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NeighborWorks AMERICA NATIONAL REAL ESTATE PROGRAMS PORTFOLIO STRENGTHENING CLINIC
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  1. NeighborWorks AMERICANATIONAL REAL ESTATE PROGRAMSPORTFOLIO STRENGTHENING CLINIC Asset managing your portfolio: Assessing and Analyzing PORTFOLIO PERFORMANCE 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 : 2012

  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 : 2012

  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 : 2012

  5. Gathering the Data • Key Determinants • Location • Age • Bedroom mix • Key Indicators • This Morning: • Financial • Occupancy • This Afternoon: • Other Performance • Other Performance PSC-I : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  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% - 4.99% 3 = 1% - 2.99% 4 = < 1% RANKING: 0 Troubled, Watch List 1 Watch List 2 Watch List 3 Performing 4 Performing PSC-I : 2012

  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 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 : 2012

  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 : 2012

  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 : 2012

  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 : 2012

  26. Lynnhaven Landing • 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 PSC-I : 2012

  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 : 2012

  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 : 2012

  29. Creating Your Watchlist PSC-I : 2012

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

  31. EXERCISE • 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 PSC-I : 2012

  32. CLINIC OBJECTIVES PORTFOLIO STRENGTHENING CLINIC I 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

  33. What is portfolio management & Why is it important? PORTFOLIO STRENGTHENING CLINIC I NREP 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 STRENGTHENING CLINIC I • Portfolio Management • Properties combined • Link owner/stakeholder goals with organizational goals;

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

  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 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. 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 Reviewing Property vs. Portfolio Results PORTFOLIO STRENGTHENING CLINIC I

  39. KEY PERFORMANCE INDICATORS: PORTFOLIO STRENGTHENING CLINIC I • 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.

  40. OTHER AFFORDABLE HOUSING KPI’S FINANCIAL & OCCUPANCY 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 PORTFOLIO STRENGTHENING CLINIC I

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

  42. PORTFOLIO STRENGTHENING CLINIC I

  43. PORTFOLIO STRENGTHENING CLINIC I

  44. 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 Portfolio Profile Indicator #1A:NET OPERATING INCOME (NOI) Gross Potential Income – Vacancy and Collection Loss + Miscellaneous Income =Effective Gross Income – Operating Expenses = Net Operating Income PORTFOLIO STRENGTHENING CLINIC I

  45. PORTFOLIO STRENGTHENING CLINIC I

  46. 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. Quick Report Operating Indicator #1:Net Cash Flow (NCF) PORTFOLIO STRENGTHENING CLINIC I

  47. PORTFOLIO STRENGTHENING CLINIC I

  48. 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 Quick Report Operating Indicator #2:Debt Service Coverage Ratio (DSCR) PORTFOLIO STRENGTHENING CLINIC I

  49. PORTFOLIO STRENGTHENING CLINIC I

  50. 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). Quick Report Operating Indicator #3:Operating Expenses (OpEx) PORTFOLIO STRENGTHENING CLINIC I