As we have touched upon in this asset management series, the role of an asset manager is to ensure that the property’s business plan is being executed well. The result of such execution should be the generation of strong returns for investors.
In this final part of the series, I review how Investor Relations (“IR”) is a critical part of the asset manager’s role. In some larger companies that have significant scale, the IR function is often separated from asset management but for most newer and smaller syndication companies this is usually a role of asset management.
In commercial real estate, investors play a critical role in the acquisition of assets since they provide the majority of the capital required to close on the deal. Whether the capital is sourced from institutional investors or from ‘family and friends’ it is imperative that sponsors have strong IR capabilities. In our experience, we have seen sponsors who are very communicative during the acquisition phase (sales and marketing) when they are trying to secure investor capital and then fall short in the post-acquisition phase (operations and asset management) and have very poor and inconsistent IR practices thereafter.
Reporting / Communications Standards:
Most projects rarely go exactly as planned and most investors are (or should be) cognizant of this. As a sponsor, the key is to ensure that investors are in the know on how the project is performing, how obstacles are being addressed and to eliminate any surprises. We believe the following reporting and communication mechanisms are critical:
- Monthly Updates: There should be a monthly touch point with investors that should articulate the project’s status and cover the KPI’s. These updates usually include a review of the high-level monthly P&L packages.
- Quarterly Reports: On a quarterly basis, there should be a more detailed review on the project, the financials and go-forward plan. This is particularly important in the 1st year post-acquisition, where the bulk of the heavy lifting occurs. Many sponsors issue distributions on a quarterly basis and the quarterly reporting is crucial to understand the results of the project.
- Annual Reviews: We believe that there should be an annual review, often via a presentation or webinar, that reports on the results of the project compared to original projections. This usually serves as the sponsor’s scorecard to see if the project has delivered to expectations.
- Ad-Hoc: Communication should also be on an as-needed basis. For example, once COVID-19 impacted operations, many sponsors began reporting to investors on a weekly or bi-weekly basis. Furthermore, if something unplanned and potentially material (e.g. large property fire, flood, etc.) occurs, it may be prudent to share with investors immediately.
There are many variations of the above communication/reporting cadence but the key is to ensure that the sponsors have a consistent process that serves the needs of the investor base. In addition, this should be communicated to investors upfront so that expectations are set before the project starts.
In addition to property level reporting and communication, there are administrative deliverables for investors that sponsors are responsible for. Some of these include:
- Yearly Tax Documents: One of the great benefits of real estate are the tax advantages it provides to investors. Most investments result in the investor getting a Schedule K1 to include on their tax return. Strong sponsors ensure that these are delivered on-time to meet filing deadlines.
- IRA Compliance Reports: Many investors invest via a Self-Directed IRA (SDIRA), which requires yearly reporting on the asset’s fair market value that sponsors need to provide.
- SREO Updates: Many investors are sponsors themselves and often need to update their Schedule of Real Estate Owned (SREO) statements, which requires up to date investment data. Most investors will email sponsors for this data, which can be time consuming for sponsors.
- Other: There are a multitude of other needs such as updating personal information, bank account information, etc. that investors may need throughout the lifecycle of the project.
As a sponsor’s business scales these ‘customer service’ types of functions are usually separated from the asset management role so that the asset manager can focus on the asset itself. In addition, technology such as investment portals, can be integrated and help manage a lot of the reporting and administration duties.
The ability to deliver returns that were projected is obviously very important to keeping investors happy. But returns alone are not enough; regular reporting, communication and customer service is critical to creating a great investor experience. Even though projects will not go exactly as planned, if investors can get consistent updates, transparent communication and strong customer service, in addition to great returns, they are more likely to continue investing with a sponsorship team. As an investor, it’s important to properly gauge if a sponsor has the team and experience to not only deliver on it’s projections but to also ensure the investor relations and customer service throughout the deal lifecycle is top notch.