NOI Strategies

Commercial Real Estate Discovers Banking Technology

Author: Tamir Shafer, NOI Strategies

Is your company maximizing its cash flows? Over the last two decades, financial instruments have evolved rapidly. The complexities associated with managing all aspects (e.g. cash flow, regulatory requirements, reporting) of these instruments have increased in lock-step with this evolution.

Meanwhile, commercial real estate (CRE) companies have simultaneously expanded the types of projects they have entered into, and generally have established a web of LLCs, corporations, and partnerships across their entire portfolio of properties. Each of these projects and ventures have their own specific cash flow associated with them, and in some situations, they are not limited to one country or currency. There will be at least one bank account in place for each entity, and sometimes several accounts. The reality is that CRE companies are as much cash managers as they are asset managers. Are CRE firms up to the task of effectively and efficiently managing the financial intricacies associated with the multitude of cash related transactions occurring across their entire enterprise? 

What if we were to broaden this and ask a series of questions related to the entire treasury space – how would your firm stack up?

Most CRE firms would answer “Yes” to at least one of the above questions, and many would answer “Yes” to all of the above questions.

Fragmented Process / Fragmented Technology
The treasury space encompasses a wide array of services and responsibilities within a CRE company. These include: cash management (e.g. wires, receipts, cash flow projections), asset and liability management, debt issuance, short-term cash investments, funding the firm, and bank relations. Within most companies, the management of all these moving pieces is fragmented. A combination of spreadsheets, databases, websites, and various departments within the firm are responsible for managing and monitoring all of these pieces. In other words: the technology is fragmented, the processes are fragmented, and the responsibilities are fragmented. This leaves the typical CRE company open to risk and potential financial loss as there is no single centralized engine or repository that houses all of this information.

Treasury Work Station
I will let you in on a little secret that investment banks have known for a long time: The Treasury Workstation (TWS). Few technology platforms offer returns on investment as tangible as TWS. Did you know that treasury organizations within global investment banks such as Barclays Capital are completely structured around a single TWS? Cash management, bank fees, debt issuances, coupon payments, financial investments, bank contracts; all of these can be captured within a single TWS. An effectively utilized and integrated TWS will house and process all treasury related data and information in a nice and neat package. It can provide past, present, and predict future cash flow requirements. But its real value is its ability to maximize the potential of your cash flows, while at the same time optimizing your cash flow processes.

Speaking the Banks’ Language
Electronic messaging with banks is an inherent part of a TWS. It allows everything from wires, to cash receipts, to bank balances (opening & intra-day) to be captured within its own framework and make it available for viewing on a customizable graphical user interface (GUI) to anyone within the firm. Over the years, banks have established an intelligent network of messages they use to communicate with each other and their clients. The primary network is called SWIFT, and a plethora of SWIFT messages are available depending on the information that needs to be transmitted. TWS can subscribe to these messages, translate them, generate them, and publish them for users. From a financial perspective, since banks charge usurious fees to use their tools, TWS can reduce or eliminate many of these fees as the electronic messaging is the ideal and cheapest method of communicating with banks.

Integration & Functionality
Once a TWS has been integrated, its data can be analyzed, scrubbed, reported on, and sliced and diced an exponential number of ways. It can provide general ledger postings while also highlighting discrepancies between cash movements in a bank account vs. a firm’s internal expectations of these same cash movements. Users can enter data into TWS that will be available immediately for review and processing.

But the capability of a well incorporated TWS goes even further. Generally, a TWS can be easily customizable so that GUIs can accommodate nearly any viewing request. Furthermore, components can be easily added to TWS to enhance its core functions. One popular add-on is the SSI component (standing instructions), which allows for frequently used payment instructions to be kept individually. With this in place, wires can be generated with the payment instructions built in (e.g. to clients, vendors, government agencies). This leads to reduced operational friction and increased efficiency, while reducing the need for multiple data sources of information. Another popular component is Pre-Settlement, which allows for a separate control group to review, modify, and release messages to the bank and the general ledger. With this component in place, all wires and postings have to pass through this “control” mechanism before they can be completed; a built-in risk mitigation.

In Summary
TWS is a comprehensive tool that, when integrated properly, results in perpetual dividends. It is customizable and user friendly. The initial costs are not insignificant, but the substantial functionality that TWS provides delivers a quantum leap over traditional methods. Operational groups can be built around the utilization of TWS. Treasurers can have a myriad of information available at their fingertips in real-time. Risks will be mitigated, fees will be reduced, efficiency will take hold, and order will be restored. The positive impact that a TWS will have to a firm’s Net Operating Income will be considerable. Once fully integrated, it will be hard to imagine the days before your firm had a TWS in place.

