Transcript Second Quarter 2010 Quarter 1 NCREIF Indices Review

Town Hall Meeting
March 4th
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Agenda
• Debt Valuation Methodologies
• Education Update
• Daily Price Index
• Survey of Global Indices
• NPI Calculation Change
• New Member Portal
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Sally Ann Flood, Chair, Reporting Standards Council, John Kjelstrom, Vicechair, NCREIF Valuation Committee and project task force member,
Marybeth Kronenwetter, Director, Reporting Standards Operations and
Jeff Walker, project task force member
DISCUSSION OF DEBT VALUATION METHODOLOGIES
ASSESSMENT FOR ODCE FUNDS
BUBBLE SIZE = SIZE OF FUND (NAV)
EXTERNAL
VALUATIONS
NET APPROACH
GROSS APPROACH
INTERNAL
VALUATIONS
Analytics provided by National Valuation Consultants
March 4, 2015
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Survey of Global Indices
Education Update
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Survey of Global Indices
Daily Price index
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Survey of Global Indices
Survey of Global Indices
Jacque Vedra
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Survey of Global Indices
Survey of Global Indices
Purpose
• To determine if there is interest within the PMC to produce an global index list
that outlines the relevant metrics of all indices within the industry. This index
list would serve as a tool to educate reporting and investment management
teams, for research and to educate plan sponsors.
Discussion Topics
• Relevant indices
• Format
• Phases
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Survey of Global Indices
Proposed Index List
NCREIF Property Index
NCREIF Fund Index - Closed End Value Add
NCREIF Fund Index - Open-End Diversified Core Equity
NCREIF Fund Index - Open-End Equity
NCREIF Transaction Based Index
NCREIF Farmland Index
NCREIF Timberland Index
CoStar Commercial Repeat-Sale Index
Green Street Advisors Commercial Property Price Index
European Association for Investors in Non-Listed Real Estate Vehicles Index (INREV)
Asian Association for Investors in Non-listed Real Estate Vehicles Index (ANREV)
Global Real Estate Fund Index
PREA/IPD U.S. Quarterly Property Fund Index
Investment Property Databank Ltd.
Moody's/RCA Commercial Property Price Indices
RCA U.S. Commercial Property Price Indices
RCA/PD U.K. Commercial Property Price Indices
Cambridge Associates LLC Real Estate Index
Burgiss
Proposed Attribute List
Index Full Name
Abbreviated Name
Published By
Fund level or Property level
Geography
Strategy
Leverage
Type of Return Presented
Calculated Values
Weighting
Currency
Contributing Members / Data Source
Based On
Number of Indices and Sub indices
Periodicity
Frequency of Release
Launch Date
Base Date
Query-able Database
Frozen/Unfrozen
Access and Cost
Website
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Survey of Global Indices (Example)
Index Full Name
Abbreviated Name
Published By
Fund level or Property level
Geography
Strategy
Leverage
Type of Return Presented
Calculated Values
Weighting
Currency
Contributing Members / Data Source
Based On
Number of Indices and Sub indices
Periodicity
Frequency of Release
Launch Date
Base Date
Query-able Database
Frozen/Unfrozen
Access and Cost
Website
NCREIF Property Index
NPI
NCREIF
Property (appraisal based)
U.S.
Not specified, although primarily core as development properties are excluded and leverage is removed.
Unlevered
Gross TWR
• Gross TWR (total return, income return, and appreciation return)
• Gross IRRs by acquisition and disposition period (IRR tool)
• Operational data (NOI, Cap Ex)
The NPI can be thought of as a market cap weighted index as opposed to an equal weighted index. Thus, larger properties in terms of market value have a greater impact on the index than smaller properties. What is being calculated is essentially the return for the entire
portfolio of NCREIF properties.
In equal weighted performance analysis each property counts the same weight, regardless of the value of the fund. Index aggregates are typically value-weighted. Equal weighting however; is useful for statistical analysis as well as peer comparisons. Some of the NPI
query tools and Fund Level Indices provide Equal-Weighted Return Analysis, however the overall index is published on a Value-Weighted Basis.
U.S. Dollars
~30,000 properties; changes over time as Data Contributing Members buy and sell properties and new Data Contributing Members are added.
All properties have been acquired on behalf of tax-exempt institutions and held in a fiduciary environment.
• All Data Contributing Members of NCREIF must submit all properties held in the U.S. (including properties in taxable accounts and in all "lifecycles"), but only qualifying properties enter the NPI.
• Qualifying properties include:
- Wholly owned and joint venture investments.
- Existing properties only-no development projects.
- Only investment-grade, income-producing, operating properties: apartments, hotels, industrial, office, and retail.
• The database increases quarterly as participants acquire properties and as new members join NCREIF.
• Sold properties are removed from the Index in the quarter the sales take place (historical data remains).
• Each property's market value is determined by real estate appraisal methodology, consistently applied.
Property level valuations and operating income data.
The NPI rate of return formula assumes:
NOI is received at the end of each month during the quarter.
Capital Expenditures occur at mid-quarter.
