Glossary of Terms Absolute Return - The return which an investment generates over a specific time period, expressed as a percentage. Account Level IRR See Fund Level IRR definition. Account Level TWR See Fund Level TWR definition. After Fee Return (a/k/a Net Return) Any type of return including the effects of fees that were agreed upon to be disclosed. For example, a commingled fund return with the investment management fee and incentive fee subtracted. Annualization The process of expressing a return calculation in annual terms even if the return is calculated over a period less than or greater than one year. Cumulative returns can be annualized using the following formula: AR p = [(1 +R p )^(SPY/ASP)] 1 AR p = Annualized return for the measurement period R p = Compounded Rate of Return for the measurement period (non-annualized) SPY = Sub-Periods in a Year ASP = Number of Sub-Periods in the measurement period Appreciation - In the context of income measurement and return calculations, appreciation is a general term used to convey a measure of change in value due to market conditions during a period. Appreciation Return The return generated from the change in market value of an investment caused by changing capital market conditions. The appreciation return is one of the two component returns that make up a total return. Attribution An analysis of the performance of an investment against a benchmark which quantifies and explains the variance. There are many different types of attribution analysis but the one thing they all have in common is that they help to facilitate understanding of which events or investment decisions led to the investment performance. Before Fee Return (a/k/a Gross Return) Any type of return which is calculated based on the full measure of performance defined but prior to the effect of agreed upon fees relevant to that return type. For example, a before fee total return for a commingled fund would be measured as including all investment income and all measures of appreciation for the period but would exclude the impact of investment management and incentive fees. Benchmark - A point of reference against which the performance and/or risk or an investment is compared. Wherever possible, a benchmark should reflect the investment mandate, objective and strategy of the contractual arrangements provided in the account documents. Capital Expenditures See Capital Improvements definition. Capital Improvements (a/k/a Capital Expenditures) Additional expenditures made in an investment after acquisition which are meant to improve the real estate, extend its useful life, or improve future cash flows. Examples include building improvements, tenant improvements and
leasing commissions. Changes in an investment s fair market value resulting from capital improvements do not result in appreciation. Cash Flow Return - An alternative property level TWR that shows the amount of cash from a property that is assumed to be distributed to investors as a portion of weighted average equity for any given quarter. Often used in conjunction with the Price Change Return, the Cash Flow Return is an alternative to the traditional income return whereas the Price Change Return is an alternative to the traditional appreciation return. Cash Flow Return = NOI CI FV t-1 + (1/2)(CI - PSP)- (1/3)(NOI) NOI = Net operating income (before interest expense) FV t-1 = Fair value of property at beginning of period CI = Capital improvements PSP = Net sales proceeds for partial sales Chain-Linking The mathematical process of linking individual sub-period returns (arithmetically or geometrically) together to create a cumulative return over a longer holding period. For example, twenty successive quarterly period returns may be chain-linked to create a five-year cumulative return. Commingled Fund An investment portfolio in which more than one investors pool their money together to acquire assets. Component Return The building blocks of a total TWR. In the U.S. institutional real estate investment industry, the income return and appreciation return are the two most typical component returns but other alternatives exist. Compounded Rate of Return The cumulative return that results from geometrically linking subperiod returns together. The formula is as follows: R p = (1 +R 1 ) * (1+R 2 ) * (1+R 3 ) (1+R n )] 1 R p = Return for the measurement period R 1 n = Calculated returns for periods 1 through n Cumulative Return A TWR calculated over more than one sub-period. Debt Service Coverage Ratio ( DSCR ) The DSCR is used to measure the amount of cash flow from operations that is available to meet annual interest and principal payments on debt. DSCR = Net Operating Income Debt Service Payment Debt Yield - The debt yield provides an assessment of the ability to pay the outstanding debt balance currently and when due by focusing on net operating income and ignoring appraised value and changes in interest rates. It also provides an assessment of refinancing risk by comparing results with current market interest rates. The higher the debt yield, the lower the risk. Debt Yield = Net Operating Income Outstanding Loan Balance Disaggregated Income Return An alternative property level TWR calculation which breaks the income return into two further components, the Distributed Income Return and Retained Income Return.
