Document

Transparency in Real Estate

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This presentation was prepared exclusively for the benefit and internal use of the Alintra client to whom it is directly addressed and delivered. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by Alintra. Neither this presentation nor any of its contents may be disclosed or used for any purpose without the prior consent of Alintra.

Contact

Wolfgang Brötz Fon: +49 69 5095 17 960 Fax: +49 69 5095 17 990 alintra GmbH Börsenstrasse 2-4 60313 Frankfurt/Main [email protected] www.alintra.de

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Overview

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1. Alintra‘s offering

2. Real estate in transition

3. Transparency as a shared service

4. Functional elements

5. Technical aspects

Alintra‘s offering | Real estate in transition | Transparency as a shared service | Functional elements | Technical aspects

Alintra’s offering

• arsago is a platform for Alternative Investments for institutional investors; Alintra coordinates the Controlling / Accounting / Liquidity / Tax / Reporting framework

• 2004, arsago Real Estate and Morgan Stanley Real Estate Fund established a JV which acquired 15.000 residential units and required institutional calibre reporting

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Initiating a real estate fund ….

Alintra offers real estate transparency: a service defined as detailed, comprehensive, timely and customized reporting on the basis of advanced cash-flow controlling

• Controlling gained new importance when the financial crisis hit real estate, banks, insolvent SPEs, CMBS

• Alintra’s experience gained from transparency of own fund attracts various parties in demand of outsourcing partnership

• Modular approach to demonstrate return, risk & liquidity

… as a foundation for providing shared services


New dynamics in real estate

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• Reporting was long regarded as a by-product • Institutional investors and lending parties consider transparency as a key concern when providing

capital • Quality of investor communication plays a key role in establishing investor confidence

Prop Mgmt

Equity/ debt

Asset Mgmt

Water- fall

Cash does not lie !

Change of the real estate industry

• Re(finance) is key

• Successful enterprises scrutinize structural set-up

• Reporting as an external obligation

• Built on advanced controlling


The real estate sector has faced considerable changes ….

• Investor perception of asset class „real estate“: Leverage necessitates operative resources to stabilize the cash flow

• Once bitten, twice shy: Lending parties raise reporting requirements substantially

• Insolvent portfolios as investment opportunity pose the question how a potential purchaser can achieve the turn-around

…. real estate companies have to adjust

• Capital sourcing: bottle-neck or catalyst for organisational overhaul? • Cash flow statement as road map for strengths & weaknesses • Focus on core competence: reletting & collection activities, overhead • Outsourcing of controlling & reporting functions

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Transparency: a bunch of charts?

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From historic data to actionable decisions

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Predict! (What will happen?)

Ope

rativ

e ob

ject

ives

data action


• Transformation of raw data into information

• Predictive analysis provides valuable insights

• Vacancy reduction

• Collection of arrears

• Overhead management

• …

Analyse! (what has happened?)

Explain! (How? Why?)

Transparency requires a revolving process

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• Agility

• Connectivity

• Flexibility

Topics:

• Liquidity • Controlling • Reporting

Objectives:

• Aggregate portfolio overview

• Rapid alert system • Strategic controlling

system Requirements:

• Integration of vast data marts

• Extensive experience in both finance and real estate asset management

Integration

Business Plan

Liquidity(Act & Plan)

Prop Mgmt/ Collection Acc

Financial Accounting

Reporting & Ad-hoc

queries

Business Plan: compilation of expectations

• Tight link between operations and funding; permanently monitored • Binding character (e.g. element of shareholder & finance documents) • Objectives on various levels are cross-checked in a timely manner

• Information: a difference that makes a difference

• Transparent accountability impacts performance


Banks

Business Plan

Asset Manage-

ment Investors

Property Manage-

ment

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Elements of the annual Business Plan

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• Narrative description of sales, rental profile, capex etc

• Plans for Financing of owner

• Projected income statement for the coming year

• Projected Operating Cash flow for five years in advance

• Projected balance sheet

• Marketing plan

• Leasing guidelines

• Insurance

• Projected construction

• Business Plan as a Corporate Memory

• Annual revision

• Quarterly reconciliation (actual vs plan)


Objectives are broken-down into sub-goals with clearly-defined responsibilities; constant comparison of budget/actual transparently reveals strengths and weaknesses on various levels

Business planning on a cash-flow basis

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• All business plans are constantly monitored and annually revised

• Bottom-up Planning of NOI on a location/property basis

• Plans are useless, planning is priceless!


Liquidity Management

Business Plan: return & risk

Property Management

Asset Management

Lessons learned from controlling real estate

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• Property managers struggle to meet institutional demands

• Focus on cash flows is a paradigm change („Cash doesn‘t lie!“)

• Increasing human and IT resources are allocated to reporting

• Constant monitoring of every single property is a necessary, but resource-consuming prerequisite for transparency

• Preparation of electronic filing cabinet needs collection, verification, reconciliation, analysis and archiving of data from heterogeneous sources

• Both accurate electronic data and business intelligence software in order to operate a cost-efficient centralized data warehouse

• (Dis)aggregate information over various areas of responsibility (e.g. prop mgmt, asset mgmt, letting/collection/janitorial ressources) to attach personal accountability for sub-goals of business plan

• Focus on cash flows

• Upgrading quality and quantity of underlying data


Economies of scale and scope

Outsourcing as a strategic option

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Business critical functions: • Reletting • Collection • Overhead

Cost of ownership reduced by out-sourcing partner’s economies of scale/scope

• Financing as a catalyst for a functional assessment

• Substantial implicit ex-penses for debt compliance

• Transform fixed costs into variable costs


The answer to all strategic worries or the ultimate evil?

