Finally, in our whistle-stop tour of what Manston look to as our key performance indicators, we look to our relationships with our tenants, through the medium of the lease we hold with them.

At Manston, for KPIs, we focus on the leases and their attributes – rather than attributes of the tenant themselves – for all that these are considered by the firm elsewhere. Naturally, we need to consider the financial health of our tenants – both by using external credit checking agencies, but we find that these measures lend themselves less meaningfully to Key Performance Indicators

As with the previous sections of Finance and Property – it should be remembered that none of these exist in isolation – they must be taken in holistic context in order to actually give you actionable information.

Leases

• Lease Security
  • (WAULT to Expiry)
  • (WAULT to Break)
• Rent-at-Risk
• Tenant Concentration
• Passing to ERV
• Quarter Collection Rates

Lease Security

We adopt standard measures for measuring the overall lease lengths of the portfolio – that of Weighted Average Unexpired Lease Term, both to (Tenant) break and to Expiry. In essence – this takes each of our leases, and their lengths, and then weights them in proportion to their passing income (more complex approaches might seek to forecast the impact of future rises in rent, but for our purposes we would consider this a triumph of complexity over practicality). Therefore it gives us an ‘average’ (that most dangerous of words again!) length of term for each lease we hold.

This gives us an overall sense of ‘security’ for the portfolio – on average, how long is our income (contractually) secure for?

Manston Portfolio Weighted Average Unexpired Lease Terms (Break & Expiry), 2019 – 2025 (YTD)

Being conservative investors – in truth, WAULT to expiry is a bit of a ‘vanity’ metric! From a valuation, banking perspective – it is really at the break that concerns arise. Who is to say if a tenant will exercise a break or not? We must engage in caution here and assume the worst!

Furthermore, even a nice long WAULT (to Break) doesn’t of course give commercial & credit security – a 50 year lease with no breaks to sole trader is unlikely to be considered to have an effective risk-weighted term of the same length. Here we must consider the credit-worthiness (in the short term) and business model (in the longer term) of the tenant – are they going to be around to back up their obligations? Whilst our finance and property teams do an admirable job of monitoring credit health – this is difficult to meaningfully ‘KPI-ify’.

Rent-at-Risk

Rent-at-Risk seeks to take the above and disaggregate it a bit – turn a single average (!) into something that enables more granular planning. What this KPI does is to illustrate how much of our rent-roll is at risk of disappearing (either through Break or Expiry) within 1, 2,5 and 5+ years.

Knowing that Manston has a WAULT(to Break) of 6 years is good – but knowing that our current income is at risk over the following time horizons enables us to address the forthcoming issues and plan for the future much more clearly:

• 21% of income at risk within 1 year
• 35% within 2 years
• 51% within 5 years
• 49% secure for more than 5 years.

With the benefit of this we can better plan the ‘layering’ of our portfolio, seeking to avoid ‘cliff edges’ in our income, where significant levels of revenue are at risk simultaneously

Tenant Concentration

Very simple representation of, as you may have guessed, our income concentration.

For a company such as us, with few multi-let assets – this maps quite closely to our Property (being Capital Value) concentration levels. Who doesn’t love a bit of symmetry?

Other possible interpretations of this metric would include monitoring concentration within a given industry, geography, etc. This will be guided by the type of investor you are, and the type of portfolio you are constructing. As we have very few tenants leasing more than 1 of our units, and our geography is relatively flexible (albeit with a preference for the East & West Midlands) – we do not actively report on these.

This is another good KPI that illustrates the fundamental flexibility of the discipline – it can easily be modified to provide metrics relevant to your specific portfolio and strategic aims.

Passing to ERV

As alluded to under our Finance KPI’s – this metric provides a ratio of our current income against the ERV (Estimated Reversionary Income) potential of the portfolio. Given that markets rarely move in a linear fashion – any asset with a lease of any age at all, is likely to be rented out at a rate that differs from what the market would pay ‘today’.

What is important for investors to know is whether, when these leases are either reviewed as OMR (Open Market Review), or come up for re-lease – is our income going to be higher, lower or the same as it is now?

Currently – Manston return 81% on this metric – showing that (all other things being equal), if all of our currently let assets were re-leased at market price today, we would see a c. 25% increase in our income levels. This gives some comfort for the future.

If we were heavily exposed to (hypothetical) 15 year retail leases, started some 14 years ago with RPI rent increases annually – we may well expect this number to be some way ahead of 100% – showing that we were over-rented, and a reversion to the market is going to involve a drop in revenue. This is a very important metric to consider when looking at properties for disposal, and how best to position them in the market.

If we have a property that is highly over-rented, with only 4 years left term certain – and it is one that is no longer considered core for the portfolio – how best can we look to maximise value in a sale? Do we sell it with the over-rent, and a shorter term certain; or do we look to re-gear the lease – offering to (partially) re-set the rent closer to market value, in return for extending the term certain with the tenant? Which of these options will be most accretive to value?

Quarter Collection Rates

As with many KPI’s – this measure is more of a proxy, whereby we can monitor trends and emergent themes, rather than being a ‘hard’ number, meaningful in and of itself. This is merely the expression of rental income invoiced vs. rental income received.

As the bulk of our income is quarterly in nature – we measure this KPI quarter-by-quarter, for all that some of our leases are payable monthly. Not wishing exactitude to get in the way of meaning – we measure not to the contractual rent payment dates – but to the calendar quarter date (i.e. last day of the month, rather than English Quarter Days).

In brief – this proxy is an expression for the (rental) invoices issued within a quarter month (being March, June, September and December) – and the amounts received within that same month. How quickly are our tenants paying their rent? Are they paying ahead of the due date, or is this routinely slipping further and further?

As quarter days fall so close to month end – we also include the same calculation extended for quarter month + 1 (so, all invoices issued in December and January vs all receipts over the same period) – to better capture ‘effective’ payment (being only a few days past due), rather than being to hide-bound and losing sight of commercial actualities.

Whilst not an exact measure of collection within lease terms – it serves as a consistently comparable proxy – illustrating trends and allowing for re-active measures to be taken if significant variation between quarters emerges.

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KPIs are a fascinating area of consideration for a business – being so flexible that they can be adapted to provide the information that you need, rather than being an ‘off the shelf’ one-size-must-fit-all consideration. High St. fashion is all well and good – but if you really want to be able to measure, analyse, and steer your business successfully – why not nip down to Savile Row and go bespoke? I might even go so far as to say that if you don’t have at least one relatively unique KPI for your business or portfolio, then you probably don’t understand it well enough!

A good KPI doesn’t always need to be providing an answer – it can be equally valuable if it is prompting good questions from its audience – be they internal, board or external stakeholders.

What KPIs would you consider valuable?