Discretionary Account - Classification assigned to an account or portfolio based on a determination that the investment manager maintains substantial control over the inflow and outflow of capital to the account and the investments in which that capital is deployed. Distributed Income Return An alternative property level TWR calculation defined as the amount of investment income derived from operations that is 1) actually distributed to investors or 2) credited to investors in the case of investment fund dividend or income reinvestment programs that are elected by the investor. The sum of the Distributed Income Return and the Retained Income Return equals the Income Return. Distributed Income Return = Distributed Income Weighted Average Equity Distribution Return - An alternative investment and fund level TWR that shows the amount of actual cash that is distributed to investors as a portion of weighted average equity for any given quarter. Often used in conjunction with the Price Change Return, the Distribution Return is an alternative to the traditional income return whereas the Price Change Return is an alternative to the traditional appreciation return. Distribution Return = LP Distributions Net of Fees LP Weighted Average Equity Distributions to Paid in Capital Multiple ( DPI a/k/a Realization Multiple) - The DPI measures what portion of the return has actually been returned to the investors. DPI = D PIC D = Total Distributions PIC = Paid in Capital DPI Multiple See Distributions to Paid in Capital Multiple definition. DSCR See Debt Service Coverage Ratio definition. Equity Multiple A performance metric shown as a ratio, with one financial input in the numerator and another in the denominator. Typically, presented for the entire life of the investment. Fair Value Generally Accepted Accounting Principles ( FV GAAP ) A common accounting basis used in the U.S. institutional real estate investment industry in which an entity s investments are measured and reported at fair value rather than cost basis. Performance measurement calculations should be based on FV GAAP financial inputs. Fund Level IRR (a/k/a Account Level IRR or Portfolio Level IRR) Fund Level IRRs reflect the performance of a group of one or more investments that are combined together in a single portfolio including the amounts earned or incurred which relate to the portfolio but are not specifically attributable to a particular investment. The cash flows used in a fund level IRR calculation are actual contributions to the fund from the investors, and distributions to the investors from the fund. Fund Level TWR (a/k/a Account Level TWR or Portfolio Level TWR) Fund level TWRs reflect the performance of a group of one or more investments that are combined together in a single portfolio including the amounts earned or incurred which relate to the portfolio but are not specifically attributable to a particular investment. Fund level TWRs can be calculated for either commingled funds or single-client separate accounts. FV GAAP See Fair Value Generally Accepted Accounting Principles definition. Geometric Linking The mathematical process of chain-linking individual holding period returns together by multiplication to create a cumulative return over a longer hold period. This is
contrasted with arithmetic linking in which the individual holding period returns are added together rather than multiplied. GIPS - See Global Investment Performance Standards definition. Global Investment Performance Standards ( GIPS ) The GIPS Standards are a voluntary set of standards developed by the CFA Institute to provide an ethical framework for the calculation and presentation of investment performance history. The GIPS standards are based upon the fundamental principles of full disclosure and fair presentation. Gross Return See Before Fee Return definition. Grouping The process of aggregating/disaggregating two or more entities (properties, investments or funds) to evaluate their combined performance. Hedging Instrument - A financial instrument whose cash flows should offset changes in the cash flows of a designated hedged item (asset, liability or investment). Examples of common hedging instruments include interest rate caps, collars and swaps. Income Return The return generated from the net income (operating or investment depending on the return level) of an investment. The income return is one of the two component returns that make up a total return. Internal Rate of Return ( IRR a/k/a money-weighted return) - The discount rate at which the present value of all future cash flow is equal to the initial investment or in other words the rate at which an investment breaks even. Investment Level IRR Investment Level IRRs reflects the performance of a single investment or group of investments, either wholly-owned or a joint venture. The cash flows used in an investment level IRR calculation are actual contributions to the investment from the investors, and distributions to the investors from the investment. Investment Level TWR - A TWR that reflects the performance of a single investment or group of investments, either wholly-owned or a joint venture. This TWR includes property-level activity and fund-level activity (ownership income and expenses, use of working capital etc.). IRR See Internal Rate of Return definition. Leverage - In institutional real estate investments leverage refers to using debt and other debt-like instruments to acquire assets. In essence, the use of leverage lowers the equity required to fund an investment by sharing the risk of the investment with the lender. Leveraged TWR A TWR calculation that includes the impact of leverage used in the investment. Loan to Cost The loan to cost ratio helps lenders assess the risk of making a construction loan. The higher the loan to cost ratio, the higher the risk. Loan to Cost = Outstanding Loan Balance Ending Cost Value Loan to Value The loan to value ratio represents how much of a property is being financed. Higher loan to value ratios mean higher risk for the lender. Loan to Value = Third Party Debt Market Value Modified Dietz Return - Single period rate of return formula that approximates an IRR for the period. The Modified Dietz return formula is: R p = EFV BFV CF BFV + WCF
