Maximize Real Estate Fund Performance:

Proactive Management Spurs Profitability and Growth

Point of View

www.realfoundations.net

Maximize Real Estate Fund Performance:

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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 reportingprocesses are woefully inadequate to keep up the pace in this market. In addition, business processes areoften 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 undermanagement, 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 NCREIFand AIMR. Manual processes are costly, too: the cost of the time and resources required increases operatingexpenses 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 informationacross the portfolio, along with sophisticated analytical capabilities. Integrated information systems andfinancial analysis software are critical for effectively managing their extensive, diverse portfolios andmaintaining 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 potentialacquisitions in terms of the impact on a portfolio, and make strategic decisions regarding the handling ofthose assets. Standardized processes, accessible information and up-to-date analytical tools help fundmanagers 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 andvisibility into data across multiple systems. Business processes must be streamlined and made consistentacross all operations. Only then can real estate fund managers provide truly effective decisions, consistentlyimprove returns, and attract new capital.

People, Processes and Technology Create Value

Technology supports integrated information flow and analytical tools, enabling streamlined processes toflow seamlessly across the enterprise. Standard processes and real-time information allow the organization’speople—from fund managers to property managers—to consistently create more value.

RealFoundations specializes in helping real estate businesses run better through people, processes andtechnology. RealFoundations builds targeted real estate fund management solutions to ensure optimumportfolio 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 howto apply tools and technology to help them meet investor expectations.

www.realfoundations.net2

Introduction: Time for a ChangeCompetition for investor funding is growing in the real estate capital markets, and the ability to maximizeportfolio performance and investor returns is critical for continued profitability and growth. Real estateportfolio investments are growing in popularity, which not only attracts new capital but also newcompetition for that capital.

For example, opportunistic real estate funds have raised more than $100 billion in equity commitmentssince 1990. Real estate is predicted to outperform both stocks and bonds in 2005, with the followingforecasted 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 whilesimultaneously meeting accountability and compliance requirements.

Real estate managers within the capital market sector have traditionally been resistant to investing in newtechnology and still lags behind other industries. Portfolios worth billions of dollars are managed usingobsolete technologies, manual processes, fragmented data sources, and offline tools for analysis andreporting. And, because this sector is seen as a late adopter of new technology, software vendors havebeen slow to develop integrated, industry-specific solutions.

However, competition in the marketplace is driving the need for streamlined processes and integratedtechnology—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 barrierto maintaining and exceeding performance expectations. Analysis and reporting are often carried outwith disparate, legacy systems. Information is either unavailable or inconsistent—and the proliferation ofmanual 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 thecorporate system. In addition, every property manager may operate with a unique set of businessprocesses. Once a month, all the property managers extract data from the individual systems at theproperties they manage (i.e., balance sheets, income statements, leasing statistics, etc.) and compile it inMicrosoft® Excel® spreadsheets or other offline reporting tools. The property managers then submit theirmanually complied reports to the portfolio manager.

The portfolio manager must then manually consolidate the individual reports before portfolio-levelreporting and analysis can be performed. Data integrity issues can arise from this data transfer andconsolidation process. Furthermore, these manually intensive processes leave little time for quality dataanalysis, as a majority of the time is spent on compiling the data for reporting purposes. And, because thetime needed to perform all these manual processes adds up, quarterly reports are often not finished forpublication until the next quarter.

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Now imagine the cumulative effect of all these manual processes on a real estate investment fund holdingmultiple portfolios and a few thousand properties.

Under these circumstances, portfolio managers are restricted in their ability to make decisions that impactthe 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 NCREIFand AIMR standards.

But, with standardized processes and integrated technology solutions tosupport them, portfolio managers have access to real-time activity anddata (both financial and operational) at the underlying property level aswell as at the portfolio level—and any defined levels in between. Thisallows portfolio managers to proactively capitalize on opportunities thatoptimize the performance of individual assets and the portfolio as awhole.

The integration of people, process, and technology promotes operationalefficiency and provides detailed, real-time visibility into portfolio assets.The synergy of these three components allows portfolio managers todirectly influence the performance of assets, increase profitability, andattract additional capital.

The Cost of the Information Deficit: Time Is Money Unlike mutual fund managers, real estate portfolio managers are in a position to move proactively andcreate positive results for their funds and portfolios. With streamlined processes and integratedtechnology, they have the ability to analyze the operating characteristics of individual buildings and takeaction 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 datacompilation 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 outdatedtechnology, a lack of integration, and manual processes.

