Robot Mapping

We think we're pretty clever the way we create drawings these days. Laser measurement devices and computers have made the creation of drawings an efficient process. The resulting CAD files are much more reliable than anything that was created using manual measurement and drafting techniques. The electronic files are very versatile and can be reused for a variety of applications.

So what's next?

I've found some great videos of robots measuring buildings. Look at this one for example:

And here's a guy adding some intelligence to his Roomba:

I have a Roomba at home and its not that smart. It has a problem with doors. It goes into the bathroom. It vacuums behind the door which causes the door to shut and then it's stuck in there. It bounces around, beeps and clicks for an hour and then runs out of power. The exhausted machine then has to be carried back to the docking station.

But, given the rapid development of technology, it is inevitable that robots will be able create CAD surveys of buildings within the next few years. But first, there are two technical problems that must be solved:

1. Robots must be able to safely navigate through buildings, not get lost or stuck in corners. This is not a big problem. It will occur through an incremental refinement of existing technology.
   
2. Robots must understand what they see. The survey robots that exist today can scan a space and create a point cloud of their environment. To create useful drawings the robot must be able to distinguish a door from a niche and a wall from a window. Electronic drawings and models have to indicate what things are, not just their outlines. Recognizing objects is a bigger problem that will require more computing power and clever programing.
   

By the time we have these survey robots, we will be used to seeing cleaning robots, maintenance robots and delivery robots. All these applications rely on the same two problems of spatial navigation and object recognition.

Checking in on the CMBX index

What does the CMBX index now suggest about the future health of the commercial real estate industry? I've been interested in this index for quite some time - see my earlier posts:

• CMBX
  
• Markit CMBX
  
• How Vulnerable is Commercial Real Estate?
  
• What is CMBX exactly?
  
• CMBX Index
  

CMBX is a derivative index that shows a market assessment of the risk for default for various classes of commercial mortgage backed bonds. In an efficient and rational market, this should be a good indicator of the future performance of the commercial real estate sector. Of course, these are not rational times.

This is what the index looks like today:

What does it mean? The index tells us what traders at hedge funds and investment banks have thought about the future of the market at various times in the past.

• At the beginning of the year, these bonds were considered to have almost no risk.
  
• In March, they were thought to be junk! Investors expected significant defaults. Perhaps commercial real estate would follow on the heals of the residential melt-down?
  
• Now, commercial mortgages carry a moderate risk premium.
  

Recent events are so far supporting the view that commercial real estate will suffer far less than the residential sector. Take for example the case of the Harry Macklowe, who bought several New York office buildings at the top of the market from Blackstone. He used $50 million of his own money and $7 billion of debt from Deutsche Bank. With that much leverage in a shaky economy, he soon ran into trouble. But he worked it out. Deutsche Bank took several of the buildings, but Macklowe retains a sizable real estate portfolio. The bank was then able to turn around and
sell the buildings very quickly. And the price they got was no more than 20% - 30% less than the value at the market peak.

The lesson is that unlike in the residential market, there are buyers for distressed property which offers significant protection for bond holders.

On the other hand, the general economic downturn in the U.S. will have an impact on the sector. Office Tenants are taking less space. Vacancies continue to rise in retail centres.

Even if there are far fewer structural problems in commercial real estate, risk in the sector is increasing due to the general economic downturn.

How to Read Financial Statements

This post is for people who don't have a financial background, but still need to analyze corporate financial statements from time to time.

Like a lot of people, you don't deal with finance most of the time. When you do need to review statements it can seem intimidating and confusing. Even after you figure them out you are left with the question: are they good? Or are they bad?

I Googled for a good simple explanation for how to read Financial Statements. The best result I got was this one from the SEC - but it's still pretty complicated! The following is an attempt to describe them in basic terms so that you can get a quick understanding about what is going on in a company - and to give you a guide for how to ask intelligent questions.

Step 1 - Focus. Financial statements are often divided into four reports, but for an initial quick overview, we only need to look at two. Look for the Balance Sheet and the Income Statement (sometimes called Profit & Loss)

Step 2 -try to get a sense of the big picture before you drill down on details. Look for subtotals. If you need to compare companies to each other, you can only do this with the bigger groupings of accounts.


The main groupings and sub-totals of an income statement

Step 3 - look at profitability. Turn to the Income statement. The income covers a period of time. At the top is the total revenue that the company took in, at the bottom is what is left over as either a profit or a loss during that period of time. In between there are some very important sub-totals:

• The first expenses at the top apply to the expenses incurred to deliver the product or service. Often there is a sub-total for 'Cost of Goods Sold' and 'Gross Profit'. These lines give you a good sense of how profitable the 'business' is.
  
• Underneath the 'Gross Profit' section are listed all the other expenses of the company. Here you can see what management is doing with expenses that are somewhat discretionary. Are they investing in the business? Do you think management is being wasteful in certain areas? Or are they under-investing in others?
  
• The net profit is the 'bottom line' - the amount of profit that is kept in the company over the period of time that the statement covers. A decent number here can either mean a good profitable business, or it could mean a business that is being milked for cash. Don't look at this number before you understand the numbers above!

Typical main sections of a balance sheet statement

Step 4 - look at financial health. Turn to the Balance Sheet. This is a very confusing statement. It is stacked as two sets of accounts that add up to the same number. Unlike the Income Statement (which covers a period of time) it is a snapshot of the company as of a specific date.

• To understand this statement, you have to understand the concept of the Fundamental Accounting Equation: Asset = Liabilities + Shareholders Equity. The way to think of this is like this: what a company owns has to equal the way in which the company paid for what it owns. Assets are all the valuable things in a company: cash, receivables, inventory, furniture, land and property. The company acquired these assets either by taking a loan (liabilities) or by using the owners capital to pay for them. The capital can be the cash invested originally or it can be profits that have been left in the company. The Fundamental Accounting Equation says that the assets have to equal the debt and equity used to pay for the assets.
  
• How do you determine the financial health of the company? You need to look at the at the 'short term' debt - which means things that have to be paid soon such as payables and compare it to liquid or near liquid assets - which are cash and receivables. For these items liquid assets need to be a fair bit more than short term debt for the company to be comfortable.
  
• You should also look at the ratio of total debt and equity, but there is no absolute rule about the best relationship. Too much debt can be risky, but too much equity can be inefficient. The ideal balance can depend a lot on the industry and the type of business. If these seem out of wack, you should find out why.

Step 5 - Put the pieces together. Think about the net income on the Income Statement. Think about the liabilities on the balance sheet. Is the company earning enough to pay its obligations? And now think about the business itself. Will the income be steady or variable? If the revenue grows, will more capital and debt be required?

I hope these very basic steps will allow you to leverage Financial Statements into useful management tools that can help you better understand the workings and performance of a company.

In a future post, I will cover financial ratios which are very useful in comparing two or more companies in the same industry.