What metrics should you track to manage your real estate portfolio?

It's easy to get caught up with "pet metrics" early on when we don't know that many metrics. We figure one out, and suddenly it's the MOST important thing we use to base our decisions on. (I'm looking at you, Cap Rate!) The most important thing is to know how these metrics interact with and change one another. Top ones to learn in regards to investment returns: Cap Rate vs Loan to Value (LTV) Net Operating Income (NOI) vs Debt Service Internal Rate of Return (IRR) vs Cash on Cash Return (CC, CCR, CoC, CoCR) Equity Multiple vs Hold Time Return on Equity (ROE) vs Rate of Appreciation Break Even Ratio (BER) vs Economic Occupancy There are more relationships of metrics to measure the risk of a project (for another post!)

NOI can grow via lease-up of vacancies, rental mark-to-market on rollover, & streamlining expenses, etc. Eventually take forward 12 NOI at end of hold to help determine exit value. Cap rate can grow also over time. Cap rate goes up if NOI goes up & you divide it by purchase price. Also can look at yield-on-cost by dividing NOI / total basis (incl. TI/LC/capex). Growing your cap rate or yield-on-cost is good since stabilized market cap rate is lower. So if I can “build to a 9” (9%) yield on cost, but sell to a buyer at a 6%, that’s 300bps of spread or profit. You should also be tracking “below-the-line” items like tenant improvements (TIs), leasing commissions (LCs), building capex, & reserves. This helps you calculate COC, IRR, EM, etc.

-Rental rates -Vacancy (if you're 100% occupied, time to raise rents) -Renewal rates for existing tenants (you want people to enjoy living in your units) -Fixed costs (taxes, insurance- continually shop policies and seek ways to trim overhead) -Maintenance requests- seek out themes and execute preventative measures as needed. -Maintenance costs - ensure you're getting competitive pricing -Yield on cost: What is the return we've received for every dollar invested into each project? How has this number changed over time? Are there opportunities to create more value (upgrade common areas, add amenities, update units, etc). -Actual performance vs. projected performance- analyzing this will improve future underwriting and benchmarks.

You could have some downsize/extensions & known vacates, but also expansion/extensions & new leases—want to see net adjusted occupancy going up. Continue to drive leasing to your prop until reaching an acceptable net adjusted occupancy, rollover schedule, & wtd avg lease term (WALT) for disposition. Tenants will gravitate towards amenity-rich & productive/functional business environments, so make necessary improvements to stay competitive. “Cream rises to the top” so position your prop to have some competitive advantages—best in class; low cost alternative w/ attractive amenities, etc. Positioning your prop for success will give a better chance of capturing & capitalizing on fair share of tenant requirements in the marketplace.

The key metrics we use to track our commercial real estate portfolio are; - physical and economic vacancy - delinquency - velocity of rent ready for vacant units - operating expense ratio on gross income - maintenance orders - lease renewals - traffic to property (leads, appointments, application, leased) - Capex projects All these are important for us to keep our DSCR on check and impacts the NOI growth and cash flow positive.

As net operating income (NOI) & value go up, so does debt service coverage ratio (DSCR) & debt yield (DY). Recall that DSCR = NOI / debt service payment (as 1.xx), while debt yield = NOI / mortgage amount (as a %). So although lender doesn’t participate in upside, investment gets safer via more NOI to cover debt. Less stressful on servicer as well—don’t need to worry about setting up cash traps/sweeps to cover debt service etc. Borrowers track these DSCRs to ensure they stay on track per required loan covenants, & for earn-outs on bridge debt, etc. May also be able to refinance after property gets stabilized. So a higher NOI, DY, & LTV = more debt proceeds. So LTV important.

Internal rate of return (IRR) is a time-weighted investment metric whereas equity multiple (EM), & cash-on-cash (CoC), etc don’t factor in the time value of money (TVM). To get a full picture on investment returns, incl. lease-up timing, IRR, EM, & COC, you’ll need to build out a multi-year cash flow model. Combine actuals w/ remaining forecast. Need to determine the actual inflows & outflows of cash flows, including any equity capital calls; tracking of draws for TI/LC/capex (both debt & equity), etc. Also need to track debt service.

Some institutional investors track their property & portfolio-level returns vs. NAREIT (public) & NCREIF (private) indexes, etc. Perhaps you’re a fund manager & want to track fund level returns to peers. Groups like prequin help track the top x in peer groups. For a new portfolio, may have some assets that aren’t w/in your “core competencies” & targeted geography, so you sell these. Within a portfolio, you may want to rebalance later & sell off certain assets after value has been maximized & focus on rest.

Benchmarking is comparing your portfolio to industry standards. Diversification is the variability in your portfolio in terms of - Location - Asset class - Risk associated Both of these are crucial to make sure your portfolio is more aligned with your goals and provide better returns.

Some common metrics that real estate funds report are distributions to paid-in capital (DPI), residual value to paid-in capital (RVPI), and total value to paid-in capital (TVPI). DPI: Distributions / Paid-In Capital RVPI: NAV / Paid-In Capital TVPI: DPI + RVPI Essentially, this shows you how much of the projected returns you're being shown come from already distributed cash flows vs. the Net Asset Value, or residual value, of your current holdings.