"As real estate managers and advisors

for the nation's largest corporations,

we have a responsibility to ensure

that our clients' investments are not

only managed profitably, but also

managed intelligently," says the

managing director of asset services

for a global real estate brokerage and

services firm.


Emanating from the center of thecircle, influencing each relationship,are the activities and processes thatultimately produce the desired resultsfor investors: the expected return oryield on the real estate fund. Thegroups that are closest to the centerhave the biggest stake in performanceand influence on the returnsassociated with it.

Moving further away from the center,each group possesses deeper, moregranular detail, and less directinfluence on performance. Fundperformance is a function of investors,who are influenced by how well theportfolio is managed by the portfoliomanagers. Portfolios are the result ofasset management, which is a functionof property management. Drilling outfrom the center, each party or grouppossesses more granular, property-level detail.

In the past, traveling further out in thecircle of influence to obtain detailedinformation required touching moreand more people directly. Fundmanagers often confrontedincreasingly fragmented data and aplethora of time-consuming manualprocesses. More and more time andresources were required, with dataintegrity suffering at each step furtheraway 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.

Circles of Influence:People, Process, & Technology: Interlocking Interdependencies

The Relationship between People and Information in Property and Asset Management

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What Prevents Real Estate Portfolio Managers from MaximizingPerformance?The real estate investment sectors’ use of information technology has historically lagged behind otherindustries—most of this sector continues to use a resource-intensive approach. For example, portfoliomanagers rely on property managers to provide property-level information on a monthly basis. Thismethod is utilized by a majority of firms in the real estate investment industry to accumulate and manageinformation at the property level.

Real estate portfolio managers in the capital markets sector must deal with fragmented data and manualprocesses to manage their portfolios, calculate returns, and produce financial reports. Instead of using asingle, integrated data source to build reports and perform analyses, they must get crucial property-leveloperational 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 manuallycompiled for reporting purposes. This is a time and resource-intensive process, and worse yet, dataintegrity can be compromised at each step of this consolidation process. Readily available information ismostly financial in nature, and access to operational information is limited or only available in hard copydocuments.

In addition, it may take months from data collection to report delivery: by thetime the information is available, it is stale.

Stale Information Limits PerformanceWhat this means is that real estate portfolios are primarily managed fromhistorical information that is less than complete and exact because of the lack ofaccessibility and timeliness. These issues may prevent portfolio managers fromcapitalizing on opportunities “today” because they are not aware of them until“tomorrow.” Portfolio managers lack real-time visibility into underlying data, andtherefore are limited in leveraging that data when making decisions.

Furthermore, the outdated technology used by many portfolio managers doesnot provide compliant performance calculations with industry standards such asNCREIF and AIMR. These standards are used to evaluate fund performance in themarketplace. Investors and analysts may rely on these standards to assess realestate fund performance and make sound investment decisions.

Reporting in compliance with these standards requires calculating returns based on specific pieces of datacombined in detailed computations. For example, NCREIF Income Return is calculated with the followingformula:

Net Operating Income

Beginning Market Value + 1/2 Capital Improvements – 1/2 Partial Sales – 1/3 Net Operating Income

“When managing large portfolios,

the asset manager often needs to

look at performance by region,

property type, ownership and

more. Information from several

sources can be stored in [a]

centralized database structure,

providing expansive reporting and

analysis capability,” says the VP of

marketing at a leading real estate

software provider.


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 placecreates additional manual, resource-intensive processes.

However, current releases of integrated real estate software offer compliant NCREIF and AIMR calculationsas a standard feature. With these tools, portfolio managers can benchmark their performance against otherportfolios in the industry because these calculations are based on a standard set of requirements. Inaddition, investors will place greater confidence in the results, knowing that they have been derivedaccording to industry-approved standards.

Integrated software solutions have become critically important for real estate companies that manageextensive, diverse portfolios. These solutions give all users involved in the process real-time access to thesame, consistent data.

TenantsPropertyManager

A

INVESTOR1

QuarterlyInformation

and Performance

PORTFOLIO1

Operational

Data Required

for reporting

ASSETMGMT.

QRTLYOperationalData

MonthlyFinancial Data

Leasing Agents

Tenants

Tenants

PropertyManager

B

PropertyManager

C

PORTFOLIO2

INVESTOR2

INVESTOR3

Leasing Agents

Valuation Lawyers Bankers Lawyers

Asset Mgmt.A Reliance on Property

Managers

A Lack of Timeliness

A Manual Data Transfer intoMultiple Analysis andReport Tools

Portfolio Mgmt.A Resource-Intensive

A Data Compilation vs.Data Analysis

A Manual Calculations and Reporting from MultipleSources

Investment Mgmt.A Risk of Non-Compliance

With Industry Standards

A Potential Loss of Credibility With Investors

A Hindrance of CapitalGrowth

Property Mgmt.A Unrelated Databases

by Property

A Inefficient Data Entry

A Multiple Charts ofaccounts

ISSUES: DECISION MAKING, REAL TIME VISIBILTY, DATA INTEGRITY

Lack of integration, along with the proliferation of manual processes fosters complexity, threatens dataintegrity and ultimately hinders success with bankers, lawyers and investors.

