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Asset managing your portfolio: Assessing and Analyzing PORTFOLIO PERFORMANCE NeighborWorks AMERICA NATIONAL REAL ESTATE PROGRAMS PORTFOLIO STRENGTHENING.

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Presentation on theme: "Asset managing your portfolio: Assessing and Analyzing PORTFOLIO PERFORMANCE NeighborWorks AMERICA NATIONAL REAL ESTATE PROGRAMS PORTFOLIO STRENGTHENING."— Presentation transcript:

1 Asset managing your portfolio: Assessing and Analyzing PORTFOLIO PERFORMANCE NeighborWorks AMERICA NATIONAL REAL ESTATE PROGRAMS PORTFOLIO STRENGTHENING CLINIC Presented by: David Fromm

2 Ways to Create Portfolios By Activity  In development  Stabilized  Troubled By Use  Residential  Family  Elderly/Disabled  SRO  Special Needs  Office  Retail  Industrial By Location By Size By Ownership Self-Managed/Third Party Those With Cliffs/Debt Maturities PSC-I :

3 Ways to Analyze Portfolios Trends Identify trouble or potential trouble Operating Indicators Scattergram Benchmarks Comparables Balance Sheets Ratios Reserves Cash balances Accounts receivable and payable PSC-I :

4 What is a Watch List? It is a portfolio of properties that are under scrutiny based on their performance in one or more identifiable indicators Different stakeholders are likely to focus on different indicators Being on a watch list can trigger events or consequences that pose difficulties for a property or an organization PSC-I :

5 Gathering the Data Key Determinants Location Age Bedroom mix Key Indicators This Morning: Financial Occupancy This Afternoon: Other Performance PSC-I : Other Performance

6 Gathering Data Key Determinants Location Age Bedroom mix Key Indicators This Morning: Financial Occupancy Other Indicators CNAs Stakeholder Report Cards Risk Management Staff Performance Resident Satisfaction Board/Owner Involvement PSC-I :

7 Key Determinant of Cost #1: Location, Location, Location What It Is  Census tract in which the project is located. What It Tells Us Operating costs are influenced by their location in the country, state, city, neighborhood. The higher the rate of poverty in the census tract, the higher the operating costs relative to nearby neighborhoods. Poorer neighborhoods tend to have higher rates of vandalism, crime, turnover – all of which contribute to higher operating costs. PSC-I :

8 Key Determinant of Cost #2: Age of the Property What It Is Date project was built/ first occupied, OR Date project was fully renovated What It Tells Us The older the property and its systems, the more it costs to maintain. Thus operating costs are often higher in older projects. PSC-I :

9 Key Determinant of Cost #3: Average Bedroom Size (Unit Density) What It Is Formula: Total Number of BRs Total Number of Units What It Tells Us Higher the average bedroom size, higher the anticipated operating expenses Average BR size over 1.5 = family property Some SROs with low average BR size may be costly to operate Often very difficult/costly to operate properties with bedroom density over 2.0 PSC-I :

10 Other Performance Indicator #1: Capital Needs Assessment (CNA) What It Is  Long range forecast of physical needs of a property  Prepared comprehensively periodically (every 5 years)  Updated annually  Often required by lender What It Tells Us  Identifies capital items that will need to be replaced based on their anticipated useful life  Quantifies anticipated costs of non-routine replacements  Helps owners size replacement accounts PSC-I :

11 Other Performance Indicator #2: Stakeholder Report Card What It Is  Formal or informal rating of performance of a property in one or several areas Examples: REAC physical inspection; HFA property management review; LIHTC compliance monitoring audit; meeting established Owner goals; MFI Portfolio Report; local health department inspection; insurance company review of safety status What It Tells Us  How a property is performing  How an owner and/or manager is performing  How imminent a stakeholder action is PSC-I :

