Managers have been hyper-focused on data during the pandemic. “The last couple of months have been about transparency,” says Thomas Kallenbrunnen, senior portfolio manager for Newark-based PGIM Real Estate’s European core strategy.
The firm received more intensive reporting requests during covid-19, particularly for rent collection as well as the valuation and cashflow effects on individual assets. “The level of detail investors were asking questions was quite high in this crisis,” he explains.
During the covid crisis, having complete financial data has been paramount for a manager, he notes: “You need a high quality data set on the lease contract level and then for every expense, be it op-ex or cap-ex, if you want to do a proper performance attribution and contribution analysis.”
London-headquartered Nuveen Real Estate has been fastidious about its record keeping at the asset level during the crisis. “When covid hit, we actually set up covid charge codes within our system, so that when we do rent abatements, we’re able to charge it to that code and really track it in a lot of detail, a lot of granularity on a lease by lease basis,” says John Caruso, global head of fund finance. “If you start granular, you can always roll up, if you start at a high level, you can’t always roll down and get granular.”
He expects to see increased reporting during the second quarter relating to covid-19’s impact on cash collections and performance, with managers likely to attribute poor performance to the pandemic and quantify the virus’s negative impact on that return. “Covid is going to impact not so much the computation of the return, but the analysis of the return, because more and more investors are looking at, what are the attributes of that return, what’s driving that return?” he says.
Chicago-based LaSalle Investment Management, likewise, has set up new accounts to track covid-related expenses and created billing policies for delayed rent payments. However, to do a covid-related attribution analysis would be extremely difficult, says Diane Wild, the firm’s head of North America investment performance reporting and analysis.
“To say, ‘this portion of performance was purely related to covid,’ would require a huge analysis to be accurate,” she says. Also, by the time financial and performance reporting is completed and the results are delivered to clients, “it would be stale because covid is changing all the time. Right now, the moving parts of covid make it difficult to get that analysis to somebody in a timely manner.”
Wild does not believe Q2 2020 performance numbers will be indicative of current market conditions.
After all, Q2 2020 performance will reflect occupancies by tenants still in business because they were able to delay rent payments or borrow money. However, by the third or fourth quarter, tenants without deep pockets are likely to have created vacancies in properties, which, in turn, would translate to lost revenue. “I don’t think we’ve felt the full economic impact of covid,” she says. “I believe that fourth quarter and even into next year will be telltale for performance.”
Reporting standards have taken on greater importance as cross-border real estate investment activity has been on the rise over the past decade – reaching $294 billion across 1,251 unique buyers in 2019, compared with $100.94 billion across 689 buyers in 2010, according to data provider Real Capital Analytics.
“If you’re new to the global arena as an investor, you’re not going to understand what some of the differences are,” Caruso notes. “But I think many of the larger investors that have been in the global arena for a while, even they don’t understand what the return differences are.”
In fact, when attendees are surveyed at NCREIF conferences about the meaning of assets of under management, there is a notable lack of consensus, Caruso points out. “AUM, it sounds like a pretty simplistic definition. What does AUM mean? We give five examples, and you get approximately 20 percent in each one.”
The standardization of performance reporting remains an ongoing problem, because “there’s so many judgment decisions you can make,” Kallenbrunnen notes. And “if you’re a global business like we are, it’s always a balancing act,” he adds. “You have to balance global firmwide standardization with following the relevant local market practice. So, there might be an INREV guidance which is different from the NCREIF guidance. And then what do you follow – do you follow the NCREIF guidance for the European fund or the European strategy or do you follow INREV, the local guidance?”
Meanwhile, with the calculation of net asset value, capitalized acquisition costs are not a material issue in the US, but they are in Europe, where such costs can make up 6-8 percent of the purchase price. “So the question whether you write them off after the acquisition, or whether you amortize them over 5 years, 10 years, your holding period makes a big difference on performance reporting,” particularly when evaluating performance in the shorter term, he says.
Because there are different ways to calculate NAV, which is, in turn, used to calculate performance, identical returns for an office building in London and an office building in New York are not actually the same, Caruso adds. “So, we try to explain to investors what those differences are,” he says. However, “I’m not sure we’ll ever get to a standard NAV on a global basis because there’s too many entrenched positions on both sides.”