In the wake of new regulation and rise of real estate crowdfunding platforms, there’s been significant growth in private real estate syndications where operators pool capital from a group of high-net-worth investors to acquire a property and execute a specific investment strategy. In the past, real estate syndications were done on a trust-basis; operators would go out to a handful of their buddies to raise the capital. Under this structure, reporting was less important. If things didn’t go as planned, operators had to deal with their uncle, best friend, and golf buddies. That, in and of itself, was motivation to work hard.
At Atlas, detailed quarterly reporting is one of the pillars of our operating platform. Each quarter, we draft 20+ investor letters which typically include an operations, renovations, and market updates, as well as a financials & performance section. The report is supplemented with a summary income statement and recent property photos. This process takes 100’s of combined team hours. We’re not required to provide such detailed reporting and it doesn’t add any value to the deal, but we believe it’s important to be transparent, goes a long way to building continued trust with investors, and provides us with a framework for thinking strategically about each deal.
One of the challenges with the frequency of reporting is the mis-match between the quarterly update and the timeline of the investment. Most of our deals are 10+ year investments with a core 24-36 month business plan. We model deals on a monthly basis and provide investors with annual projections, but deals never go the way they’re underwritten in a spreadsheet.
The best analogy for deal execution is one I heard years ago during a talk by Peter Linneman. He compares underwriting/executing a deal to drafting/running a football play. On paper, there are all these different moving parts; this guy blocks here, this guy runs out left, the QB fakes the hand-off and RB blocks this guy, then at the perfect time the QB sends it deep down the left to an open WR who scores a touchdown. The deal, like the play, looks great on paper, but it never goes that way. There’s a missed assignment, the QB scrambles away from an oncoming rusher, and the WR makes an athletic move to catch an under-thrown ball. The result of the play is the same, a TD, but the execution on paper is different than the on-the-field execution. The same can be said about the execution of a value-add real estate deal.
We have 20+ active value-add deals in various stages of business plan execution and not one is going exactly as it was underwritten:
- We have a value-add multifamily deal where the renovation took longer than expected due to bad weather and permitting delays, however we achieved rents well above our underwriting and thanks to cooperating capital markets, we achieved an appraised value above our underwriting and refinanced returning a majority of capital to investors.
- We had a retail deal in a booming submarket. After executing a modest renovation (more modest than originally planned), we sold the deal for double what we had purchased it for just 2 years earlier.
- We have a medical office deal located in a submarket hit with a bad storm and located adjacent to a hospital system going through a sale. As such, leasing has been slower than expected and distributions have been delayed.
If you look at any of these deals at a single point in time, you may think things aren’t going well.
Something similar can be said about every single deal we own. However, despite some of the challenges around the execution, we continue to feel good about the deals and their fundamentals; our basis is below replacement cost and comparable sales, the submarket has strong local demand drivers, we have some positive leasing momentum, we have a great team in-place, there is plenty of capital reserves, and we maintain low leverage and a great relationship with our lender etc.
This remains a difficult subject to communicate to our investors. Just because we distribute 5% instead of the anticipated 8% or we withhold distributions for a quarter, doesn’t necessarily mean things aren’t going well, it just means things aren’t going the exact way we drew it up. And things never go the way we drew them up!
Benefit of Quarterly Reporting
Quarterly reporting is not just for our investors, it also forces us to step back and look at all the moving parts of an investment in a way that’s hard to do on a day-to-day basis. It keeps as focused. In writing and answering investor’s questions, we often get insights on how to express something, how to think about something, and to look at something. Questions make us think and challenge what we know, so we really enjoy and benefit from doing quarterly reporting and interfacing with our investors.
At the end of the day, real estate is a long-term investment. We don’t try to time markets, we know that’s impossible. We want to own good properties for 10, 15, 20+ years and if we maintain responsible leverage, we believe we’ll do well over the long-term.
While we believe it’s important to provide high-quality and detailed reporting quarterly, we hope investors can step back and see the bigger (much more important) picture. This quarter may be the missed block, but at the same time, our QB is dodging a tackle and looking downfield to a talented WR who has two steps on his man…
What do you think?