Partial Sales occur at mid-quarter. A partial sale is the sale of a portion of the property such as excess land.
These assumptions are the reason that the formulas above include terms in the denominator for adding ½ Capital Expenditures, subtracting ½ Partial Sales and subtracting 1/3 NOI. These adjustments make the denominator an estimate of the average investment during
the quarter.
This methodology is well accepted in performance measurement and is consistent with what is referred to as the "Modified Dietz" formula for measuring investment performance which considers the average daily investment in an asset. In this case it is as if the NOI was
received on days 30, 60 and 90 of the quarter and capital expenditures and partial sales occur on day 45.
Single index
Quarterly
~25 days following quarter-end
1982
1977
Yes
The NPI was "frozen" each quarter beginning First Quarter 2003. This means that a snapshot of the index was taken each quarter and changes are not made historically unless there is a significant error that is caught later that would require the restatement of the NPI. A
significant error is considered to be one that affects the National, Property Type or Regional returns by 10 basis points or greater. A restatement has only happened once since the "freeze." The restatement took place in Fourth Quarter 2004 due to a manager submission
error that affected a property type return by 16 basis points. Prior to 2003, the NPI was restated historically every quarter for various reasons, the majority being the fact that when there were property sales in a given quarter, the previous quarter's ending market value
was changed to reflect the sales price.
Available to NCREIF members.
https://www.ncreif.org/
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Formula Revision
NPI Formula Revision
Sold Properties Taskforce
(Research and Performance Measurement)
March 4, 2015
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Formula Revision
Background
NPI “frozen” in 2003 to eliminate restatement
each quarter
Freezing required treating “Full Sale” as “Partial
Sale” in quarter sold
Seemed like a good idea at the time
With small percentage of sold properties, the
impact on NPI almost unnoticeable
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Formula Revision
Current Formula
Change in Market Value plus NOI and PS minus
CI divided by Beginning Market Value and timeweighted amounts
MV t – MV t-1 + NOI t + PS t – CI t
–––––––––––––––––––––
MV t-1 – ⅓NOI t – ½PS t + ½CI t
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Formula Revision
Full Sale Case
Full Sale treated as Partial Sale post-freeze
Thus, sale is assumed to take place mid-quarter
Ignoring NOI and CI, total return is:
PS t – MV t-1
–––––––––
MV t-1 – ½PS t
Gain on sale is extrapolated to a quarterly return (as if
same gain will occur the second half of the quarter)
Denominator also used for the weighting in the value
weighted NPI.
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Formula Revision
Two Issues:
1. NCREIF formula does a poor job calculating an effective
quarterly return for a partial period.
A. Derivation assumes any inter-period cash flow is
relatively small
B. Bad approximation of an IRR for the quarter if interperiod cash flows large
2. Many properties not revalued at the beginning of the
sale quarter
– Thus the gain may have actually accumulated over
one or more quarters.
– This “appraisal lag’ is also being extrapolated into the
quarterly return.
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Formula Revision
Example
MVt-1 = $100
Sale Price = $120
Assume no NOI or CapEx for simplicity
Total Return = (120 - 100) / (100 - 60) = 50%
•
A 20% gain produces a 50% quarterly return
•
Note that (1.20)2 -1 = .44 or 44% - not 50%
•
The formula overstates quarterly return even if we
believe the 20% change in value will continue for the
rest of the quarter.
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Formula Revision
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Formula Revision
Sold Property Bias
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Formula Revision
Something Happened Post Freeze!
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Formula Revision
Proposed Solution
 Use data already collected quarterly…no new data required
(Sale date has always been collected.(
 Calculate returns each month of quarter and chain-link to get
quarterly results
 Sold properties only impact months until sale…no
“extrapolation”
 Denominator just Beginning Market Value…no ½ or ⅓ terms
 Formula gives an exact IRR for each month – no
approximation
 Reported gain is simply allocated to each month property in
index that quarter based on compound growth
 NOI allocated equally to each month
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Formula Revision
Proposed Total Return Formula
MV t – MV t-1 + NOI t + PS t – CI t
–––––––––––––––––––––
MV t-1
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Formula Revision
Chain-Linked Months
Chain-Linked Months
Each monthly return in a quarter is:
R 1 = (MV 1 – MV 0 + NOI 1 + PS 1 – CI 1 ) / MV 0
R 2 = (MV 2 – MV 1 + NOI 2 + PS 2 – CI 2 ) / MV 1
R 3 = (MV 3 – MV 2 + NOI 3 + PS 3 – CI 3 ) / MV 2
Quarterly returns equal three chain-linked
monthly returns:
Q 1,2,3 = ( 1+R 1 ) x ( 1+R 2 ) x ( 1+R 3 ) – 1
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Formula Revision
NPI Virtually the Same
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Formula Revision
Proposed Plan of Action
Provide comparisons between old and new
Approve new formula for NPI past, present, and
future
Initiate new formula starting in Q1, 2016
Publish concurrently both new and old for two years
Then, cease publication of old
Similar to approach used when leveraged properties
added to NPI as if unleveraged.
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Survey of Global Indices
Member Portal
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