Case Realica Properties ASA 1. Introduction Realica Properties ASA is a Norwegian company whose shares are traded on the
Posted: Sun Jun 05, 2022 6:45 am
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!
Questions to answer from case
a) Assume that the average shop size in Myriaden Shopping Center
is 200 m2 , the average rent is kr 2 600 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?
b) 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 5 6 7 9 10 11 12 Activity Realica 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 1 61 5 66 7 73 14 87 4 91 20 111 7 118 7 125 1 126 1 127
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!
- Case Realica Properties Asa 1 Introduction Realica Properties Asa Is A Norwegian Company Whose Shares Are Traded On The 1 (408.5 KiB) Viewed 32 times
a) Assume that the average shop size in Myriaden Shopping Center
is 200 m2 , the average rent is kr 2 600 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?
b) 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 5 6 7 9 10 11 12 Activity Realica 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 1 61 5 66 7 73 14 87 4 91 20 111 7 118 7 125 1 126 1 127