Tamir Shafer is a Managing Director with NOI Strategies. Across a 15-year career, Tamir has managed the international treasury operations at investment banks such as Goldman Sachs, Barclays Capital, and Morgan Stanley, overseeing up to $250 billion of cash flow and related liquidity positions. 

A Sustainable Roadmap for Improving NOI

By Eric Williams

There can be no denying that the commercial real estate business is in survival mode.  We’re doing more with less and cautiously approaching even the most inconsequential of decisions. Words like risk management, capital conservation, and “de-leverage” now dominate our daily agendas.  The events of the past eighteen months have forced the industry into making decisions that will either enable a path toward victory or, conversely, contribute to its eventual demise. While there is no guarantee that even the best plans and strategy will succeed, here are several guidelines that can help real estate executives successfully navigate to economic recovery: 

  

Cost-Cutting: More Than a Do-It-Yourself Project 

 

The typical response to a cost reduction mandate is: reduce staff, freeze discretionary spending, and slash operational budgets.  The expected result is a reduction of general and administrative expenses and NOI improvement. What most companies do not consider is the aftermath of gaping resource holes, loss of intellectual capital, battered employee morale, exit of key customers, and operations that cannot meet the demands of customers.  

 

Cost-cutting programs need to look at more than the reduction in human capital expense, because the result of these programs is an impaired ability to conduct business. These programs need to include a plan that examines process improvements, technology modifications, property operations, and internal restructuring. The combination of these activities will deliver a sustainable cost-cutting program that is designed to handle the aftermath and improve the customer experience. While the combination of these elements can be overwhelming for organizations, if done right, the business can position itself for a dynamic recovery and limit the impact on customers. Companies that go beyond headcount reductions and implement cost-cutting programs will be better positioned to improve NOI, outperform competitors, and achieve business growth objectives.  The goal of the cost-cutting program should be to both fix immediate needs and reposition for the longer term.  

 

Attracting Investment Capital Requires a Robust Back-Office 

 

Investors are looking for opportunities to increase funding into real estate operations that have transparency and sophisticated technology solutions. Conversely, they are pulling out of ventures that cannot support their reporting requirements. The days of spreadsheet crunching and limited investor reporting are over. Investors want the ability to access on- demand, standardized reporting that provides them with the security that their funds are being spent appropriately with minimal risk.  In addition, providing investors with real- time reporting on all their investments allows them the transparency into the performance of their assets and the flexibility to make informed decisions about additional investment opportunities.   

 

Companies that are serious about being in business are investing in technology and operational solutions to improve their ability to react to investor reporting requirements. They are replacing spreadsheets and modernizing their operations with customized portals and dashboards linked to real-time performance data.  These improvements will not only help attract capital sources that will provide long-term partnerships, but will also position the company to emerge from the economic downturn a more dominate player. 

  

Risk Management Goes Beyond the Individual Asset 

 

Real estate companies are beginning to embrace risk management practices. Investors are demanding more accurate budgeting, forecasting on forward cash flows, risk assessments on lease agreements, and portfolio-level reporting. The industry is looking for the right combination of portfolio-level risk management methodologies and the technology to support the shift in operational thinking. Companies that embrace the shift to more robust portfolio risk management strategies will deploy capital more effectively and yield better risk-adjusted returns for their investors. 

 

Real estate companies that are focused on dominating in the new economic climate will implement technology to reduce spreadsheet usage, enable forward cash flow modeling at the portfolio level, assess debt risk at a portfolio level through better prediction of market and property driven events, and be more proactive in tying lease administration into overall risk modeling. Risk management is no longer about monitoring historic trends but about being proactive and predicting the likelihood of events that will impact returns to investors and operations.  

 

With discipline, a focus on operational improvements, and an understanding that we cannot do everything ourselves, the ability to emerge as a more dominant and capable player is in our hands. Those companies that recognize: cost-cutting is more than handing out pink slips, investors want more reporting and automation, and risk management is a new part of our business, position themselves for domination in the new reality. No one wants to be the last victim of this crisis and, as we are finding out, it takes as much effort to survive as it does to emerge a better company. Companies need to get busy doing and set an agenda focused on protecting and conserving their most precious resources: their clients and their personnel. 

