Memo. Operations Database

Transcription

1 Memo To: NCREIF Research Committee From: Mark G. Roberts, CFA, Vice-Chair Date: March 9, 2005 Re: NCREIF Research Committee Meeting Minutes for February 2005 The Research Committee meeting was called to order by Chris Christensen of RREEF, Chairperson of the Research Committee. Attendance was noted at 34 (see attached). A summary of the major topics discussed and initiatives set forth are highlighted below. Operations Database Jeff Havsy of Equity Office Properties reported on the status of the operations database. NCREIF has been collecting operating data on properties within the NCREIF database starting with the First Quarter of Members can access this information in the Private Services Area of the NCREIF website. For assets within the NCREIF database, information is being collected on numerous income statement items such as Base Rent, Contingent Rent, Total Income and Net Operating Income, Utilities, Taxes, Insurance, etc. If members cannot get access to the information through the website, please Stacy Gaskins for log-in access. Action Items: Jeff noted several enhancements can be made to both the website query system as well as creating standards for several items to make the information more useful. For example, distinguishing between Class A and Class B assets can provide greater insights into the performance attributes of each. The task force, consisting of Jeff Havsy-EOP, Jim Costello-Torto Wheaton, Jeff Fisher-NCREIF, Matt Novak-Hines and Rick Vendl- NCREIF will address these items for the June conference. In addition, Blake Eagle and the NCREIF staff will continue to encourage and source operating data from other real estate companies, such as REITs, and report back to the research committee in June. Valuations Database Jeff Fisher of NCREIF reported on the status of the Valuations Database. Since the third quarter of 2004, NCREIF has required mandatory submission of valuation data for office assets within the NCREIF Index. Jeff Fisher presented a summary of the valuations database and the type of information which is being collected and how that information can be analyzed. This report will be published in the upcoming issue of the NCREIF Performance Report and all members are encouraged to read this report which is also available on the NCREIF website. Further discussion ensued as to whether or not NCREIF should require mandatory submission of valuation data for the other property types. Also, it was noted that additional enhancements to the website are required in order for members to access this information. The committee agreed it is important to provide feedback to members who have provided information. As such, the NCREIF staff is expeditiously pursuing enhancements to the query system on the website to provide member access. Action Items: The research committee agreed it was important to provide access through the website for the valuation data before requiring additional mandatory reporting of valuation data for the other property types. Contingent upon progress with the website, the research committee voted unanimously to recommend the NCREIF board require mandatory submission of valuation data for the other property types starting with the 3 rd quarter of The task force members are: Jeff Fisher-NCREIF, Ellie Kerr-JP Morgan, Mark Roberts- 1

2 INVESCO, Kevin Sherer-Blackrock and Jeff Havsy-EOP. The task force will work with NCREIF staff on finalizing access to the information through the website and standardizing information. Real Estate Information Standards (REIS) Council Mark Roberts of INVESCO reported on the prior day s activity of the REIS Council and sought approval from the research committee to recommend that the REIS Council approve distribution of the exposure draft of Debt Valuation standards for public comment. The research committee voted unanimously that the REIS Council distribute the Debt Valuation standards for public comment. Subsequent to the research committee meeting, the REIS Council also voted to release the exposure draft for public comment subject to providing supplemental information which reconciles US GAAP rules for portfolio level debt. Once distributed, the public comment period will last for 60 days. Mark also reported that the governance procedures of the REIS Council are posted on the NCREIF website and that it would be beneficial for all members to familiarize themselves with the governance procedures of the REIS Council. The representatives from the research committee for the REIS Council are Mark Roberts, INVESCO and Doug Poutasse of AEW. In addition, Neil Myer of the Townsend Group represents the Database and Indices Committee. Any questions of the REIS Council may be directed to either of these members or to the chair of the REIS Council, Jeff Kiley, or to NCREIF staff. Database and Indices Committee Neil Myer reported on the agenda items for the Database and Indices Committee. For a summary of these items, please see the Database and Indices meeting minutes on the NCREIF website. Census Bureau Reclassification of MSA s Mike Miles from Guggenheim reported on the changes the government is making to MSA designations. Every decade, the census the government undertakes can lead to a change in the classification of certain metro areas. This decade was no different. Mike reported on several of the changes, such as the reclassification of New York which now covers a more populous geography and other areas where MSA s have been separated, such as Raleigh-Durham which now represents two distinct MSA s. For the NCREIF MSA sub-indices, this reclassification can have an effect on the reported returns for a metro area. Fortunately enough though, NCREIF has been collecting county level codes on individual assets within the NCREIF Index and will be aligning these county codes to correspond with the new MSA designations. Adjustments will be made to the NCREIF Index and the associated sub-indices with the release of the 2 nd quarter 2005 performance report. In addition, Mike Miles has agreed to write a report for the quarterly NCREIF Performance Report which more fully describes the changes the MSA designations. The committee was very appreciative of Mike s work and looks forward to the 2 nd quarter report. Members are encouraged to review this report on the NCREIF website. Development Properties Within the NPI Mark Roberts from INVESCO reported on the apparent ambiguity in the data submission manual. Page 10 of the data submission manual indicates in part that, a property will not be included within the NCREIF Index unless it is: at an initial occupancy level of at least 60%, or 1 year has passed since an initial Certificate of Occupancy. On page 33, Appendix 1, note 1 with respect to stabilized operating properties indicates, once the Certificate of Occupancy has been issued and the property is at least 60% occupied.the property will then be included in the NCREIF Index. Mark noted that an investor could acquire a substantially vacant building that received its initial Certificate of Occupancy several years ago, say in 1995 or something longer than one year ago, and per the data submission manual on page 10, such a property investment, which many would consider as something other than a core investment, would be included in the NCREIF property index. Mark also reported that these types of assets Page 2

