Investment Transparency and Investor Confidence

Soon you won’t have one without the other.

The criticality of an investment manager to have and provide timely, accurate, and easily accessible visibility of the investment both for themselves and their investor intensifies every day. One of our clients recently announced that they are providing an investor with access to Request, thereby giving them unprecedented access to their investment information and performance. The research firm Morgan Keegan recently gave one of our publicly traded clients an “outperform” rating citing their asset and portfolio management system that enables management to spot risk areas and take action before it’s too late as a primary driver for the high rating. And today I just read in in Globest.com that Coventry Real Estate Advisors filed a $500 million lawsuit against DDR. The complaint states that DDR “left Coventry in the dark” when it came to financial, development and leasing reports on the properties. The list of examples is going to continue to grow but the bottom line is that timely, accurate, and easy access to information for all interested is critical to everyone’s livelihood.

LPs Seek Greater Visibility Into Their Real Estate Investments

Imagine that your income stream is changing monthly, but you have no visibility into next month’s changes. In fact, you might need to pony up a lot of capital soon, but you don’t know it until the very last minute, and the only way to understand where you stand is through painfully time consuming manual processes that have to be repeated again and again. At the same time, your constituents are counting on you to deliver your budgeted numbers, or at least provide them with any changes to those numbers as soon as possible so they can plan accordingly.

This is not an enviable position to be in. However, for the most part, this is the environment that the Limited Partners such as pension funds and many private equity investors are living in.

As an example, I just got off the phone with a state pension fund that has $2billion in equity invested in real estate. They are suffering from a liquidity crisis. They need to have visibility into their future cash requirements, but can’t. Here’s some of what contributes to their challenge:

• Their consultants are each allocated a portion of the portfolio to work on. This results in silos of information based on separate groups of investments that cannot be easily aggregated.
• Important information such as tenant exposure analysis, occupancy reports, and portfolio-wide lease expiration schedules is hard to come by and outdated for most of the time.
• Their investment partners deliver an investment level cash flow report once a year. This report highlights projected contributions and distributions to the LP. With rapidly changing market conditions, these annual reports become outdated and irrelevant very quickly, leaving the LP in the dark for the remainder of the year.
• The LP receives quarterly and annual reports in pdf format, which makes it virtually impossible to consolidate the information, slice and dice it for analysis purposes, or search across multiple reports.

These challenges result in less informed decision making and difficulty in planning. To change this reality, LP’s like the one I spoke with are actively pursuing new processes and technologies that automate the delivery of information from their General Partners in an electronic format that can be quickly and easily accessed and analyzed on-demand.

Isn’t it time all LP’s moved in this direction? Are these pains common to what others in the industry experience? I’d be curious to find out what you think.

Can the Industry Keep Up with the Demand for Information as the Economy Stalls? Survey Shows It’s a Struggle.

The economic downturn is greatly impacting the way the commercial real estate industry is operating these days. Some insight into this new mode of operation can be gleaned from a recent survey conducted by Resolve, completed by over 50 representatives of investment management firms, REIT’s, and private equity firms.

Survey results show that demand for information has been growing as the economy has been slowing down, with over 80% of the survey respondents saying the frequency of demands for reports and information is either significantly higher or higher now compared to a year ago.


At the same time, the survey shows that most companies are struggling to provide the needed information and measure many of the key risk parameters in a timely manner. One example is tenant exposure. While the risk of tenants going out of business has risen dramatically in the past year, most companies still measure it only quarterly or even less frequently.

In addition, the survey shows that most real estate investment companies have trouble generating portfolio and fund-level reports, evaluating debt management strategies, and projecting future debt compliance.

70% of the survey respondents consider Loan-to-Value (LTV) and Debt Coverage Service Ratios (DCSR) either highly important or important to their financial and operational decision making. This should hardly come as a surprise as property values and projected income continue to decline. Yet over a third of the respondents indicated it takes them several days or weeks to calculate future DSCR for a portfolio of assets, and almost half of the respondents need that amount of time to calculate future DSCR for their entire fund.

Another example is what-if scenarios that are used to evaluate future decisions, including strategies for managing real estate debt. Only a third of the companies responding to the survey use what-if scenario to evaluate their debt strategies on a monthly or weekly basis, while 41% do it once a quarter and 22% only once a year or less.