12 Other Performance Indicator #3: Risk Management Program What It Is  Identification of risks involved in owning and/or managing real estate  Description of how to manage risks (e.g. types and levels of insurance coverage; plans for emergencies; contingencies)  Trends in schedule of debt – debt recourse – mix of hard/soft debt What It Tells Us  How we evaluate and prioritize risks  How well prepared we are to address unknown events PSC-I :

13 Other Performance Indicator #4: Staff Performance Evaluation What It Is  Objective measure of staff’s contribution to a property or portfolio meeting its stated goals (e.g. turnover time is reduced from 15 to 7 days; collections are reduced from 3% of GPR to 1% of GPR - both require staff involvement to meet goals) What It Tells Us  Helps identify training needs  Helps determine if staff are part of the problem or part of the solution PSC-I :

14 Other Performance Indicator #5: Resident Satisfaction What It Is Measure of satisfaction residents report in key factors effecting their residency Examples: Timeliness and quality of work order completion Responsiveness of staff to inquiries, problem solving Availability of amenities, resources – on site, nearby Neighborhood What It Tells Us How well we are delivering management services Likelihood of retention PSC-I :

15 Other Performance Indicator #6: Board/Owner Involvement What It Is  Level at which the Board/Owner is engaged in establishing property, portfolio and organizational goals and routinely measuring performance against those goals What It Tells Us  Likelihood that problems will/will not be addressed timely and strategically PSC-I :

16 Stakeholder Watch Lists What measurements are likely to be on these stakeholders’ watch lists? Board of Directors Lender Investor Regulator Board of Directors Property Manager Residents PSC-I :

17 How Do We Monitor Sustainability? NeighborWorks America has initiated a Green Organization Program for its NWOs. It provides guidance to NWOs committed to implementing and sustaining “green” practices. It encourages the establishment of a Green Asset Management Plan that measures performance in:  Energy Efficiency  Water Conservation  Healthy Indoor Environments  Recycling and Waste Reduction  Accessibility and Walkability  Environmentally Friendly Landscapes  Sustainable Materials and Products  Durability  Lifecycle Approach PSC-I :

18 How Do We Monitor the Impact of Resident Services? Anecdotal evidence has suggested for years that resident services in affordable family housing helps reduce operating costs. Studies* are beginning to confirm these observations in specific areas:  Vacancy Loss  Bad Debt  Legal Fees (eviction prevention) Rent loss (vacancies plus bad debt) is a common performance measure. * NW and Community Housing Partners study PSC-I :

19 The Asset Manager’s Watch List First, identify the key indicators for your portfolio Be certain they tie back to the Board’s goals for the properties Secondly, establish the criteria you will use to evaluate each indicator Lastly, decide on a ranking system Make the criteria SMART Specific Measurable Attainable Realistic Timely PSC-I :

20 Watch List Example INDICATOR: May be one discrete indicator, such as vacancies, or a combination of one or more (rent loss which equals vacancies plus uncollected rent) CRITERIA: Rent Loss 0 = > 7% 1 = 5% - 7% 2 = 3% % 3 = 1% % 4 = < 1% RANKING: 0 Troubled, Watch List 1 Watch List 2 Watch List 3 Performing 4 Performing PSC-I :

21 Sample NASLEF Guidelines for Watch List Criteria: Development CATEGORY Construction delays Construction cost overruns Leasing delays – qualified occupancy Leasing delays – all units Mechanics liens Sources/Uses of Funds Change in qualifying units Other litigation GUIDELINE Over 3 months behind schedule Exceeds 15% of original contract and contingency spent Over 3 months behind schedule Over 4 months behind schedule Filed lien not covered by indemnity & not cured in 3 mos Uses exceed 3% of TDC of $100,00, whichever is less Any change Any action 20 PSC-I : 2012