Real estate transparency: make or buy?

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• Institutional calibre reporting demands both an aggregate portfolio overview and the flexibility to drill-down to detail

• Integration of financial accounting, liquidity, rent accounting, debt compliance & waterfall, planning & forecasting

• Regulatory and debt compliance requires modelling and monitoring of complex conditions and individual covenants

Challenges • Beyond past performance

• Early warning system

• Foundation for strategic re-assessment


• Continuous improvement of process quality by accelerated acquisition of consistent raw data lowers cost of ownership

• Cross-portfolio analysis allows evidence-based decision-making • Flexibility for ad-hoc requests deepens investor confidence

Benefits

Compliance with institutional reporting needs

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• Quarterly reports no later than 20 day after end of cal.q.

• (un)audited balance sheet & statement of income & expenses

• Cash flow statement to reconcile business plan quarterly

• Accounts receivable aging summary

• Status of collection activities

• Individual reports

• Computer compatibility

International investors set demanding reporting standards which reflect sound practices of asset/property management


• Business plan

• Rent accoun-ting/contractual rent

• Financial ac-counting/actual

• Liquidity management

Cash doesn’t lie! – Liquidity vs accrual accounting

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Responsible Per property PnL Liquidity

Facility Mgmt/ Asset Mgmt + Rental Income + Rental Income

Facility Mgmt/ Asset Mgmt - Maintenance expense - Maintenance expense

Facility Mgmt/ Asset Mgmt - „rental loss“ - „rental leakage“

= Income 1 = Liquidity 1

Asset Mgmt - Capex, if expense - Capex

Asset Mgmt - promotional expenses - promotional expenses


(Dis)Investment Mgmt + privatization gains + privatization proceed

(Dis)Investment Mgmt + blocksale gains + blocksale proceeds

(Dis)Investment Mgmt - commissions - commissions



Cash doesn’t lie! – Liquidity vs accrual accounting

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Fin. Controlling/ Facility Mgmt ± cost of operations

Fin. Controlling () - Mgmtfee - Mgmtfee

Fin. Controlling - accounting/audit/other - accounting/audit/other

Fin. Controlling - interest - interest

Fin. Controlling - depreciation - amortization

Fin. Controlling - income tax - income tax


Investor relations - Distributions - Distributions

= p/l per period = Cash per period

+ p/l previous periods + cash previous periods

= p/l carried forward = Cash to date


Seamless exchange as success factor

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In order to efficiently tackle the requirements of private equity real estate investments we have established an organisational setup which exchanges data within the various providers and requestors:

• Due diligence database

• regional Asset-Management Teams

• Various Property Management Agents

• Liquidity- und Loan-Management

• Business Planning Team

• Accounting & Tax

• Auditors

• Investors

• Complex data structures

• Tight reporting schedules

• Seamless ex-change without media con-version

Property Mgt.

Asset Mgt.

Liquidity Management

Complex data and tight reporting schedules

Continuous integration of data warehouse

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Portfolio Management

Asset Management

Property Management

BP cash ledger

….

….


Information requestors

hete

roge

nueo

us d

ata

sour

ces

Layers of data management

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Data Collection

Data Cleansing

Monitoring

Analysis

Rep.

• Client focused reporting

• Performance attribution, e.g. letting, collection, overhead reduction

• Analysis on various levels according to business plan

• Archiving in a data marts

• Intelligent, rule-based plausibility checks

• Automated translation between differing input formats, Standardized input requirements

Collection, verification, analysis and reporting of heterogeneous data

Business intelligence for real estate data

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• Continuous data requests from property managers, banks, other data providers (timely, accurate, consistent, electronic!)

• Systematic follow-up for missing or modified data • Connectivity through various input formats

Exchange, transfer & load

• Filing of all relevant information electronically • Proven data models can easily be adjusted to specific requests • Data retrieval within portfolio context

Data modelling and storage

Advanced analysis of real estate data

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• Performance measurement

• Flexible analysis levels

• Scenario analysis to evaluate cash flow impacts

• Standardized reporting format is assisted by flexible multi-criteria ad-hoc queries

• Integration of real estate data and meta data, e.g. local responsibilities

• Encouraging of pro-activity by transparent accountability

• Transformation of disjoint property data into decision-making fundamentals


Monitoring of real estate portfolios

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• Key performance indicators are derived from business plan

• Cash management & cash flow forecast

• Predefined event-driven profiles for alerts

• Representation of waterfall of bank accounts

• Debt compliance checks & alerts

• Capacity to efficiently oversee highly diversified portfolios

Document

Real Estate

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