R p = Return for the measurement period EFV = Ending fair value of the investment BFV = Beginning fair value of the investment CF = Net cash flows for the period (add if net distribution) WCF = Sum of weighted cash flows for the period Money-Weighted Return See Internal Rate of Return definition. NAV See Net Asset Value definition. NCREIF Fund Index Closed End Value Add ( NFI-CEVA ) - The NFI-CEVA is a NCREIF Fund Database product composed of closed-end real estate commingled funds pursuing a value added investment strategy. The focus of the index is to provide net investment returns on both a historical and current basis along with diversification and Vintage Year stratifications. NCREIF Fund Index Open End Diversified Core Equity ( NFI-ODCE ) The NFI-ODCE is an index of investment returns reporting on both a historical and current basis the results of open end commingled funds pursuing a core investment strategy. NCREIF Property Index ( NPI ) The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. Calculations are based on quarterly returns of individual properties before the deduction of portfolio-level management fees, but inclusive of property level management fees. Each property's return is weighted by its market value (value-weighted). Index values are calculated for income, capital value and total. NCRIEF Fund Index Open End ( NFI-OE ) - The NFI-OE is a NCREIF Fund Database product composed of open end commingled real estate funds pursuing a value added investment strategy. Net Asset Value ( NAV ) Total assets minus total liabilities. In the institutional real estate investment industry often real estate assets minus mortgage liability is used as an estimate for NAV since those two components are usually the largest asset and liability and the other assets and liabilities net to an immaterial amount. Net Investment Income ( NII ) Net investment income, or NII, is equal to an investment s gross income less total expenses for the period of measure. Gross income includes all income associated with an investment including both rental income and other income such as parking fees, laundry and vending receipts, etc. Total expenses include both operating (repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc.) and nonoperating expenses (interest, investment management fees, etc.). NII is used in the numerator of an investment and fund level TWR calculation. Net Operating Income ( NOI ) - Net operating income or NOI is equal to a property's gross income less operating expenses for the period of measure. Gross income includes all income associated with a property including both rental income and other income such as parking fees, laundry and vending receipts, etc. Operating expenses are costs incurred during the operation and maintenance of a property. They include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc. Capital expenditures and non-operating expenses, such as interest, depreciation, income taxes, and amortization of loan points, are not included in the calculation of such a measure. NOI is used in the numerator of a property level TWR calculation. Net Return See After Fee Return definition. NFI-CEVA See NCREIF Fund Index Closed End Value Add definition. NFI-ODCE See NCREIF Fund Index Open End Diversified Core Equity definition.
NFI-OE See NCREIF Fund Index Open End definition. NII See Net Investment Income definition. NOI See Net Operating Income definition. Non-Discretionary Account - Classification assigned to an account or portfolio based on a determination that the investment management does not maintain substantial control over the inflow and outflow of capital to the account and the investments in which that capital is deployed. Open-End Fund - An infinite-life fund in which multiple investors can contribute or redeem shares on a periodic basis. Paid in Capital to Committed Capital Multiple ( PIC ) - The PIC multiple gives information regarding how much of the total commitments have been drawn down. PIC = PIC CC PIC = Paid in Capital CC = Committed Capital Partial Period A sub-period return in which the entity was not in existence for the full period. For example, if an asset is acquired on a date other than the first day of a quarter, or sold on a date other than the last, the resulting quarterly measurement period is said to be a partial period because the asset does not have a full quarter s worth of activity during that period. Partial Sale - The act of selling a real estate interest that is smaller than the whole property. For example, selling an out lot parcel in a retail investment or selling one building in a multi-building industrial park. PIC Multiple See Paid in Capital to Committed Capital Multiple definition. Portfolio Level IRR See Fund Level IRR definition. Portfolio Level TWR See Fund Level TWR definition. Price Change Return (investment/fund level) - An alternative investment and fund level TWR meant to measure the change in NAV that is not attributable to investor equity