22 Evaluating a Watch List Your materials include Four Watch List Examples Avesta (6 pages) Foundation Communities (1 page) Homeport (4 pages) Sample (2 pages) All “rank” or “rate” properties Critique these report as follows: Evaluate the indicators What do you like What’s missing Evaluate the criteria Are they SMART? What would you change? Can you determine the Board’s asset management objectives from what they measure? PSC-I :

23 From the Field: Identifying Opportunities Jeffrey Reed, CFO for Community Housing Partners of Christianburg, Virginia and a CHAMpion offers: So many times, our focus is on our high watch list – We spend our time, money and resources trying to keep problem properties afloat. Often, more focus on our good properties can generate more money than our bad properties are losing. Lets look at Sea Haven Apartments: PSC-I :

24 Sea Haven Apartments, Virginia Beach 26 unit family property with some Section 8 Vouchers No restrictions on distributions Flowing $50K per year (over $2K per unit), no debt 4 blocks from the beach, C quality Apartments Brick Construction, high energy costs, high maintenance costs Low watch property We should not spend time on this property and focus on high watch properties, Right? Wrong! We applied for Weatherization funds which provided new heat pumps, roofs and energy efficient appliances We invested an additional $5K/unit ($130K)to upgrade the kitchens, baths, flooring and exteriors which brought the property up to a B quality Now, two years later with rent increases and reduced maintenance costs, we are flowing $143K per year ($5.5K/unit) PSC-I :

25 CHP’s High Watch List Community Housing Partners has 11 properties in its High Watch List One is Lynnhaven Landing and it cash flowed $165K through September 2011 One is The Crossings of Leesburg and it lost $235K. The other 9 properties on the high watch list had negative cash flow of $114K through September. Where should I focus my time? How about Lynnhaven? PSC-I :

26 Lynnhaven Landing YearCash FlowOccupancyMaintenance Costs ,00098% 503, ,93897% 407, ,00095% 388, ,00093% 405, ,00093% 404, ,65192% 353, ,00088% 416,421 PSC-I : What do you see here? Good cash flow…sporadic maintenance costs… and decreasing occupancy What story could this be telling? Actually… Our occupancy was slipping because our asset was aging and our marketing was not as strong as it could have been, and… Property management was trying to defer maintenance to give me the cash flow I said I wanted

27 What happened? We did a market survey –concluded rents were good for this age product but we could get $100/unit/month more for an updated unit We shopped our leasing agents and found our leasing office was closed during key times We did a ‘CNA and it identified immediate and long term capital needs We brought in our Architecture and Construction departments to recommend upgrades needed PSC-I :

28 Lynnhaven Outcome Began a $1 million rehab focusing on upgrading 110 of the total 252 units. So far, 50 units have been completed (and rented) and they are, in fact, bringing $100 more We improved our leasing techniques and changed our office hours We have almost achieved our budgeted vacancy of 93%, up from 88% which will, alone, net a $135K cash flow improvement…. Eclipsing the $114K loss at the other 9 high watch properties ! PSC-I :

29 Creating Your Watchlist PSC-I :

30 Most Common Problems In Affordable Housing The Market The Financing The Management Physical Condition Not Competitive Overleveraged Subsidy and/or other restrictions Functionally obsolete Hazardous Deferred maintenance Unresponsive Combative Not skilled enough 29 PSC-I : 2012

31 EXERCISE Property Name NO ISSUES MARKET FINANCIAL STRUCTURE MGMTPHYS COND OTHERAMT DUE PARENT AX BXXXX$200K CXX $ 76K TOTALS111211$276k PSC-I : Draw above matrix on flip chart List your properties (up to 10) Place “X” in appropriate box(es) for each property; BE PREPARED TO DISCUSS INDICATORS THAT LED TO THIS DECISION Enter total payables to parent for each property (related party) Total each column Prepare presentation to group

32 CLINIC OBJECTIVES Identify the strengths and challenges of your current rental portfolio by gaining an understanding of well-established key performance indicators/benchmarks Understand the impact the portfolio has on your organization; Identify the type of problem(s) for each property in your portfolio Develop a (preliminary) watchlist for your portfolio Articulate specific steps to be taken to improve the portfolio’s operating performance PORTFOLIO STRENGTHENING CLINIC I 31

