How we manage risks

Steps in the process risk management

 

Arranged bodies

Control and risk committee

The Control and Risk Committee is a body with consultative and propositional functions vis-à-vis the Board of Directors for matters relating to the evaluation, direction and adaptation of the internal control and risk management system. In this context, the Committee:

• Supports the Board of Directors in defining guidelines for the internal control and risk management system

• Expresses opinions on spe cific aspects related to the identification of the main business risks

• It examines the work plans of the Control Functions as well as the related periodic reports, formulating any observations and proposals to the Board of Directors on the same and expresses its opinion on t he adequacy of the Company

• Carries out coordination and liaison act ivities between the various control functions

• It examines the periodic reporting of the control functions that are of particular importance in terms of the risks of the Company’s typical business and its normal operations

• It may require the Heads of the Control Functions to carry out checks and analyses on specific areas and/or themes.

Risk management function

The Risk Management Function, in the exercise of its activities:

• Supports the Board of Directors in preparing and updating the risk management policy and in identifying risk limits

• Develops and proposes to the Board of Directors the methodologies for measuring the risks to which the Company is exposed

• Monitor the implementation of the measures taken to remedy the deficiencies found in the risk management system

• Verifies compliance with the risk management policy and compliance with the limits defined by the Board of Directors

• Examines investment/disinvestment transactions.

The Risk Management Function prepares a map of the risks to which the Company is, or could be, exposed and continuously assesses the possible emergence of new risks considering all the relevant elements of the reference context and the business, such as:

• the lines of development and corporate objectives, the market context, possible changes in the company’s business and/or new opportunities

• Expected evolution of the balance sheet and income statement aggregates

• Information on the development of investments and other “company specific” information (e.g. organisational structure, internal regulations, etc.).

The Company’s risk map is periodically updated and submitted for approval to the Control and Risk Committee and, subsequently, to the Board of Directors.

The structure of the Company’s risk map is inspired by the main best practices in the financial sector, although not directly applicable to COIMA RES. The risks exposed in the map also take into account the investment strategy adopted by the Company and its SIIQ status, from which constraints on the nature of revenues and assets arise.

The Risk Manager is independent, both functionally and hierarchically, from the operating units and reports directly to the Board of Directors.

RISKS COIMA RES MITIGATION

Market risk

The risk of losses related to the fluctuation in the prices of properties in the portfolio or in rental values resulting from adverse changes of macroeconomic variables, the local and international political context, the property market, and/or the specific characteristics of the properties owned by the Company and/or structural changes in tenant habits. This risk also includes the effects resulting from properties in the portfolio that are vacant (vacancy risk) and potential losses associated with investment in “valueadd” projects, in particular relating to restructuring or refurbishment works of certain real estate projects.
The Company’s investment strategy is focused on high-quality assets (real estate or fund units) in large urban areas, specifically in Milan, which have demonstrated high income capacities and good resilience during negative market cycles, partly due to a less volatile level of demand compared with smaller assets located in secondary cities. Regarding vacancy risk, the Company deals with long-term rental agreements with adequate protection clauses. Tenant-specific asset management initiatives are designed in order to understand the situation and needs of each tenant, and to identify and address potential problems proactively.

Credit and counterparty risk

The risk of losses resulting from the non-compliance of counterparties due to the deterioration of their creditworthiness, with them defaulting in extreme cases with reference to:
- tenants;
- counterparties in real estate development operations (manufacturer, operator);
- counterparties in real estate transactions.
During the on-boarding phase, the Company analyses and continuously monitors the risks of non-compliance of tenants and other significant counterparties (e.g. solvency and creditworthiness analyses, analysis of the financial situation, references, prejudicial and negative information, etc.), also resorting to external databases. In this regard, the Company’s investment strategy favours reputable and wellcapitalized counterparties and those belonging to large international groups.

Concentration risk

The risk resulting from properties leased to individual counterparties or groups of legally connected counterparties, counterparties from the same economic sector or which carry out the same activity or are located in the same geographical area.
The Company analyses and monitors this risk regularly and has also defined the limits in its Articles of Association with regard to concentration of individual properties/tenants. The Company’s strategy involves increasing the number of tenants and the number of industrial sectors in which our tenants are active, in order to mitigate the risks associated with excessive concentration.

Interest rate risk

The risk related to adverse changes in the rate curve that change the current value of assets, liabilities and their net value (ALM), and cash flows (assets and liabilities) based on changes in interest expense (assets and liabilities).
The Company purchases hedging instruments or otherwise contractually fixes an adequate amount of its floating rate exposure in order to reduce the impact of adverse changes in interest rates.

Liquidity risk

The risk of not being able to meet one’s payment obligations due to:
- the inability to obtain funds in the market and generate adequate operating cash flows (funding liquidity risk);
- the inability to monetise one’s assets (market liquidity risk).
The Company continuously monitors the level of its liquidity based on detailed cashflow analyses and projections as well as through cash flow and ALM risk management activities, utilizing among other tools scenario analyses and stress tests. From the perspective of optimising the financial and capital structure, the Company’s objective is to maintain a stabilised leverage of less than 40% (LTV) in the medium term.

Other financial risks

Other financial risks not associated with real estate assets such as, for example, counterparty risks and/ or other market risks on any financial instruments in the portfolio.
The strategy currently adopted by the Company involves a limited investment in assets other than real estate assets except for treasury bills and instruments needed to hedge interest rate risk; this also takes into account statutory restrictions related to the SIIQ status to which we are subject. Exposure to any financial risks, not connected with real estate assets, is subject to periodic monitoring and is also mitigated through our use of reputable and well-capitalized banking counterparties.