transactions (contributions, distributions or redemptions) as a portion of weighted average equity for any given quarter. Often used in conjunction with the Distribution Return, the Price Change Return is an alternative to the traditional appreciation return whereas the Distribution Return is an alternative to the traditional income return. Price Change Return = LP NAV 1 ex distribution LP NAV 0 ex previous quarter distribution + LP redemptions LP Contributions LP Weighted Average Equity Price Change Return (property level) - An alternative property level TWR that measures the change in NAV that is not attributable to investor equity transactions (contributions, distributions or redemptions) as a portion of weighted average equity for any given quarter. Often used in conjunction with the Cash Flow Return, the Price Change Return is an alternative to the traditional appreciation return whereas the Cash Flow Return is an alternative to the traditional income return. Price Change Return = (FV t -FV t-1 ) + PSP FV t-1 + (1/2)(CI - PSP)- (1/3)(NOI) FV t-1 = Fair value of property at end of period
FV t-1 = Fair value of property at beginning of period CI = Capital improvements PSP = Net sales proceeds for partial sales NOI = Net operating income (before interest expense) Property Level IRR Property level IRRs reflect the performance of an operating property or group of properties using inputs based on property cash flows, which serve as surrogates to the actual cash flows between the property and investors. Property Level TWR - Property level TWRs reflect the performance of an operating property or group of properties. The property level relates strictly to property operations and attempts to strip out all ownership level activity, usually including advisory fees, use of working capital and owner income and expenses. Real Estate Fees and Expenses Ratio ( REFER ) - REFER measures the total fee and expense burden of a real estate fund. The REFER is calculated as follows: Total Fund Level Fees and Expenses (Rolling 4 quarters) Weighted Average NAV (Rolling 4 quarters) Realization Multiple See Distributions to Paid in Capital Multiple definition. REFER See Real Estate and Expense Ratio definition. Relative Return - The return that an investment generates over time compared to a benchmark return. Residual Multiple See Residual Value to Paid in Capital Multiple definition. Residual Value to Paid in Capital Multiple ( RVPI a/k/a Residual Multiple) - The RVPI measures what portion of the return is unrealized. RVPI = RV PIC RV = Residual Value PIC = Paid in Capital Retained Income Return An alternative property level TWR calculation which measures the return on the income that is earned by the entity that is not distributed. The sum of the Retained Income Return and the Distributed Income Return equals the Income Return. Retained Income Return = Retained Income Weighted Average Equity Return to Volatility Ratio See Treynor Ratio definition. RVPI Multiple See Residual Value to Paid in Capital Multiple definition. Separate Account (a/k/a Single Client Separate Account) An investment portfolio with a single investor. Sharpe Ratio - A ratio used to measure risk adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. Single Client Separate Account See Separate Account definition. Sub-Period Return The return for a discrete period of time (i.e. day, month, week) that is generally less than the entire hold period for the investment. For an example, an investment that has a five year hold period can be broken into twenty quarterly sub-periods.
Time-Weighted Return ( TWR ) The geometric average of the holding period yields to an investment portfolio. The TWR is commonlyy used in the investment industry to measure an investment manager s performance becausee the return negates the effect of external cash flows. In a TWR calculation, each period s return iss weighted equally, regardless of the amount invested, or the timing of cash flows. Total Return The return generated from ann investment from both operations (income return) and changes in the market value (appreciation). Total Value to Paid in Capital Multiple ( TVPI ) - The TVPI gives users information regarding the value of the investment relativee to its cost basis, not taking into consideration the time invested. TVPI = TV PIC TV = Total value PIC = Paid in Capital Tracking Error - A financial ratio which measures how closely a portfolioo performs compared to its benchmark. σ 2 = 1/( (n - 1) Σ(xi - yi) 2 σ 2 = The tracking error n = Number of periods over which it is measured x = Percentage return on the portfolio in period i y = Percentage return on the benchmark Treynor Ratio (a/k/a Return to Volatility Ratio) - A financial ratio which measures the returns earned in excesss of that which could have been earned on a riskless investment per each unit of market risk. r p = r f = B p = Average return of the portfolio Average return of the risk-free investment Beta of the portfolio TVPI Multiple See Total Value to Paid in Capital Multiple definition. TWR See Time-Weighted Return definition. Underwater Asset An investment in which the entity s real estate asset value drops below its debt balance resulting in a negative net asset values (i.e. negative equity ). Unleveraged TWR A TWR calculation that t removes the impact of leverage from the investment to show what the return would have been without leverage. Showing an unleveraged return is often used when comparing the performancee of investments against one another or against a benchmark as the use of leverage varies andd can make comparisons difficult if not removed.