CoRE
Fundamentals
An Academic Lecture
Series From CoreNet Global
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Placeholder for Speakers
picture
Speaker Name
Title
Company
University
Corporate Real Estate: Finance
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Agenda
Context
Accounting
Financial Analysis
Future Trends
Examples
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Context of CRE Finance
Primary focus of a corporation is on its core business(s)
“The Crown
Jewels”
Real estate is a significant resource and cost
“Top 3 costs”
Key real estate decisions must have regard to:
Wider business needs and challenges
“Investing in
property or the
core business”
Finance approval
CRE Executives who understand the impact of Real Estate on a
company’s Financial Statements can contribute to the bottom line.
“Comparability”
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Different Financial Performance Priorities
INVESTORS
• Appreciation (Capital Growth) and/or Dividends (Income)
• Long and Short Term Goals
• Responsible for predictable, consistent earnings growth
CEO
• Responsible for management of financial resources
CFO
Director of
Real Estate
• Responsible for cost effective operating facilities
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Corporate Finance Goals
Financial Goals
• Long term goal of corporate finance is to maximize
shareholder wealth (ROI)
• Short term goal is maximization of profits
• Balancing long and short term goals to meet analysts
projections.
Share Price = projections, performance and perception
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Corporate Financial Management
Financial Management
includes:
•
•
•
•
Financial planning and analysis
Investment decision making
Financing and capital structure
Management of financial resources
including:
• Allocation of funds
• Raising of funds
• Managing working capital such as
Free Cash Flow, Inventory and
Real Estate
Budgets
Capex
Capex, Lease or
Buy
Business Case
Sale &
Leaseback
Cash Outflows,
Sub-lease
Income &
Surplus Property
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Accounting versus Finance
Accounting is a set of
rules that attempts to
standardize the
measurement of
business value at a
point in time,
generally historic
performance.
Finance is a set of
analysis
methodologies and
practices for
analyzing and
maximizing economic
value of the
enterprise.
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Introduction to Accounting
FASB - Financial Accounting Standards Board
IASB - International Accounting Standards Board
GAAP - Generally Accepted Accounting Principals
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Accounting Framework
Board responsible for financial
statements
Depreciation
Finance vs. op lease
Auditors review for compliance
and issue an opinion
Fixed asset valuation
Vacant space
The ‘Rules’
Rent free
• Legislation – The Companies Act
• Accounting fundamentals
• Accounting standards
• Accounting policies
• Stock exchange regulations
Dilapidations
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Accounting Standards
IAS 17 (FAS 13)
• Capital Lease
IAS 36 (FAS 144)
• Asset Impairment-decline in value,
held for sale
IAS 37 (FAS 146)
• Asset Disposition-Sublease “cease use”
IFRS 7 (FAS 157)
• Fair Value Accounting
FAS 66
• Property Sale
FAS 98
• Sale/Leaseback
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Financial Statement Interaction
Income
Statement
Cash Flow
Statement
Balance
Sheet
Notes to the financial statements
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Financial Statement Interaction
Balance sheet
Profit and loss

Fixed assets


Investments

Debtors

Investment income

Prepayments

Depreciation

Trade creditors


Accruals
Interest (finance
lease)

Finance lease
obligations

Deferred tax
Direct costs –
admin or gross
profit
Notes

Standard balance
sheet notes

Profit and loss is
stated after
charging...