Operating risk

The risk of suffering losses resulting from the inadequacy or malfunction of procedures, and internal systems or external events. This risk includes the risk of outsourcing, i.e. the operating losses arising from the performance of the outsourced activities.
Operating risks are addressed by adopting adequate internal procedures and the structuring of the internal control system on three levels:
- Level One: Scheduled checks carried out by the business units and staff functions;
- Level Two: Checks carried out by the Legal, Compliance and Risk Management functions;
- Level Three: Checks carried out by the internal audit function based on the Audit Plan.

Legal and compliance risk

The risk of changes in performance due to changes in the legislative framework or violations of the regulations to which the Company is subject.
The Company continuously monitors the risk of non-compliance with current legislation and compliance requirements. Our compliance checks include asset and profit tests to ensure that legal requirements, necessary to maintain the SIIQ status are met now and, in the future, as indicated in the Articles of Association.

Reputational risk

The current or future risk of a fall in profits or capital, resulting from a negative perception of the Company’s image by customers, counterparties, shareholders, investors, internal resources or the Regulatory Authorities.
These risks also refer to potential value losses for shareholders deriving from inadequate management and control of environmental, social and governance standards (so-called “ESG factors”) connected to the activities carried out by the Company.
Reputational risk, like operating risk, is mitigated by adopting an adequate organizational and control structure, consistent with international best-practices. We also mitigate reputational risk by putting in place stringent and specific procedures such as supervising external communication, overseeing interaction with stakeholders (e.g. governmental authorities) and monitoring contact with investors (e.g. complaint management). The Company pays particular attention to full and continuous compliance with the ESG Standards and considers sustainability as an integral part of its business by aiming to create a high quality real estate asset, with sustainable long-term growth, preferring properties with potential for appreciation in the time. In this context, during 2017, the Company contributed to the creation of a “Think Tank” in collaboration with 5 of the most important listed real estate companies operating in Europe, whose activities are concentrated on the discussion of issues related to sustainability and innovation. The environmental performance of the asset portfolio, and the social and governance performance of the Company are subject to stable monitoring and adequate disclosure to stakeholders.

Strategic risk

Pure risk and business risk; this consists of the current or prospective risk of a fall in profits or capital, resulting from changes in the operating environment or from incorrect corporate decisions, inadequate implementation of decisions, poor reaction to changes in the competitive environment, customer behaviour or technological developments.
In addition to a comprehensive strategic planning and evaluation process for analysis of investments, strategic risk is mitigated by the high level of experience and professionalism of Company management, with regard to the real estate market, operational/financial management, and internal controls.

The risk management model

The Company adopts an advanced risk management model that combines quantitative analysis for interest rate, credit, liquidity and market risks and other qualitative risks (operational, reputational and strategic) and provides for the use of scenario analysis and stress tests to assess the degree of exposure to the main risks under adverse conditions.

In terms of quantitative analysis, the model is based on an examination of the dynamics of the Internal Rate of Return (IRR) of the Company’s investments, resulting from evolutionary scenarios of the components of the IRR itself. The methodology adopted is based on a comparison between the “basic” IRR, calculated on the basis of information derived from the Company’s Business Plan and individual investments, and the IRR@Risk calculated on the basis of estimates of risk factors (e.g. probability of default of tenants, occupancy of properties, break option clauses, lease agremeent reversion, asset and tenant concentration etc.) and the performance of a real estate market index. The latter is determined based on the evolution of macroeconomic variables (e.g. interest rates, unemployment, etc.), formulated by international bodies (e.g. IMF, etc.) and appropriately selected, using a multivariate linear regression model.

The distributions of the possible evolution of the risk factors / variables considered are summarized in as many IRR distributions, from which an IRR is estimated for each risk and an Overall IRR@Risk, at individual investment and portfolio level. The difference between the “base” IRR and the IRR@Risk is a measure of the risk exposure of each investment and of the investment portfolio as a whole.

The activity of the Risk Manager, based on the method described above, is mainly directed at evaluating investment and divestment opportunities, and at monitoring portfolio risks and the risk of the Company’s business, reporting the results of the analyses conducted to the Board of Directors.

In 2019, on the back of the rotation of the portfolio and the active management of the assets conducted by the Company, a reduction in the risk level of the portfolio was recorded. In line with the corporate strategy, the Company has increased the exposure in the offices sector in Milan and in particular in the Porta Nuova area, which currently has greater attractiveness and resilience to negative trends, and has reduced the concentration risk in terms of lease agreements and property value. In addition, the Value-add project (Corso Como - Bonnet) continues as planned in terms of timing and costs, and highlighted the interest of primary tenants.

Market risk is mitigated by the high quality and location of the Company’s real estate portfolio, which has good resilience to market volatility, also based on recent industry studies. The risk of vacancy is limited because the portfolio of lease contracts has an average duration of more than 5 years, with a limited percentage of the portfolio with a maturity of less than three years of approximately 28.1%, and a limited vacancy rate of 2%.

Credit and counterparty risks are low due to the high credit standing of the tenants - almost 90% have an investment grade rating and only about 1% do not have an ECAI rating - and given the very limited backlog of leases, less than 3% of the total portfolio volume. Liquidity risk is modest due to the size of the cash flows generated by the investment portfolio, while interest rate risk is adequately mitigated as about 89% of the debt is hedged by derivative instruments.

Operational, reputational and strategic risks are subject to periodic analysis based on a qualitative approach that takes into account the following aspects:

• identification of the major risk factors and determination of the probability of occurrence and loss estimate by risk factor

• determination of the level of risk exposure (“absolute risk”) and, on the basis of existing controls, the residual risk

The analyses carried out show that operational, reputational and strategic risks are adequately mitigated in view of the level of controls and controls implemented by the Company.