3 currently comprise roughly 2.3% of the NCREIF Index and has had only a negligible impact on the performance attributes of the overall NPI. Tony Pierson of Cornerstone, who serves on the Index Oversight Committee, provided some background behind the original intent of the data submission manual. To summarize, it is important to recognize that once an asset is included within the NPI, it stays in the NPI even though its occupancy level may decline below 60% due to market related reasons. It is important to continue to include such weaker performing assets within the NPI so as to avoid creating survivor bias which would artificially enhance index performance. With this in mind and to maintain consistency, NCREIF s intent several years ago was to capture the performance of recently developed properties that failed to reach the appropriate occupancy level due to market related reasons. Action Item: With the forgoing in mind, the committee voted unanimously to revise the language within the data submission to note the original intent. For example, on Page 10, the language should be revised to, The property will not be included in the NCREIF Index unless it is: At an initial occupancy level of at least 60%, or, for recently developed properties, one year has passed since the Certificate of Occupancy was issued. Such assets will enter at its current market value. Since no change to the original intent was made, NCREIF staff will make the appropriate administrative revision to the data submission manual on pages 10 and the Appendix. Pursuant to this discussion though, another discussion ensued as to whether or not 60% leased buildings are Core and whether or not the intent is for the NPI to be Core index. Many agreed that individual assets within the NPI may be deemed by some to be something other than core, however, the diversification of all the assets together would most likely result in a core index. Tony Pierson noted that the occupancy level was lowered several years ago when the real estate market was weak. At that time, if NCREIF had not lowered the occupancy threshold and revise the inclusion/exclusion rules, many office assets could have been dropped from the Index causing survivor bias which would have resulted in artificially high index performance. Action Item: There was clearly enough interest in the research committee to review whether or not 60% is reflective of the intent of a core index. As such, a task force was formed to investigate the inclusion and exclusion rules of the overall NCREIF Index as well as for the sub-types within the index. For example, 60% may be the appropriate number for the office sector, but is it the appropriate number for other sectors. Mary Ludgin from Heitman will lead the task force, which will also include: Chris Christensen (RREEF), Jim Costello (TWR), Will McIntosh (ING), Doug Poutasse (AEW), Kevin Scherer (Blackrock), David Lindahl (Kennedy). The task force will report back on their findings at the next NCREIF Research Committee. Other Approaches to Benchmarking Using the NPI Blake Eagle received a request from a plan sponsor who noted that many plan sponsors may be interested in seeing NCREIF develop an index which is more reflective of the scale and size of the assets they invest. For example, only the largest of plan sponsors can invest directly in larger average asset sizes such as CBD office and Regional or Super-Regional Malls. Such lack of exposure can at times create tracking error in their portfolios relative to the NCREIF Index. Several research committee members noted that customized indices, such as one which would focus on smaller sized assets, can be created by using the query system on the NCREIF website. However, some indicated that Pension Plan boards frequently do not like to rely upon customized indices and from a fiduciary perspective, would prefer published indices instead. In further discussion, David Brunette from Russell Real Estate noted that over the years, a number of additional indices have been created in the equity markets as the style and practices of the market evolved. For the NCREIF Index, different indices could be created based upon market capitalization or other factors which drive the performance attributes of real estate. As an analogy, perhaps factors akin to the Fama-French factors in the equity market can be developed which could provide insight into the performance attributes of private real estate. Action Item: A task force was formed to investigate this topic further. The members of the committee serving on the task force will be: David Geltner, MIT, Neil Myer from the Townsend Group, Jeff Fisher of NCREIF/Indiana University, Cate Polleys of Fidelity and Jim Valente of ING. Mark Roberts will help coordinate activities with the NCREIF Research Committee. The task force will report on the status of their research at the next committee meeting. Page 3

