Metrics for Responsible Property Investing:

Developing and Maintaining a High Performance Portfolio

2009 ULI Fall Council Forum

RPI Metrics Panel Webinar Presentation

October 28, 2009 (9:00 AM PST)

Jean Rogers, Arup

Lisa Michelle Galley, Galley Eco Capital

David Wood, Responsible Property Investing Center, Boston College

Agenda

• What is responsible property investing (RPI)

• Metrics imperative

• Background to the RPI Council project

• Metrics and structure

• Use cases

• Road test

• The Panel

• The Paper

The Big Picture for Real Estate

• National economic downturn

• Energy (in) security

• Weakened consumer fundamentals

• Climate response

Responsible Property Investing

Responsible Property Investing facilitates a more comprehensive

engagement between investors, their properties, and tenants by “taking

into account social, ethical, and environmental factors in the selection,

retention and realization of investment, and the responsible use of

rights (…) that are attached to such investments1.”

_________________________1 Mansley, definition of Responsible Property Investing

Ten elements of responsible property investing

• Energy Conservation

• Environmental Protection

• Voluntary Certifications

• Public Transport Oriented Developments

• Urban Revitalization and Adaptability

• Health and Safety

• Worker Well-Being

• Corporate Citizenship

• Social Equity and Community Development

• Local Citizenship

Source: UNEP-FI Property Working Group

Context for Responsible Property

Investing

• State of the industry

• Need for

• Other metrics efforts and how this ties

in

Why RPI metrics?

Fund

managers

Acquisition Asset

managementDivestiture

Commit to

responsible

property

investment

Institutional

investors Development

Can traditional financial metrics answer these questions?

What makes this

fund manager

“green”?

How is this fund

manager seizing

opportunities and

addressing

challenges, while

meeting fiduciary

duty?

What is the

sustainability

performance of this

investment?

Does this investment

respond to risks and

opportunities?

Will this acquisition

improve the

sustainability

performance of the

portfolio as a whole,

or require additional

investment?

How are assets

performing in terms

of sustainability? Is

performance

improving as a

whole?

What opportunities

have been tapped?

What risks remain?

Which asset classes

outperform on

sustainability?

Is it time to capture

value from

sustainable assets in

the marketplace?

Will value decline

through increased

regulation and other

drivers in the

market?

Will net zero

buildings render

some assets

obsolete?

How can the

commitment be

demonstrated?

Background to the RPI Council Metrics Project

• ULI Fall 2008 Meeting called for Metrics Research– Define RPI in and of itself (How is a RPI portfolio different?)

– Provide tangible, real world examples of specific metrics

– Support investors practicing RPI

– Link to Value!

• Lisa, Jean and David spearheaded effort

• KPIs research – current reporting practices

• Spring 2009 – Tentative Proposed Metrics

• Road testing – case studies

• Presentation at ULI Fall 2009 Meeting

• Paper – Draft for Comment

Metrics in Practice

• Many property companies are implementing sustainability

initiatives on ad-hoc or rolling basis to existing building stock

• Few are tracking results at portfolio scale and fewer are

reporting back on this performance

• Focus for many is on promoting 1-2 showcase green buildings

• Investors and stakeholders are unable to identify:

– How green is the overall portfolio

– Is sustainability performance of the portfolio improving

over time?

– How does the portfolio’s green performance compare to

others (benchmarking)?

– What are the sustainability risks of this portfolio?

Defining new performance metrics

Key requirements for new RPI metrics:

• Must respond to 10 principles, covering

environmental and social aspects

• Be flexible, recognizing wide range of RPI projects

• Enable analysis of a single acquisition or a whole

portfolio

• Address risks and opportunities

• Focus on high impact, KEY performance indicators

• Minimize burden of data collection and use proxies

for performance where applicable

• Facilitate tracking and benchmarking performance

over time, normalizing results where needed

• Be scalable, straightforward and simple

“There is no set of

broadly accepted

metrics for

evaluating the

commitment of real

estate investors to

principles of RPI.”

Pivo & McNamara,

International Real Estate

Review, 2005

Structure of Metrics

• 2 types of KPIs: Acquisition & Portfolio – One building vs. many

– Screening vs. monitoring

• Issues covered:

– Energy Conservation and Carbon Management

– Environmental Protection

– Urban Revitalization and Adaptability

– Smart Growth and Transit Oriented Development

– Health and Safety

– Worker and Tenant Well Being

– Social Equity and Community Development

– Local Citizenship

– Voluntary Certification

– Governance

• Characterization data: used to normalize results

Impact on investment return

Increase or improvement in:

• Tenant retention/renewal rate

• Vacancy rate

• Tenant satisfaction

• Market demand

• Favorable lease terms

• Rental premiums

Decrease in:

• Utility expenditure

• Risk from price volatility

• Maintenance expenditure

• Insurance costs

Revenues Operating Expenditures Financing & Value

Improvement in:

• Market appeal

• Sales premium

• Cap rate

• Ability to attract capital

• Risk profile

Reduction in:

• Asset obsolescence and

devaluation

From one showcase green building

…to a high performance portfolio of green buildings

Making

Progress

Exceeding

Targets

Road Test

• Study participantsAcquisition – BACFOF

Portfolio Management – TIAA-CREF

• Review metrics for relevance

• Attempt to use in the “real world”

• Focus on “doing” and insights: ease of use,

materiality, link to value, impact on investment

strategy & process

• “Must have”, “nice to have”, “don’t go there”

• Given 2 weeks and an excel spreadsheet with

over 50 metrics to start

What we learned about the metrics

• Less is more

• Social indicators static (critical during acquisition)

• Environmental indicators dynamic (improve over

time)

• Acquisition and management practices together

shape the quality of the RPI portfolio over time

• Links to value essential to offset burden of reporting

• Metrics help prioritize investments

• Help is available

Benefits of RPI metrics

Enables investors and property owners to:

• Demonstrate fiduciary responsibility

• Track performance trends over time

• Benchmark performance by asset type and region

• Identify outliers: weak performers and best practices

• Identify risk exposure at portfolio level

• Evaluate links between sustainable performance and financial

returns

• Assess impact of RPI initiatives at portfolio level and prioritize

investments

• Inform future acquisition decisions

• Improve transparency

• Demonstrate real estate-tailored commitment to social

responsibility

The RPI metrics panel - November 4, 2009

• David Wood, Director, Responsible Property

Investment Center, Boston College

• Lisa Michelle Galley, Managing Principal, Galley

Eco Capital

• Jean Rogers, Principal, Arup

• Nicholas Stolatis, Director, Strategic Initiatives,

TIAA-CREF

• Scott Zengel, Vice President, Bay Area Council

Family of Funds

The RPI Metrics Paper – Developing and

Maintaining a High Performance Portfolio

• Authors: David Wood, Lisa Galley, and Jean Rogers

• Draft for Comment available at ULI Fall Meeting on

November 4, 2009

• Volatile real estate investment environment

• Risks and opportunities

• Current practices in reporting

• New metrics for a new era – Proposed KPIs

• Portfolio characterization

• Acquisition, portfolio management, and reporting

• Implementation

• Case studies