Transparency and consistency in real estate reporting: the GP-LP dynamic
John Kjelstrom, an active member of NCREIF and current Vice Chair of the NCREIF-PREA Reporting Standards Council, facilitated a panel discussion on transparency and consistency in real estate reporting at the recent NCREIF Spring Conference.
Some objective baseline perspectives were laid out, such as the principles-based nature of the Reporting Standards, which led to a discussion about deviation in reporting practices between different funds. The types of investments being made in real estate now are different than they were 10 years ago — real estate as an asset class is evolving and becoming more sophisticated. While individual fund managers may still have the belief that their reporting practice is the best method, others are more forward-thinking as demands for data have changed.
Over the past decade, debt valuation has been an area that has greatly improved in consistency. That said, volatility in fourth quarter 2022 and the first quarter of 2023 across base rates, borrowing spreads, property performance, and availability of capital have shown there is still a bit more room for growth in generating greater consistency across the domestic open-end real estate fund universe.
Representing the investor or LP perspective on the panel was the chief investment officer at a fund that’s been investing in real estate for about a century, overseeing a little over $500 billion in quarterly financial reporting. They described how they accept that there will be some variance in reporting models, but that any variance should be compensated by robust transparency from the GP and that footnotes in financials should describe diverging practices and philosophies behind them. Examples include:
- Accounting choices such as whether to amortize or expense debt fees.
- Valuation philosophy in light of market volatility or lack of transaction volume, including self-assessment of conservative or data-driven philosophy versus a proactive attempt at placing more timely marks on assets. They provided an example of appraisal and research teams marking assets down 15-20% where their internal team would mark similar assets down 50% or more.
- While there is still some diversity in practice among different service providers’ debt valuation methodology, they suggested that LPs want to see some explanation from GPs of how the debt was valued, presumably to include not only methodology but also relevant market data and assumptions.
One perspective shared in the panel discussion was that there seemed to be two groups of GPs post-COVID. The first was waiting to mark down assets until more information became available and transactions picked up. The second marked assets down more aggressively, which seemed to position them better for additional fundraising. In either case, the panel intimated that such “wiggle room” in the principles-based standards might allow GPs to game either returns and/or redemption queues.
The CFO of an investment manager provided the GP perspective on the panel, who noted that transparency and consistency are important to establish your credibility with investors. Sufficient information must be communicated effectively every quarter to keep investors feeling good about the decisions they make to stay invested or invest more in your fund. In the open-end fund universe, investors are making an active decision to stay or leave, to add or reduce investment every quarter. GPs devote resources and focus to share complete information consistently across all their individual investors.
One interesting anecdote on investor reporting was that most funds do not report specific performance of each LP’s own investment returns to date in a fund. While a few GPs add an appendix to account statements that show the specific LP’s returns since investing, most do not. It was estimated that only about 10% of open-end funds provide account statements with enough data for an LP to derive net income, appreciation, and total returns, a derivation that takes considerable time and effort for each LP. There was acknowledgement that the industry continues to evolve, including changes to reporting standards and increasingly complex data sets and classifications of assets. The challenges for NCREIF-PREA Reporting Standards as well as GP reporting practices continue to be very dynamic.
The bottom-line takeaway from the panel was that when consistency in industry practice or across different GPs does not clearly exist, LPs want better and more robust disclosures of what was done and how it was done. More and better information in valuation reports and financials would yield the transparency that LPs desire to better understand, trust, and differentiate GPs’ performance to make well-informed investment decisions. Ultimately, transparency creates consistency.
John Kjelstrom, Managing Director, Chatham Financial
“I encourage everyone to work together on these problems. Talk to your peers, talk to your service providers, talk to your auditors, talk to your investors. An open dialogue helps drive the consistency and transparency that we need during this volatile time in the market.”
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