Town Hall Meeting March 4th 1

Agenda 2 Debt Valuation Methodologies Education Update Daily Price Index Survey of Global Indices NPI Calculation Change New Member Portal

DISCUSSION OF DEBT VALUATION METHODOLOGIES ASSESSMENT FOR ODCE FUNDS Sally Ann Flood, Chair, Reporting Standards Council, John Kjelstrom, Vice- chair, NCREIF Valuation Committee and project task force member, Marybeth Kronenwetter, Director, Reporting Standards Operations and Jeff Walker, project task force member

EXTERNA L VALUATIO NS INTERNAL VALUATIO NS NET APPROACH GROSS APPROACH BUBBLE SIZE = SIZE OF FUND (NAV) Analytics provided by National Valuation Consultants March 4,

Survey of Global Indices 5 Education Update

Survey of Global Indices 6 Daily Price index

Survey of Global Indices 7 Jacque Vedra

Survey of Global Indices 8 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

Survey of Global Indices 9

Survey of Global Indices (Example) 10

Formula Revision 11 NPI Formula Revision Sold Properties Taskforce (Research and Performance Measurement) March 4, 2015

Formula Revision 12 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

Formula Revision 13 Current Formula Change in Market Value plus NOI and PS minus CI divided by Beginning Market Value and time- weighted amounts MV t – MV t-1 + NOI t + PS t – CI t ––––––––––––––––––––– MV t-1 – ⅓NOI t – ½PS t + ½CI t

Formula Revision 14 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.

Formula Revision 15 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 inter- period 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.

Formula Revision 16 Example MV t-1 = $100 Sale Price = $120 Assume no NOI or CapEx for simplicity Total Return = ( ) / ( ) = 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.

Formula Revision 17

Formula Revision 18 Sold Property Bias

Formula Revision 19 Something Happened Post Freeze!

Formula Revision 20 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

Formula Revision 21 Proposed Total Return Formula MV t – MV t-1 + NOI t + PS t – CI t ––––––––––––––––––––– MV t-1

Formula Revision 22 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

Formula Revision 23 NPI Virtually the Same

Formula Revision 24 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.

Survey of Global Indices 25 Member Portal