Finance lease
obligations

Lease
commitments

Contingencies
Where does RE touch the financial statements?
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Introduction to Financial Analysis
Investing & Finance
Financial management
has two distinct
decision areas:
1. Investing decision
2. Financing decision
What assets should
we acquire?
How should we pay
for the assets?
Decision rule: risk
versus return
Decision rule: financing
cost, capital structure
considerations (in
property this may be a
lease agreement)
Overall objective is to maximize NPV or IRR
Financial Analysis
Cash Flow projections over a set period
Profit projections over a set period
Net Present Value (NPV)
Cost per sft
Cost per
workstation
Internal Rate of Return (IRR)
Cost per FTE
Payback
Sqft per FTE
Economic Value Added (EVA)
Vacant space
Financial KPIs – specific to CRE
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Financial Analysis
Cash-flow is usually the foundation
• The term
• Monthly, Quarterly or Annual Analysis
Discount rate:
• Theory and practice
• Rates used (cost of debt, WACC, target
investment return)
WACC calculation
example:
Equity – $100m @ 15%
Debt - $200m @ 6%
Total capital = $300m
Cost = $27m or 9%
WACC = 9%
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NPV 0r IRR Calculations
Net Present Value (NPV) is
the current value of a
future stream of cashflows which have been
discounted. A higher NPV
or lower NPC (Cost) is
preferable when
comparing alternatives.
Internal Rate of Return
(IRR) is the discount rate
that results in an
investment having a Net
Present Value equal to
zero, but beware:
• Some cash flow streams have
multiple IRRs, or none at all.
• It may not be possible to
reinvest cash flows
• Ignores size of investment
• Ignores duration of
investment
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NPV and IRR – A simple example
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Payback & EVA Calculations
• How long it takes to pay back
an investment
• Support for allocation of limited
capital resources
Payback is a simple
• Recently seen in energy/utility
calculation which
investment proposals
determines:
Economic Value Added (EVA)
calculates:
• Creation of Shareholder Value,
i.e. a company’s residual wealth.
• Profits after cost of capital.
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Introduction Ratio Analysis
Profitability Ratios
Efficiency Rations
(Company’s Use of Assets)
•Gross or Net Margin
•Return on Asset or Equity
Debt Rations
(Company’s effective use
of resources)
(Ability of company to pay back
long term debt)
•Assets Receivable
•Assets Turn-over
•Net Debt to equity
•Total Liabilities /Total Assets
Market Ratios
Liquidity Rations
(Measure of investors response)
(Availability of cash to pay debt)
•Share Price
•Earnings per Share
•Dividend Ratios
•Price/earnings Ratios
•Current Ratio
•Acid-test Ratio
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Property Affordability Analysis
 Occupancy expenses as a percent of revenue - Measuring
revenue that is absorbed by occupancy costs.
 Occupancy expense per person - Comparing occupancy costs
with the number of employees is another way of measuring how
efficiently the company uses its resources.
 Occupancy expense per square feet - Comparing occupancy
costs per Net Lettable Area as a benchmark of other comparable
space in the market.
 Square feet per employee - Nothing to do with financial
statements, the ratio of space to the number of employees is
important measure of real estate efficiency.
 Sales per square feet - Sales per square feet, especially important
in retail operations, directly relates real estate costs to revenue of
the company.
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Future Trends – Global Considerations
Labor – skills, cost
and availability
Logistics and
management
Currency Exchange
Cost of Debt
Uncertainty
Joint Ventures
Capital
Repatriation
Sovereign Risk
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Communicating CRE Impacts
Governance
These factors
increasingly impact
Procurement
how we work.
Transparency
Do they make things
better?
Sophistication
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CRE Impact – Financial Management
Is real estate
material to
financial
statements?
Is real estate’s
impact more
than
incremental
cost?
Should real
estate be a
part of
strategic
planning?
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Own versus Lease Example
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Own versus Lease example (cont’d)
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Own versus Lease example (cont’d)
What other financial
considerations might
influence the outcome?
Availability of capital
Financing
Sector ratios
Taxation
Bank covenants
Rating agency
Regulatory factors
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Accounting Policies example
15 year
lease, break
at year 7
50,000sqft
Other
revenue
costs
£5 psf
Rent
£30 psf
Fit out
£220 psf =
£11m
Rent free
18 months
Dilaps
£20 psf = £1m
Rates
£12 psf
15 year total
cost
£50 m
Note - Rent reviews applied on lease, but other costs not inflated
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Accounting Policies example
14,000,000
12,000,000
10,000,000
8,000,000
Cashflow
PL normal
6,000,000
4,000,000
2,000,000
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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Accounting Policies example (cont’d)
4,500,000
4,000,000
3,500,000
No spread - 10
3,000,000
Spread - 10
Spread - 7
2,500,000
2,000,000
1,500,000
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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Accounting Policies example (cont’d)
4,500,000
Dilaps
4,000,000
3,500,000
3,000,000
Fitout
2,500,000
2,000,000
Rent
1,500,000
1,000,000
500,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Other revenue
costs
4,500,000
4,000,000
4,000,000
3,500,000
3,500,000
3,000,000
3,000,000
2,500,000
2,500,000
2,000,000
2,000,000
1,500,000
1,500,000
1,000,000
1,000,000
500,000
500,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
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Thank you for your time and attention
What questions can we
answer for you?
Additional Corporate Real Estate Resource:
www.corenetglobal.org
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