NCREIF WINTER CONFERENCE, PHOENIX, AZ MARCH 2016 PERFORMANCE MEASUREMENT COMMITTEE ( PMC ) MINUTES

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1 Wednesday, March 9th, 2016 Opening Remarks: PMC Co-Chairs: Chair - Tom Harrington (State Street LP Services) Vice Chairs Charlie Stout (ACA Performance Services) and Jad Howell (USAA Estate Company) The PMC meetings commenced with a general welcome from Tom, Charlie and Jad at 3:00 p.m. Administrative items and the general conference agenda were discussed. Conference members also introduced themselves and the firms they represented. NCREIF Board Update: Guest Speaker: Stephanie Brower (Russell Investments) Stephanie began by recapping some of the main goals achieved by the Board during 2015: Enhancement of the NCREIF website in conjunction with the rebranding. Release of the monthly Daily Priced Index. Establishment of a peer group of plan sponsors. Partnership with INREV/ANREV to share ideas and works towards global reporting standards. Goals for 2016 include: Completion of the new member portal and analytics for the NCREIF website. Expansion of the NCREIF membership. Expansion of the CEVA index by increasing manager participation, and analysis of reporting standards for closed-end funds. Creation of a master set of manuals and clean-up of whitepapers. Creation of a data management plan. Prioritization of projects, keeping them to a minimum so as to not deter progress.

2 Focus on the mission statements of the NCREIF Board and each individual NCREIF subcommittee. A PMC member questioned whether the Board had the potential change to the NCREIF Property Index formula in its 2016 goals, and Stephanie confirmed that it was not currently one of their goals. Further discussion on the proposed formula change was deferred until Thursday. GIPS Update: Guest Speaker: Ken Robinson (CFA Institute) Ken gave a general background on the CFA Institute, noting that the GIPS standards are currently translated into five languages. The GIPS Executive Committee governs the GIPS Standards. The GIPS Technical Committee oversees the GIPS Guidance and Question and Answer sections of the website. There are also various subcommittees including the Real Estate Working Group ( REWG ), Asset Owner Subcommittee, Interpretations Subcommittee, Investment Manager Subcommittee, Verification Subcommittee and Benchmark Working Group. PMC members were reminded that they could volunteer to work on projects or join the subcommittees. There are two global chair positions open on the Investment Manager and Interpretations Subcommittees; nominations are due by April 15 th. Then Ken discussed the latest developments from the CFA Institute pertaining to the GIPS requirements: The GIPS Real Estate Working Group ( REWG ) is revisiting the GIPS standards and how they meet the needs of opportunistic and value-add real estate investment managers and prospective investors. The REWG is studying whether IRRs or TWRs are better measures for opportunistic funds and will be issuing a survey pertaining to performance best practices of Opportunistic funds. Joe D Alessandro has joined the CFA Institute s U.S. Investment Performance Committee. Volunteers are welcome and members of the PMC are encouraged to join. Ken reminded the PMC that there is a list of GIPS-compliant firms online on the CFA Institute website (for those firms that chose to have their names published). There is also a CFA Institute Asset Management Code of Professional Conduct the firms can comply with on a voluntary basis. To date, over 1200 firms in 41 countries have registered as being in compliance on the CFA Institute s website. The Code and guidance on compliance with it are located on the GIPS website.

3 Other projects underway include guidance for firms coming into compliance, a benchmark paper, updated supplemental information guide, comprehensive disclosure matrix, updated portability guidance, guidance for applying GIPS to pooled vehicles and overlay assets, verifier independence guidance, risk guidance and educational webinars. Town Hall Meeting: The PMC agenda for Wednesday concluded with the NCREIF Town Hall Meeting. Some items of interest included the following: The NCREIF website will be updated in Fall of This will include enhancements to the member and portal analytics. New academic relationships and input will be pursued in conjunction with various Research projects. NCREIF will work to increase the number of CEVA fund managers. NCREIF will promote and grow plan sponsor membership and establish a Peer Group Performance Report. A master product manual will be created for all CREIF indices/products. A data management plan will be developed. Thursday, March 10th, 2016 Opening Remarks: PMC Chair: Tom Harrington (State Street LP Services) PMC Vice-Chairs: Charlie Stout (ACA Performance Services) and Jad Howell (USAA Estate Company) Global Index Survey Update: Guest Speaker: Alden Johnson (Cornerstone Real Estate Advisors) Progress continues on this initiative, as the group is working on a paper to be circulated to committee members. The sub-committee is also considering adding REIT and various equity and debt real estate indices to those already