33 What is portfolio management & Why is it important? NREP PORTFOLIO STRENGTHENING CLINIC I 32 PORTFOLIO STRENGTHENING CLINIC I

34 Different Types of Real Estate Management Property Management Day-to-day, one at a time Achieve owner/stakeholder goals Asset Management Acquisition to disposition: long term, one at a time Achieve owner/stakeholder goals  Portfolio Management Properties combined Link owner/stakeholder goals with organizational goals; 33 PORTFOLIO STRENGTHENING CLINIC I

35 Most Common Problems In Affordable Housing The Market The Financing The Management Physical Condition Not Competitive Overleveraged Subsidy and/or other restrictions Functionally obsolete Hazardous Deferred maintenance Unresponsive Combative Not skilled enough 34 PORTFOLIO STRENGTHENING CLINIC I

36 AND - there’s a 5th Problem Portfolio Structure mix of mission vs financial performance building portfolios one property vs several properties at a time Portfolio feeding the organization vs organization feeding the portfolio 35 PORTFOLIO STRENGTHENING CLINIC I

37 TRUMPING PROBLEMS Good management trumps bad markets Excessive debt trumps good management Inadequate rehabilitation trumps debt Expense controls alone can’t fix structural problems If debt really is the problem, why not aggressively attempt to fix it.

38 Reviewing Property vs. Portfolio Results Always review both property and portfolio results in total dollar and pupy amounts Excellent way to build internal “comps” Pay Attention! Each property’s A/P to organization may be modest; as a portfolio the total may be significant Portfolio vacancy rate may be very good, but one property may have a poor vacancy rate 37 PORTFOLIO STRENGTHENING CLINIC I

39 KEY PERFORMANCE INDICATORS: Are quantifiable measurements that are critical to the success of a business. These indicators vary between organizations and industries. If implemented and monitored correctly, help a business define and measure progress toward both short-term and long-term organizational goals. PORTFOLIO STRENGTHENING CLINIC I 38

40 FINANCIAL & OCCUPANCY OTHER NREP ‘Quick Reports’ NOI/NCF DCR Collection Rate Turnover Rate Collection Rate Average Days Vacant Balance Sheet Income Statements CNAs Stakeholder Reports Risk Management Staff Performance Resident Satisfaction Board/Owner Involvement AFFORDABLE HOUSING KPI’S PORTFOLIO STRENGTHENING CLINIC I 39

41 NREP QUICK REPORTS NREP PORTFOLIO STRENGTHENING CLINIC I 40 PORTFOLIO STRENGTHENING CLINIC I

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44 Portfolio Profile Indicator #1A: NET OPERATING INCOME (NOI) What It Is What It Tells Us How much is available to cover: Hard Debt Reserves Other Cash Flow Distributions Essential for determining: DSCR Property Value (with Cap Rate) Operating pro formas Gross Potential Income – Vacancy and Collection Loss + Miscellaneous Income =Effective Gross Income – Operating Expenses = Net Operating Income 43 PORTFOLIO STRENGTHENING CLINIC I

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46 Quick Report Operating Indicator #1: Net Cash Flow (NCF) What It Is Formula: Net Operating Income - Total Non-Op Expenditures - Total Hard Debt = Net Cash Flow It does not include “soft” debt. What It Tells Us Resources available, usually on an accrual basis, once all property expenses have been counted, including all “below the line” items such as reserves. 45 PORTFOLIO STRENGTHENING CLINIC I

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48 Quick Report Operating Indicator #2: Debt Service Coverage Ratio (DSCR ) What It Is Formula: Net Operating Income Annual Hard Debt Service Usually does not include soft or deferred debt What It Tells Us How well a property can meet its current debt requirements Underwriting standards typically look for a DSCR of 1.2 or better 47 PORTFOLIO STRENGTHENING CLINIC I

