the German Stock Exchange. The company was established in the late
nineties when a major German 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 German
and foreign shareholders.
The last 15 years, Sterling Properties ASA has been one of a
handful companies that attracts both large and smaller investors
who want to put their money in the German 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 Sterling for a long period was successful with their
new real estate projects.
At the end of 2021, the company owned 24 properties in Berlin
and other German cities:
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
Berlin 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, Sterling 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:
1.High and steady financial return to our investors
2.Attractive tenants that create a high activity level in all
our properties
3.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 Sterling 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 Sterling
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 dollar. 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.
Sterling 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 Sterling 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 Sterling's three shopping centers is Myriaden in the
mid-sized German city of Hamburg. 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. Sterling 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 Sterling 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:
- Sterling Properties An German Company Whose Shares Are Traded On The German Stock Exchange The Company Was Established 1 (114.8 KiB) Viewed 43 times
Identify critical success factors in Sterling Properties ASA's
strategy from 2022-2026 and place them in the correct strategic
perspectives used in a Balanced Scorecard model.
Question 2
Design a strategy map based on your conclusions in question
1.
Question 3
Suggest Key Performance Indicators that in your opinion have the
necessary validity and reliability to be used in a Balanced
Scorecard model in Sterling Properties ASA. If you think that it is
difficult to find well-functioning KPIs in certain areas, you
should comment on this.
Question 4
Assume that the average shop size in Myriaden Shopping Center is
200 m2, the average rent is 2 600 USD per m2 per year
and that each tenant on average rent the space for five years. What
is the annual loss in rental revenue based on the observed process
cycle time?
With reference to the Lean-Philosophy, suggest changes in the
procedure that may shorten the process cycle time and reduce
organizational waste of resources.
1 2 3 4 5 6 7 8 9 10 11 12 3 4 Activity receives a cancellation notice from Tenant X. Cancellation period, according to contract. Keys are handed over from Tenant X to Realica. 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. External contractors are contacted for a quote for the planned work. Damages repaired and refurbishment works are carried out. The Market Department inspects the shop and decides rental terms (such as price per square meter). Time elapsed before Tenant Y has signed a new contract. Discussions with Tenant Y to adapt the shop to the new tenant's needs. New round with contractors with quotes for remaining work Final inspection together with Tenant Y. Keys are handed over to Tenant Y, start of new rental period Days per Days activity accumulated 0 0 60 60 61 66 73 87 91 111 118 125 126 127 1 5 7 14 4 20 7 7 1 1