‘Exceptional’ Real Estate Operations

By Glenn P. Murray

At NOI Strategies, we are seeing incredible demand for business process optimization resources that specialize in the following primary areas:

Leasing Customer Relationship Management (CRM)
Customer-centric methodologies for maximizing profitability and revenues.
Solution Providers: Argus Lease CRM, Ascendix, Sonoma

Electronic Invoice Processing (EIP)
Eliminates paper and data entry from the accounts payable process.
Solution Providers: Yardi PAY, AvidXChange, Basware, Nexus Systems

Business Intelligence (BI)
The collection, integration, analysis, and presentation of business information to support business decision making.
Solution Providers: Argus Insight, Argus Enterprise, Resolve, Asset Eye

The main objective behind each of these, of course, is to get the job done faster and cheaper. However, exceptional solutions will help you to get the job done ‘smarter’. Smarter means dealing in exceptions. It means making sure that those exceptions that need your attention get it. It means converting your reactive processes into proactive processes that actually help to reduce exceptions over time. It also means changing the way you think about exceptions. The problem with the way many solutions handle exceptions is that they are rendered as ‘problems’ that need your attention. On the contrary. Exceptions are just as much about opportunity. Recognizing this inherent value is the first step toward realizing your own exceptional operations.

Cap Rates Increasing....Back to Basics?

By Glenn P. Murray

Reversing a trend that began in 2001, cap rates turned higher in October (Wall Street Journal, November 28).  Average cap rates for apartments buildings were up to 6.10% from 6.08% in September.  Office buildings jumped to 5.80% from 5.54% for the same period. 

The implications are simple to understand:  as cap rates increase, property values decrease (you can learn more about cap rates and how they are calculated at http://en.wikipedia.org/wiki/Capitalization_rate). 

Where cap rates go from here is unclear.  What is clear is that net operating income (NOI) improvement initiatives are important regardless of cap rate fluctuations.  NOI is an indication of an individual property's performance and therefore its value.  Unlike cap rates, NOI is the one factor in the valuation of real estate assets that can be controlled.  Even modest gains through business process optimization and outsourcing of non-core services can help to counter rising cap rates.

What is your NOI strategy?

Automated A/P: Making 'Green' by Going 'Green'!

By Glenn P. Murray

When I founded rCash back in 2000, few if any commercial real estate companies believed in the value of automating their accounts payable process. Today, almost every major owner and asset manager has either implemented or is in the process of implementing an automated A/P solution.  Few innovations can claim to have had such a resounding effect on this industry. 

There are now several automated A/P solution providers designed specifically around the requirements of commercial real estate.  In addition to rCash (which was sold to Yardi Systems in 2006), leading providers include AvidXChange, Nexus Systems, and OpsTechnology.  Numerous horizontal solutions are also available.  (Click here for a comprehensive listing of solution providers).

Why is A/P such an ideal candidate for automation?

• it is extremely paper intensive
• it is highly distributed
• it is data entry intensive and subject to a high error rate

Take a look.  Your own Sarbanes Oxley compliance efforts probably exposed the A/P process in particular for its high error potential and loose controls.

So how does automating A/P provide your company with strategic value? 

Without automated solutions, the average cost to process a single invoice is $19.00.  Companies that have implemented automated A/P solutions do it for less than $13.00 per invoice.  In most cases, real estate companies are realizing a cost savings of 35% or more! 

Let's take a moment to translate what this could mean for your organization from a valuation perspective.  First, multiply the number of invoices your company processes each month by $6.00 (i.e. - 10,000 x $6.00 = $60,000.00).  This number represents the fully allocated improvement in your monthly NOI.  Next, annualize that number and divide it by your average portfolio cap rate.  (i.e. - $720,000 / 6% = $12M). 

Want some?  Of course you do!  Optimizing portfolio value is what we do here at NOI Strategies and your A/P process is a great place to get started.  Our formula for operational performance is simple:  Optimize; Reduce OpEx; Improve NOI; Improve Asset Value.  Our expert resources are the most qualified to help you find and implement the right solution for your organization. 

Converting A/P into a 'Green' Machine

And if you think that making 'green' is just passé, then I am sure you realize that going 'green' is all the rage these days. What could be better for the environment than removing all of that paper - not to mention the transportation of it back and forth from vendors to the properties to the central office - out of the A/P cycle? 

Saving money and the environment.  Now how cool is that!