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50 Quick Report Operating Indicator #3: Operating Expenses (OpEx) What It Is Total operating expenses (admin, mgmt fees, utilities, maintenance, taxes, insurance). Does NOT include: replacement reserve contributions, financial expenses (mortgage, mortgage insurance), capital expenses, developer fees or other owner payments, or oversight or asset management fees. Includes social services expenses only if paid from Operating Expenses, not cash flow or some other source. What It Tells Us Widely used in industry and allows comparison of costs across different properties when done on a per unit per year (pupy) or per unit per month (pum) basis. Regional differences are significant as are types of housing (elderly vs family). 49 PORTFOLIO STRENGTHENING CLINIC I

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52 Quick Report Operating Indicator #4: Vacancy Loss (VL) What It Is Gross Potential Rent (GPR) of units that are vacant What It Tells Us When divided by GPR, the vacancy loss percentage gives a measure of a property’s performance towards revenue potential. Vacancy loss in underwriting is typically 5%. However, other elements of rent loss are often not budgeted. 51 PORTFOLIO STRENGTHENING CLINIC I

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54 Quick Report Operating Indicator #5: Collection Rate (CR)  What It Is Formula: Total Amount Collected for Period - Previous Periods’ Arrears Amount Billed for Period  What It Tells Us  Accurate status of period’s collection rate  Helps highlight current arrearages 53 PORTFOLIO STRENGTHENING CLINIC I

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56 Quick Report Operating Indicator #6: Turnover Rate (TO)  What It Is Formula (annualized) a. Turnovers = Move Outs/ # Months x 12 b. Turnover Rate = Annualized Turnovers/ # Units  What It Tells Us  Can be an indicator of resident satisfaction  Can help explain high marketing, decorating and other vacancy costs 55 PORTFOLIO STRENGTHENING CLINIC I

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58 Quick Report Operating Indicator #7: Average Days Vacant (ADV)  What It Is Formula (for the period): The total days all units are vacant* Total number of move-outs Unit vacancy = the number of days between when a unit is vacated and it is re- occupied  What It Tells Us Average time units are vacant Does not explain why the unit is vacant - just how long. Investigate maintenance turn time, administrative turn time, market situation. ADV > days problematic 57 PORTFOLIO STRENGTHENING CLINIC I

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60 EXERCISE 1 REVIEW YOUR KPI’S WITH YOUR COACH RATE THE HEALTH OF FOLLOWING FOR YOUR PORTFOLIO: Collections Occupancy Achieving NOI and DCR Objectives Portfolio’s Impact on the Organization KEY STRONG MARGINAL TROUBLED PORTFOLIO STRENGTHENING CLINIC I 59

61 INTROS/PORTFOLIO HEALTH NWOS/M- 3 RD PARTY COLLECOCCU.NOI/DCRORG IMPACT PORTFOLIO STRENGTHENING CLINIC I 60

62 MHP PORTFOLIO STRENGTHENING CLINIC Asset Management Takes The Lead: Creating, Overseeing, Monitoring Tickler file of AM Responsibilities Key dates Reporting Operating & Capital Budgets Audits Capital Needs & Reserve Fund Management Real Estate agreements & Taxes Year-15 Issues Creating deal books Overseeing Management Agent Monitoring Economic & Operating Performance of all Properties Monitoring Owner Fees Internal & External Stakeholder Relationships Regulators Investors Board of Directors Property Work-Outs, Disposition 61

63 MHP PORTFOLIO STRENGTHENING CLINIC EXERCISE 2 Your Organization’s Asset Management Matrix For each item on the Matrix Identify: Who is currently responsible for the function? Who should be performing the function? Note any gaps in skills that need to be addressed Report back to the group What works well? What would you change? Where are the gaps? 62


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