy formulation, supplier selection, contract structuring and process migration.
Results Objective
» Evaluate BPO strategies and options after existing off-shore supplier was acquired by larger company, causing the supplier to steadily lose focus on our client’s account
» Re-evaluate BPO strategy and structural / control options to minimize risk of repeat circumstances
» Address client’s desire to broaden the outsourcing platform beyond existing work on CAM recovery pools to broader retail accounting services (six functional processes)
» Find a supplier (and partner) who could evolve to truly take on the recurring BPO work as part of their operations
» Assisted client in evaluating several different outsourcing options ranging from strategic sourcing, Build-Operate-Transfer, joint venture and building out a captive BPO platform
» Led evaluation of BPO strategy selection across seven forms of ownership and control options, based on five core criteria and 13 decision elements
» Prepared RFI materials for short list of suppliers to capture relevant information to evaluate providers
» Conducted evaluation, due diligence assessment and selection of outsourcing provider to meet client’s objectives in off-shoring selected processes, as well as criteria to serve as a joint venture partner
» Provided transaction structuring, negotiations and closing support on the supplier contract, including key performance measures
» Developed initial process migration planning and transition management efforts until BPO provider had fully scoped work and staffed up team in India
32 32
FrontLine Partners Case Study
For a global real estate institutional investment company with over $50B in A.U.M., members of FrontLine Partners designed a portfolio of business improvement initiatives spanning all business units within the company.
Results Objective
» Increase EBITDA by 200 basis points
» Improve access to and quality of business information
» Define current sate processes, applications, data flows and data owners
» Identify major business issues and design initiatives to address these issues
» Implement a program office to manage the execution of these initiatives.
» Deploy solutions to the over 900 properties under management.
» Facilitated a group session of over 50 employees to identify and prioritize current state business issues
» Setup a portfolio of 30+ business improvement projects, each with defined objectives, benefits, participants, major activities and duration
» Assisted in the development of a new budgeting and business planning process which reduced the time by 40% and increased consistency across the company (translates into $1mm in annual time savings/year)
» Designed and facilitated a future state design session for the Acquisitions group resulting in a new investment memo process and organizational design
» Outlined the structure for a data governance program within the company
» Defined the approach for a major ERP re-implementation initiative