Standardizing Pension Advisor Reporting

Article excerpt

An Interview with Roger Franz

During Roger Franz's six-year tenure as the Mortgage Investment Officer, Real Estate Asset Management, for the powerful California Public Employees' Retirement System, CALPERS has emerged as a leading force in real estate.

The fund has approximately 80 investments valued at nearly $5 billion, which accounts for part of this influence. But equally important is Franz's work in standardizing and centralizing a broad range of asset management functions with such thoroughness that CALPERS reporting criteria and formats are fast becoming the industry standard.

In an interview with JPM, Franz discusses his ideas on standardization and what it can and cannot achieve.

JPM: What initially convinced you that CALPERS needed to standardize its reporting requirements?

Franz: We oversee a portfolio of $5 billion in assets with approximately 80 investments using an internal staff of three managers and eight employees. To handle that portfolio, we need concise, yet comprehensive, reports that follow the same format.

While we always received quarterly reports from our real estate advisors, they were very limited in nature and did not contain useful information. Several years ago a typical quarterly report was less than one page per investment, per quarter. We felt we needed to know more about many aspects of the property.

We looked at reporting for other pension fund clients and other real estate investors, and then began to consider what the reports from our advisors should contain.

JPM: What are some of the areas in which CALPERS has been active in standardization of reporting from its real estate advisors?

Franz: Several years ago, we began working with the management consulting group of Coopers and Lybrand to develop a four-part quarterly report from our advisors. The reports cover both property- and portfolio-level information, including: a narrative description of property activities during the period; comprehensive, standardized financial statements; activity statements such as leasing activity, delinquency, bad-debt, and capital expenditure; and performance measurement reports.

To achieve these standardized quarterly reports, we first adopted an accounting procedures manual which defined the specific treatment of certain interpretive areas of GAAP. We then developed standardized performance measurements which allowed for more accurate comparison between our properties.

As part of our portfolio-level reports, we have developed a Risk and Performance Assessment System. It is a qualitative and quantitative assessment of the property's performance.

JPM: In addition to standardizing reports, haven't you also centralized certain management functions directly under CALPERS control?

Franz: Yes. For example, we elected to use outside MAI appraisers to do required annual appraisals of our properties rather than relying on appraisals prepared by our advisors. We have also developed a standardized appraisal report and appraisal specifications so these appraisers will use the same format in preparing reports and documenting their opinions.

Cash management is another area where we have standardized our approach. Each property's bank account is maintained at the First National Bank of Chicago where we have lock-box collection accounts and zero-balance-controlled disbursement accounts. Daily, our rents are deposited, checks are paid, and net funds are transferred to CALPERS at State Street Bank and Trust, our master custodian.

The system is highly automated so float is minimized. With annual portfolio net income of over $300 million, the amount of interest realized can be very substantial.

At the portfolio level, we have developed a comprehensive risk and insurance program, an environmental management plan, and a compliance auditing program.

JPM: To what degree does CALPERS directly supervise its property managers? …