Greater access and visibility to operational and financial information enhances the decision-making andanalytical capabilities of a portfolio manager, thereby improving returns on investments and enhancingthe ability to attract additional capital.

Standardized processes, accessible information, and enhanced analytical tools help portfolio managersimprove 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 toolsthat are applied to the collection, management, and reporting of financial and operational informationrelated to their real estate portfolios.

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Case Study:National Fund Manager Streamlines Processes, Lowers Risk

A large national fund manager, employing nearly 50 Property Managers (PMs), managed morethan 800 properties across the US. Each property used its own stand-alone version of thecompany’s property management software. Each month, financial transactions from the uniqueproperty-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 foranalysis. Once the required analysis and formatting was performed, the asset managerstransmitted the data to the portfolio accountants to be included in the financial reportingpackages.

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 valueinvestments, 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 forthe corporate office, executive management, asset managers, and investors. In the interimmonths, asset managers and portfolio accountants had to depend on the PMs for currentproperty-level data. The end result was that the PMs and portfolio accountants had to spend agreat 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 theircurrent system and processes became the driving factor in converting to an integrated, real estatesoftware solution.

The RealFoundations Solution for Portfolio ManagementThe success of real estate investments and portfolio managers is measured by overall returns.Unfortunately, financially oriented portfolio management firms tend to overlook the importance ofoperational processes and technology. Firms that view these issues as less important often lackstandardization and adequate controls that can directly impact their ability to improve returns. Improvingthe information flow from the individual assets to the consolidated portfolio level and enhancing thevisibility into operational data leads to more proactive management and better returns.

RealFoundations helps clients understand and improve key business processes while implementingtechnology solutions that address information flow, standardization, and reporting challenges.RealFoundations’ proven methodologies and extensive experience in the capital markets sector havehelped 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 investmentstrategies 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 implementingintegrated management and analytical tools.

• Standardize processes to allow for the management of greater volume withoutadditional resources.

RealFoundations has consistently affected change in the industry by helping real estate organizationsbetter 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 theoperation.

RealFoundations examines and analyzes these areas to see where they are out of balance and assessesways to bring them into balance and create synergies. RealFoundations observes the business issues, notjust technology issues: technology is an enabler to solve business problems. Technology supports peopleand creates operational efficiencies by enabling better processes: better processes save time, money, andresources.


Where Should the Organization Be?

RealFoundations starts by helping clients define their future state: the vision of where and how thesecompanies want to operate. Then, working closely with clients, RealFoundations helps develop themethodologies to meet those goals. This is how companies can begin to fundamentally change theirbusiness.

RealFoundations’ solution for portfolio managers improves the information gathering, analysis, andreporting functions, while bringing a higher level of visibility into real estate asset information to driveportfolio performance. This solution has three components:

• Assess Collection of Core Business Information: Improve core data collection by usingpeople, 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, andtechnology to build meaningful data relationships and create “real-time” information access.Proactively use information from all real estate assets to make decisions that impact revenuestreams 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 flowand decision-making capabilities that impact forecasting and performance management.

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RealFoundations’ Methodology and Approach

• Perform current-state assessment of processes, applications,tools, data and reporting landscape.

• Evaluate current operations and identify short and long-termopportunities for improvement.

• Define a baseline of operational and financial requirementsand identify solution alternatives based on thoserequirements.

• Generate a strategic information technology plan based onprioritized improvement opportunities, benefits, investment,and viable solution alternatives.

• Establish a framework of leading practices.

• Improve and standardize processes across all major businessfunctions.


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 technologyresources, and if they are strategically placed in the most productive areas. Analyzing people, processesand technology lets RealFoundations fully understand the specific needs of their clients, and design acomplete solution that enables these businesses to manage information better and leverage it effectively.

Solution Layer: Understanding What the Solution DoesThe application of the foundation layer clarifies interdependencies between existing silos of independentproperty data; the solution layer creates the technology support that allows information to flow easilyfrom one area to another and makes the same data sources available to all in real time. This is referred toas “process optimization”, which then facilitates the transfer of detailed property information into the assetmanagement 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 alllevels and layers of information. With this top-down view, executives can see how information flowsbetween property, portfolio, asset, and investment management functions, allowing them to use theirtime on more productive analytical activities, rather than gathering and manipulating data. Managers cantake more proactive stance in the decision making process.

