Case Realica Properties ASA 1. Introduction Realica Properties ASA is a Norwegian company whose shares are traded on the

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Case Realica Properties ASA 1. Introduction Realica Properties
ASA is a Norwegian company whose shares are traded on the Oslo
Stock Exchange. The company was established in the late nineties
when a major Norwegian insurance company moved its portfolio of
real estate assets to a new entity. The purpose of this transaction
was to split real estate development from the insurance services
and to engage in new development projects together with other
investing parties. A few years after the company went public in
2007, the insurance company's ownership was diluted to less than 10
per cent and the company is now owned by several thousand Norwegian
and foreign shareholders. The last 15 years, Realica Properties ASA
has been one of a handful companies that attracts both large and
smaller investors who want to put their money in the Norwegian real
estate market. The accumulated financial value creation in this
period has been high, not only because the market in general has
developed favorably, but also because Realica for a long period was
successful with their new real estate projects. At the end of 2021,
the company owned 24 properties in Oslo and other Norwegian cities:
• Three mid-sized shopping malls • Three hotels that are operated
by a hotel chain • Twelve office buildings with 3 000 to 9 000 m2
rentable space • Six combined warehouse and light industry
properties 2. Status in 2021 After an active period with a long and
steady growth, the company had by 2021 reached a stall point in
terms of rent revenues and bottom-line profit. In 2015, the company
had decided to go into the hotel market. They made an agreement
with the hotel chain Next Bestern and outsourced the operation of
three new hotels in the Oslo region. These hotels opened shortly
before the arrival of the COVID-19 pandemic, and in 2020 and 2021
the hotel chain was unable to pay the quarterly rents due to the
low travel and conference activity caused by this unexpected
situation. After lengthy negotiations in the fall of 2021/early
winter 2022, the company decided to write off a major part of the
unpaid rent and booked these losses in the financial reports for
2021. For the first time, Realica reported a financial loss on the
annual shareholders meeting in March 2022. The company's share
price and corresponding market value has dropped significantly over
the last 2-3 years. In addition to the effect of the rent losses
from the hotel properties, the company's profitability has also
been challenged by an increase in vacant areas, both in the office
and shopping markets. Up until 2018, the vacancy rate was less than
4 per cent of the total rentable space, but now more than twelve
per cent of the total areas is vacant. The costs for management,
operations and maintenance of the real estate portfolio have also
in recent years increased much more than the increase in rent
revenue per square meter. The cash flow from the company's
operational activities has been negative both in 2020 and 2021, but
these liquidity losses have so far been compensated by new mortgage
loans, which have contributed to sufficient cash reserves, despite
its financial losses. In December 2021, the Board of Directors
approved a revised strategy plan for 2022-2026, where the overall
long-term goals were summed up in three main areas: • High and
steady financial return to our investors • Attractive tenants that
create a high activity level in all our properties • High quality
standards in all our properties, as perceived by our tenants. A
summary of this strategy plan for 2022-2026 follows: 3. Summary of
Realica Properties' strategy plan for 2022-2026 After many years of
steady rental revenue increase, a good profitability, and a high
market value growth, we experienced some years ago that the
positive development stopped. Even if we choose to disregard the
effect of the pandemic, our total financial value creation the
recent years have been challenged by an increasing level of vacant
office and shop areas and increased costs for management,
operations, and maintenance. While many financial analysts for many
years kept Realica Properties ASA on their list of recommended
investments, things changed around 2019. Several negative articles
in business media also contributed to the impression that the
company no longer was the investors' first choice for a diversified
real estate placement. Early 2021, The Board of Directors gave the
new management team a clear mandate; it shall in addition to
securing a good and stable return to our investors, also have a
constant focus on finding new and attractive customers that demand
high quality standards. In the forthcoming strategy period, we must
focus on consolidation rather than growth. To improve the company's
solidity, we must sell approximately 15 per cent of our real estate
portfolio. The cash that is left after the mortgage loans on these
properties are paid will be used to reduce the borrowings on the
remaining properties, particularly where the current loan to value
ratio is uncomfortably high. The goal is that the mortgage loan
balance of one of our properties should be between 40 and 60 per
cent of the expected market value. Real estate is a
capital-intensive industry, and the total market value of our
portfolio is more than 20 billion kroner. The focus we have had on
following up our Return on Equity has not given us the right
picture of the company's profitability. We cannot influence the
Capital Turnover Rate much in the coming years, and we must
therefore strive to influence The Rate of Return on Sales as much
as possible in the strategy period that lies ahead of us. We know
that this is influenced not only by the average rent level, but
also by the vacancy rate, cost of management, operations, and
management, as well as the interest level. Thus, we must ensure
that the development of these factors is positive and sustained
over time. Although we have many experienced and highly competent
people in our organization, we see a strong need to increase the
company's human capital to be better prepared for the changes that
are ahead of us. While we for many years had an entrepreneurial
type of organizational culture, we see that the organization now
suffers from lengthy decision processes and the lack of a
commercial business spirit. This may have caused our gradual loss
of market development skills and given rise to the loss of many
customers when they have chosen not to renew their contracts after
the first 5- or 10-year rent period has ended. This trend cannot
continue! We must prioritize activities that increase the tenants'
retention rate, because when we lose customers, it will take many
years before we can try to win them back. We need to make
development and maintenance plans with corresponding budgets for
each of our 24 properties, so we can plan for an increased
attractivity for each object and secure a high rent level in the
future. The increased focus on development and maintenance will not
happen without an increased know-how and a good administrative
capacity to develop well-functioning internal control systems for
the property management. We also need to strengthen our competence
within the finance and accounting areas and develop better routines
and systems for the daily handling of accounting transactions. Each
property will now be an individual profit center where one of the
six members of Top Management will have the overall responsibility.