While risk management has become a paramount concern to investors and investment managers alike, the survey clearly demonstrates the struggles of the industry to keep up with the growing demand for timely information and the need for proactive, forward-looking risk management capabilities.

As we can see from the survey, most companies still rely on custom-built Excel spreadsheets as the primary tool for measuring risk and running what-if scenarios. Excel is just too cumbersome. It doesn’t allow companies to do their analysis quickly and frequently enough. Companies managing commercial real estate investments in today’s market need to be able to analyze and understand their metrics on a daily basis, not monthly or quarterly. There is an urgent need for better information infrastructure and analysis tools to enable the industry to step up to the required level of operational competence.

The complete survey results are available for download on the Resolve website.

Resolve's Client Summit

September is my favorite month of the year. The weather is beautiful, leaves are turning colorful, and the Red Sox are fighting for a pennant. Most importantly, though, it’s the time our clients gather in town for the Resolve Client Summit.

Taking place at the beautiful Liberty Hotel, this year’s summit was once again an opportunity to get a read on the pulse at some of the leading real estate investment management organizations.

Those who have said “may we live in interesting times” are sure getting their wish come true these days. With the world’s financial markets in turmoil, managing real estate investments has become challenging in ways that were almost unimaginable just a couple of years ago.

The “good old days”, when you could make money in real estate blindfolded and with both hands handcuffed, seem far removed right now. Today’s environment is much less forgiving. Investment managers must be constantly on-guard and ready to take action. The need for visibility, accuracy, proactive thinking, and quick reaction has never been greater. In this tough market, you can no longer tolerate being handcuffed by outdated data, inaccurate calculations, and limited access to information.

At the same time, we must remember that cycles come and go. For the past several years, the focus was on growing investment portfolios. Now that many of us are forced to take a pause, it is an opportunity to catch up on building up the organizational infrastructure required to manage these portfolios in the most effective and responsible manner.

Although the industry is facing some difficult times, I was pleased to see that our solutions are making our clients better equipped to deal with the challenges ahead—with better access to timely and reliable information, better tools to proactively manage risk and returns, and a structured framework for real estate investment management.

RealcommEDGE

I would like to commend RealcommEDGE on an impressive first issue of what is shaping up to be a most useful resource for every commercial real estate professional. I found Anthony Nazzaro’s article about the economy’s effect on real estate decision making especially telling. One of the things that strike me in my many conversations with real estate companies these days is the willingness to continue and even accelerate investments in technology. Having gone through a number of down cycles, many executives understand that a downturn could actually present an opportunity to gain competitive advantage, and are stepping up to the plate to make their companies more strongly positioned for the eventual upswing.

The Coming of The Data Czar

Over the last 6 months, we’ve been hosting a number of webinars. As part of the attendee sign up, we ask people to list their job titles. What has become very interesting is that one role rarely seen years ago is beginning to show up with greater frequency, and that is the custodian of the data in the organization. The titles vary, but have included Data Czar, Data Business Manager, Data Quality Manager, and Data Governance Manager.

With information growing exponentially, senior management is recognizing its significance to the operations and performance of the business. Managing data means understanding it, making sure there’s confidence in it, that people have access to it, that the information people are getting matches what they are asking for, and last but not least, making sure that the processes around the movement and the use of the information are streamlined and efficient.

With the role of data custodian quickly becoming mainstream, the industry has formally acknowledged that one of the keys to success, both in decision making and investor reporting, revolves around strong information management.

The Current Economy & Information Demand

Resolve has recently been hiring a lot of people and the question that always comes up is how the credit markets and real estate current events are affecting demand for our product. Having lived through 2 real estate cycles, I believe my answer is based on experience. And that is, that when people are making money, they're less inclined to ask questions and dig deep. The opposite holds true when investors, especially institutional ones, are losing money. When this happens, people want to know what is going on, and thus, in a worsening economy, the demand for information grows exponentially.

A recent conversation with one of our clients confirms this:

"It’s a bit of a Request renaissance around here...Lots of people asking for reports and data. As the market goes down it causes people to want more data. I am very busy building dashboards."

Related to this topic, we're hosting a webinar March 20th on Managing Your Real Estate Investments in the Face of a Debt Crisis. Outside experts will discuss market conditions, go forward options, and the effects of different strategies on investor returns and compliance. To register, click here.