4 Derivatives Discussion Blake Eagle provided an update to the research committee with respect to on-going discussions on derivative products. At the last NCREIF Board Meeting, the Board voted in favor of granting a limited-life exclusive agreement with CS First Boston to license the NCREIF Index for the purpose of developing a derivatives market based on the NCREIF Index. Blake noted that NCREIF is consulting closely with IPD who recently developed a non-exclusive license with several participants in the UK which led to recent derivative transactions there. NCREIF had recently been approached by one manager who expressed an interest in pursuing derivative transactions and licensing the Index on a non-exclusive basis. The NCREIF Board will be reviewing this matter further and will keep the membership appraised of the status. Open-End Fund Index Neil Myer and Joe D Alessandro presented the aggregate open-end fund index. In addition to Neil and Joe, the members of the task force working on the open-end index are; Blake Eagle, Stacy Gaskins, Jeff Fisher and Rick Vendl from NCREIF, Cate Polleys of Fidelity and Mark Roberts from INVESCO. Under the original design, NCREIF had considered publishing both the absolute and relative performance attributes of each of the active open-end funds within the NCREIF Index along with the aggregate statistics. Upon legal review though, several of the open-end funds may be subject to Regulation D of the SEC. This regulation prohibits the pre-conditioning of any offer to a potential investor in any of those funds subject to this regulation. Until these legal matters are resolved, NCREIF will be working towards publishing the aggregate performance of the index. Blake Eagle will continue to address the legal matters with NCREIF s counsel. Nevertheless, Tony Pierson of Cornerstone suggested and others agreed that NCREIF could provide a valueadded service to the active open-end funds by providing a report which highlighted the relative and absolute performance of their fund against the aggregate index. Everyone agreed this was a good suggestion and the task force will work towards this goal. In addition, another suggestion was offered regarding the weighting of certain performance statistics in the aggregate index. For example, the leverage ratio is presented on a market value weighted basis. It would also be useful to see this ratio presented on an equal-weighted basis too. Joe and Neil agreed to look at this for several of the other key statistics as well. The meeting was adjourned at 5:30 PM. Completed and Submitted by: Mark G. Roberts, CFA, Vice-Chair Page 4

5 Research Committee Attendees: February 22 nd -23 rd, Salt Lake City, Utah NAME FIRM TELEPHONE Mark Roberts INVESCO Youguo Liang Prudential David Geltner MIT Missy Fite STRS Ohio Lee Menifee CB Richard Ellis Inves Lynn Kingsland Yardi Systems Tom Mulvin Virginia Retirement System Mike Miles Guggenheim Paige Mueller GIC Real Estate Cate Polleys Fidelity Laura Huntington IPC Sam Mitts USAA R/E Rui Shi L&B Realty Advisors Andy Warren Principal Real Estate Inc Jim Valente ING Clarion Rick Brace Torto Wheaton Jeff Havsy EOP Mary Ludgin Heitman Dave Brunette Russell F.C. Neil Myer Townsedn Elysia Tse LaSalle Lijian Chen UBS Real Estate Will McIntosh ING Real Estate Richie McLemore MetLife Real Estate Jeff Smith State Board of Florida Tony Pierson Cornerstone Rick Vendl NCREIF Matt Novak Hines David Lindahl Kennedy Jim Costello Torto Wheaton Research Josselyn Boudett Resolve Kevin Scherer BlackRock Jeff Fisher Indiana University/NCREIF Chris Christensen RREEF Page 5