Investor Reporting Best Practices
For real estate exposure, investors can either invest passively with a real estate fund manager or purchase investment properties themselves. Private real estate investors tell us the number one reason they prefer acquiring properties themselves is because they are completely informed of everything happening at each property. In fact, we’ve had private real estate investors tell us that they’ve chosen to invest directly, over a higher-performing passive investment opportunity, simply because they prefer being in the know.
At Origin, we offer top-ranked, diversified private real estate funds and believe passive investing should be as transparent as direct investing. We want our investors to know what we do, how we do it, and how our investments are performing, whether they are doing well or not so well. Investors tell us they want three questions answered, so we address them in every quarterly performance report:
1. What was the original plan?
2. How is the plan performing this quarter, relative to the original plan?
3. What is the guidance going forward?
Below is a breakdown of part of an actual Origin quarterly performance report for investors, to give you an example of what type of updates to look for, whether you choose to partner with Origin or another investment manager.
The Portfolio Summary
Fund Summary: Investor real estate reports should clearly state net returns, not only gross returns. Gross returns are somewhat meaningless because fees have not yet been deducted, while net shows the returns after all fees are accounted for. Investors should care most about the net returns because this shows the money that will actually hit their bank accounts. Reports should always specify if returns are gross or net of fees and if there is no label, be sure to ask. Also, if returns are labeled as net of fees, be sure to ask if the returns are truly net of ALL fees and not just some.
Asset Summary: This section details every property the fund has invested in and how each of the assets are performing. Even though the fund is diversified by design, it’s important for investors to understand the individual properties that comprise the fund so that you’re aware of the level of risk a manager may be taking. For example, if one property is 40% of the fund and the other sixteen properties only total 60% of the fund, it may not actually be a diversified portfolio.
Also, it’s important to understand the dispersion of returns within a fund to assess risk. For example, let’s say one fund makes a 40% IRR on half of the deals and the other half make 0%, resulting in a 20% IRR for the portfolio. And the other fund’s deals perform between a 17-23% IRR, resulting in a 20% IRR for the portfolio. Which fund is risker? Both funds generated the same end result, but the fund with large swings is riskier. Investors should look for consistency as a lead indicator of a manager’s ability to repeat investment returns in the future.
Characteristics: Provides high-level metrics for each asset, including the current value of the property relative to the original value. Any material difference in these figures should be explained in the report so investors understand whether the value changed due to the market moving, work by the manager, or both.
Investment Overview: Describes the property, its location and what we liked about it that led us to purchase. This should be included in all quarterly reports, even if the investment started years ago. Evergreen information should be easily accessible so investors don’t have to flip through old reports for answers.
Key News & Status of the Business Plan: At Origin, we prepare a detailed business plan for each asset we acquire that covers how we plan to improve operations, enhance the value and sell for a gain. In this section, we update our investors on the latest information and if the investment is on plan. We highlight all material developments that occurred in the prior quarter, whether positive or negative. Make sure your investment manager is giving you the whole story. Rarely is an investment only loaded with positive news.
Return Metrics: Highlights the original return projections vs. the current projections so investors can see if we’re hitting our goals. Any material differences should be explained in the report. Investment managers should be honest and hold this up front and center.
Financial Notes & Guidance: Elaborates on the Return Metrics section and provides cash flow guidance. We know it’s important to investors to know how much cash flow they can expect to receive and when, so we tell them. Sometimes there is uncertainty around cash flows as tenants come and go or if renovations projects are still underway. We explain this as well.
Too often I hear from prospective investors that passive investing feels like a black hole of information with some managers. I always explain to them how we’re different, but I also know actions are louder than words. I wrote this blog to help illustrate how reporting truly is one of our competitive advantages and one of the primary drivers behind our 92% investor retention rate.