The National Rental Home Council (NRHC) published a new report a few days ago establishing recommended best practices for defining, calculating, and reporting key financial and operational disclosure metrics for the single-family rental (SFR) industry. Green Street Advisors’ Advisory and Consulting Group provided subject matter expertise and worked with NRHC members to develop standardized definitions and calculations of common disclosure metrics and help document industry best practices. This report will help public and private markets better understand the single-family rental industry’s performance and valuation measures and improve the consistency and transparency of information across the industry.
Best Practices for Measuring the Rental Industry
“As the single family rental industry continues to grow and mature, investors and others are seeking clearer and better insights into the industry’s basic performance and valuation measures,” said NRHC Board President and Invitation Homes CEO John Bartling. “In agreeing to a set of best practices for disclosure, we are taking a significant step forward in the continued evolution and maturation of our industry.”
To produce the recommended common language outlined in the report, Green Street Advisors’ Advisory and Consulting Group reviewed and compared NRHC members’ existing disclosure and definitional practices to identify a set of metrics deemed important to the single-family rental industry and broader REIT universe. The resulting document provides “best practices” for calculating and reporting portfolio, leasing, income and asset value metrics, with a non-binding recommendation that industry participants adopt these best practices to facilitate consistency and comparability across companies throughout the sector.
What the Report Covers
The report is 34 pages in length. Much to long to thoroughly cover in a short article. You can read the entire report here.
While the best practices outlined in this publication are non-binding upon NRHC members, the NRHC recommends that its member firms adopt the guidelines in the report. Consistency and transparency of disclosure helps support investor confidence, and investor confidence contributes to the reduction of the cost of capital for any industry.
The main categories covered are:
- Portfolio definitions
- Leasing definitions
- Income definitions
- Asset value definitions
- Appendix (with formulas to make calculations)
A Few Examples of Best Practice Definitions
What follows are a few of the definitions the report includes for standardization purposes.
- The term Occupied is used to describe the physical status of a property at a specific point in time. Occupied space is viewed as a source of existing revenue, while unoccupied reflects a source of potential revenue. Occupied and unoccupied are terms typically used for a single asset, while occupancy and vacancy are used to describe a set of properties.
- Leased Property: An occupied home, or an unoccupied home, with a signed lease (regardless of whether the tenant has moved in as of a specified date).
- Core Portfolio: Portfolio of homes that are expected to be held for at least one year.
- Days to Lease: The days between acquisition and the date the first lease is signed (i.e., the number of days the property was unleased, including the period during which up-front rehab is underway).
- Gross Potential Rent should include market rents that are net of leasing concessions.
- Average Rent Per Home: The average rental rate per home for all occupied homes. Monthly rent should be quoted on a net effective basis for the current month in question.
- Re-Lease Spread as a percentage: The percentage difference between the net effective rent on a new lease for a new tenant, and the net effective rent on the prior lease for the prior tenant.
- Re-Lease Spread in dollar value: The dollar difference between the net effective rent on a new lease for a new tenant, and the net effective rent on the prior lease for the prior tenant.
This is only a small sample of the best practice definitions released in the NRHC report. You can view the entire 34 page report here.
To some, this may seem like over regulation but these best practices are nonbinding and are intended for institutional investors. A better understanding of this relatively new, powerful, and growing industry sector can only help individual private investors.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.