4 detailed in its current comparative listing of 22 domestic and global real estate indices. Denominator Issue: Guest Speaker: Dean Altshuler (Bard Consulting) Dean circulated a handout and presented a discussion of the denominator issue which proposes that before and after fee denominators are frequently understated, causing overstated returns compared to the ODCE. Dean discussed the use of time-weighted returns ( TWR ) as a useful tool for measuring the performance of a fund manager. Next, an example was shown which highlighted that (under current NCREIF guidelines) the before-fee and after-fee denominators are the same. Dean s conclusion is that the denominators are too low because carried interest is deducted from them. By adding back the carried interest accruals to the denominator, Dean feels the TWRs would be more representative of true before fee returns. An impassioned debate ensued on whether this approach was accurate, particularly since the methodology is inconsistent with the historical paper released by NCREIF in 1998 on the proper treatment of carried interest. The impact of this proposed change on the overall ODCE index (minimal) and the NPI (none) was also discussed. The discussion was very thought-provoking, and the PMC decided that further analysis and group discussion was warranted at the next conference. In the meantime PMC members can submit comments to Dean or Tom Harrington regarding this interesting topic. PME Benchmarking: Guest Speakers: Kurt Edwards (UBS) and Dean Altshuler (Bard Consulting) Kurt discussed Private Market Equivalent ( PME ) benchmarking, using examples of Retail REIT data from Green Street Advisors. Also discussed were the simulated analysis of PME NAV, Modified PME, Kaplan Schoar PME, Burgiss PME, and Direct Alpha. These PME benchmarks are used to evaluate privateequity funds against a public benchmark or index. Dean also discussed a money-weighted rate of return that is a true average rate of return, not a constant rate of return (as the IRR is).

5 Performance and Risk Manual ( PRPM ) Update: Guest Speaker: Tom Harrington (State Street) Tom discussed in-process initiatives for the 2016 Performance and Risk Measurement Manual ( PRPM ), including a more comprehensive glossary of terms and the expansion of illustrative examples: Return Start Dates: A paper is being drafted to discuss the merits of start and end dates of time-weighted real estate returns and IRRs for stabilized assets vs. development assets, and for projects financed with lines of credit. The treatment of partial periods can significantly impact certain time-weighted returns, and the PMC will again debate this topic in 2016 before issuing a white paper for best practices. Best practices guidance on money weighted returns for horizon periods (1-year, 3-year etc.) will be incorporated in the 2016 version of the PRPM. Multi-period attribution will be included in the 2016 PRPM. Global treatment of expenses will be addressed during Tier 2 debt statistics will be expanded upon. Gross vs. net IRRs will also be expanded upon in the next PRPM release. PMC members were also encouraged to volunteer for this sub-committee. Hot Topics: Comments on the Proposed change to the NPI calculation Guest Speaker: Paul Donovan (LaSalle Investment Management) Paul discussed the proposed change to the current NPI formula. This change stemmed from the potential distortion of returns from the treatment of sold properties in the denominator. In the current NCREIF proposal, the return s denominator (and numerator) would essentially move to a monthly methodology, eliminating the 50% weighting of property sales in the sale quarter, which often distorts final period returns especially during singleproperty return reporting. Paul s recommended alternative methodology assumed the sale occurred at the end of the final quarter, to ensure the denominator wasn t artificially low when final appreciation/depreciation on sale was recorded. This method

6 however encountered some critique due to the potential for income to be understated since income during the final quarter is only reported to NCREIF through the date of sale). The PMC members discussed the current returns methodology used in their firms. Some use first full period through last full period and back date any final appreciation adjustments. Others calculate returns from the acquisition date through the final sale date, and capture partial quarter activity accordingly. Still others follow the NPI index s current method of beginning returns with the first full quarter, ending with the final partial quarter. While there is clearly diversity in practice, all three methods are currently in the PRPM as acceptable. Other issues raised in conjunction with the proposed formula change: Would the index be retroactively adjusted, or only on a going-forward basis? Should the NPI formula be adjusted to weight on the exact date of sale, as opposed to a monthly estimate? Would it be difficult for firms to incorporate any formula change into their current systems that calculate returns? Would a monthly return be more comparable to the global return indices calculations? The PMC agreed this discussion warranted more analysis and would likely be discussed at the Summer conference as well.