Hence, each manager will have a portfolio of four properties to
follow up. Empowered to make the necessary operational decisions
daily, the manager is responsible for reporting the status to the
management team. We hope that this will reduce the number of
decisions that the Top Management team will have to make, and that
we now can speed up the decision processes significantly. Realica
Properties ASA will also need to strengthen its professional
network in the forthcoming years. We have lost many valuable
contacts when former managers left the company, and we need to
build up a good external network within banking and financing, law
competence, and real estate engineering. We need to convince the
investors that we can give the best return in the real estate
sector, and we think it is realistic to achieve a Return on
Investments of around 10 per cent by the end of the strategy
period. Together we shall make Realica the most attractive company
in the market, both for our investors and customers, and for us who
work here! 4. The need for improvement of one of the company's
internal processes One of Realica's three shopping centers is
Myriaden in the mid-sized Norwegian city of Flekkesund. Here, the
rental contracts are here not time-limited to five or ten years as
most office contracts are. Contrary, rent agreements are made with
a 60-day cancellation period. A tenant that notifies the company
for instance by the end of March, will be charged for rent in April
and May and will then move out by the end of May. During the
pandemic, 20 of the 50 shops in Myriaden closed, mainly due to
insolvency and bankruptcy. Realica is now in the process of finding
new tenants for these vacant areas and wants to improve the
effectiveness of the process where new tenants replace old ones. An
important part of this process is to prepare the vacant area and
make it look attractive for a new customer. In an ideal market
situation, where Realica has many potential clients interested in
renting shop space, the company's profitability will be influenced
by the number of days that the areas stay unused. It is therefore
important to see what can be done to shorten the process starting
with the existing tenant cancelling the contract ending with the
new tenant moving in and paying rent. The process is highly
standardized and based on routines that have been developed over
many years. By observing the process, the company has been able to
document the following 12 activities in the process cycle: Activity
Days per activity Days accumulated 1 Realica receives a
cancellation notice from Tenant X. 0 0 2 Cancellation period,
according to contract. 60 60 3 Keys are handed over from Tenant X
to Realica. 1 61 4 Realica's technical team checks premises to see
if a claim against the tenant can be made for any damages and what
else needs to be done before new tenant can move in. 5 66 5
External contractors are contacted for a quote for the planned
work. 7 73 6 Damages repaired and refurbishment works are carried
out. 14 87 7 The Market Department inspects the shop and decides
rental terms (such as price per square meter). 4 91 8 Time elapsed
before Tenant Y has signed a new contract. 20 111 9 Discussions
with Tenant Y to adapt the shop to the new tenant's needs. 7 118 10
New round with contractors with quotes for remaining work 7 125 11
Final inspection together with Tenant Y. 1 126 12 Keys are handed
over to Tenant Y, start of new rental period 1 127
Question 1 (25%) Identify critical success factors in Realica
Properties ASA's strategy from 2022-2026 and place them in the
correct strategic perspectives used in a Balanced Scorecard
model.
Question 2 (25%) Design a strategy map based on your conclusions
in question 1.
Question 3 (25%) Suggest Key Performance Indicators that in your
opinion have the necessary validity and reliability to be used in a
Balanced Scorecard model in Realica Properties ASA. If you think
that it is difficult to find well-functioning KPIs in certain
areas, you should comment on this.