BUDGETING FOR A BEST-IN-CLASS PORTFOLIO
Kimco’s Mooresville Crossing in Mooresville, North Carolina
It’s budget season again for most REITs, and Kimco’s Property Management team is hard at work doing their due diligence for the process. In this post, I’m going to share with you the approach that Kimco takes to budgeting, as well as some of the tools that we use to assist in making informed business decisions for our properties. As I’ve noted in prior blog posts, Kimco has been diligent in upgrading our core properties, an effort known internally as our “Best-In-Class” initiative, so budget season is our opportunity each year to ensure that we’re advancing the portfolio in a manner that’s consistent with the corporate direction for each asset.
Preparing a Property Condition Assessment
One of the biggest challenges in managing such a large asset portfolio is doing so consistently across the organization. In other words, we want all of our Property Managers to take the same approach to budgeting and use the same resources, so that we can objectively and efficiently make spending decisions. This was a process that we started many years ago and involves a combination of in-house and third-party data on our properties. The end product, known as the “Property Condition Assessment” report (PCA), is the collection of data for each site covering the physical condition of the property, as well as the five-year capital spending needs. Property Managers update these reports each year to ensure that the site’s operating plan is always current. It’s important to note that the financial plan isn’t just the next year’s budget, it’s a comprehensive look at the past two years, and a forward-looking five-year estimate of common area maintenance fees (CAM), operating expenses (OPEX), and capital expenditures (CAPEX). The process merges the physical and financial information and becomes Kimco’s operational roadmap for the site.
Analyzing property data to set a budget
As I indicated above, Kimco has a core set of information that we rely on for each of our properties, which is an essential tool in developing the budget. In-house reports and outside consultant surveys have been tailored and standardized across the company to provide critical and unbiased information about each site. Of particular importance to Kimco are the roofs, parking lots, site lighting, landscaping, crime index, environmental condition, and ADA compliance of each property. These categories account for the majority of Kimco’s annual CAM and CAPEX spend, and are critical in making spending decisions for additional services, such as security. Once complete, the information is populated into the PCA report for each site and made available to the management team via web portal and iPad/iPhone apps. Note that Kimco doesn’t use contractors for any of this reporting due to the fact that it would be a conflict of interest, as contractors have an inherent motivation to find projects where their services can be of use.
Creating the budget
Following completion of the PCA report is the last critical piece of the budget process--the financial plan and review. Depending on the long-term strategy for the site, the financial plan will fall into one of three categories: 1) Invest and improve; 2) Maintain; or 3) Reduce expenses. Spikes and declines in costs are closely evaluated to ensure that our tenants don’t get any surprises at the end of the year. At the same time, Kimco looks to maximize recovery by keeping costs within CAM cap limits. Our budgeting system, developed over years of hard work and collaboration between departments, provides essential information on historical expenses, future project costs, and tenant CAM caps. All combined, this information is used universally by the management team to ensure that the property can reasonably afford the CAM rates, services, and projects being proposed by the Property Managers. Additionally, the leasing department provides competitive CAM rate information for the markets so that our Property Managers can benchmark the site’s rate against the competition. Kimco’s goal throughout this entire process is to produce an operating budget that promotes and maintains a first-class shopping center at a competitive CAM rate--something that’s often easier said than done!
Once budgets are done, and the financial plans have been approved, it’s up to Property Management to execute on the plan. This means that all required project work (i.e., roofs, parking lots, site lighting upgrades, etc.) have to be scoped and put out to bid early in the year. It’s critical that all approved projects are performed and paid for in the quarter that they’re budgeted. This is something that Kimco’s Regional Directors and I monitor closely throughout the year to ensure that financial projections are met and work is performed as planned. In 2013, Kimco managed its entire operating budget for the country to within one percent of plan for the year. This is a metric that we’re very proud of, especially considering all of the events that occur during the year that aren’t planned for, such as seasonal events like hurricanes, blizzards, etc.
Kimco has really ramped up its game over the past several years and put together a comprehensive program for budgeting that promotes its Best-In-Class strategy. The days of being reactive to the physical deficiencies of the property (i.e. roofs and parking lots needing repair) without having a long-term plan are gone. Our operational roadmap is now fundamental and core to the annual budget program.
The Best-In-Class strategy is in full swing at Kimco, so stay tuned for my next post that will give you more insight into the operational programs that are differentiating Kimco from our peers!