People

A Defined Responsibilities A Accountability A Capability & TrainingA Workload A Scalability/Flexibility

Process

A Leading Practices A StandardizationA Implementation & Use A MeasurabilityA Adaptable to Change

Technology

A Functional ApplicationsA IntegrationA Adaptation & Proper Use A FlexibilityA Timely Enhancements

3rd Party RelationsA CollaborationA Electronic Information

ExchangeA Industry & Market ResearchA Deal Facilitation & StructuringA Cash Mgmt.

Property Mgmt.A Lease AdministrationA Billing & CollectionsA Procure-to-PayA MaintenanceA Vendor Mgmt & RelationsA Budgeting & ForecastingA Property Reporting

Asset Mgmt.A Acquisitions & DispositionsA Capital Expenditures A Tenancy A Budgeting & ForecastingA Operational Data AnalysisA Asset Performance

Benchmarking

Portfolio Mgmt.A Financial Data AnalysisA Budgeting & Forecasting A Corporate Operations A Consolidations A Financial ReportingA Yields & ReturnsA Industry Standards

Investment Mgmt.A Investor ReportingA Investor CommunicationsA Maximizing ReturnsA Capital GrowthA Capital Planning & Mgmt.A Industry Compliance

Analytics & Dashboard ViewsReporting – Performance – Benchmarking

Integrated System

Required Foundation

RealFoundations Integrated Solution for Portfolio Management

Real-Time – Data Integrity – Operational Efficiency

FoundationLayer

SolutionLayer

DashboardLayer

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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, andimplementing 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 significantlyreduces the time and resources required for the data collection process. In addition, the quality andtimeliness of the data is improved, along with the flexibility to analyze data in many ways. This ensures dataintegrity, consistent reporting, and compliance with industry standards.

Leverage Information

Visibility into real-time operational and financial data enables portfolio managers to directly influencerevenue and expense streams. The ability exists to drill down into the supporting data for each transactionto perform analysis. For example, portfolio managers can drill down to the entire inventory of vacant orsoon-to-be vacated space, any purchasing activity, and all current building maintenance expenses oranticipated capital expenditures. With the ability to drill down into the supporting data for eachtransaction, portfolio managers can perform analyses that support better, more timely decisions. Theaccessibility of detailed, current information allows managers to manage proactively. They can measureoperating income and expenses in real-time, make better projections, and assess the performance ofunderlying assets.

Analyze Information

Information analysis gives managers the ability to see present reality and project into the future. Withinformation visibility and analytical tools, the managers can discover activities in real time and takeproactive steps to create better outcomes.

Integrated information and analysis offer a variety of opportunities for process improvements and costsavings. This also aids in dealing with operational and financial details that can detract from financialperformance. Real-time information and analytical tools enable proactive decisions that drive financialperformance and growth.

RealFoundations’ Integrated Solution for Portfolio Management Makes a Difference

The ability to effectively manage information—from collection to analytics to reporting—enhancesproactive decision-making and facilitates improved performance. Managers can view all informationholistically, 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 relationshipswith investors, banks, lawyers, property managers, tenants, and others. For example, individual propertymanagers do not have the broad visibility into all aspects of the portfolio. Improved information access atall levels combined with standardized, streamlined processes helps portfolio and asset managers effectivelyinteract with property managers. This enables property managers to also be proactive and make informeddecisions that will positively impact the bottom line. Portfolio managers can also enhance communicationand integration with other third parties, such as investors and the legal and financial communities.

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 Profitabilityand GrowthBy focusing on people, process, and technology, RealFoundations helps portfolio managers improveoverall returns. Technology supports integrated information flow and analytical tools, enablingstreamlined 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 andreporting 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 keyrelationships

• 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 forPortfolio Management helps fund managers directly impact their ability to meet and exceed targetedexpectations.

About RealFoundations RealFoundations builds targeted real estate fund management solutions to ensure optimum portfolioperformance. As a management and technology consultancy focused exclusively on real estate,RealFoundations understands the demands faced by real estate fund managers to perform, and knowshow 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: www.realfoundations.net.

Howard Barash Managing Director New York, New York [email protected] Walker Consultant New York, New York [email protected] York office phone number 646-825-7988

Copyright C 2006 RealFoundations Inc. All rights reserved. Design copyrightC 2006 The Appum Group, Inc.
