Performance Measurement

Performance measures of a vehicle or an asset should fairly represent the performance of that vehicle or that asset. They should be reliable and consistently computed and presented, to enable investors to understand and compare the performance of the vehicle or the asset.
 

Performance measurement should reflect the performance of the vehicle in the context of its style, type, structure, and strategy.
 

Performance measurement of an asset should take into consideration the vehicle performance context.
 

Vehicle documentation should include the required performance measures disclosed by the investment manager and the frequency of disclosure to investors.

Investment managers should disclose the computed performance measures and methodology used. If the investment manager chooses to use a formula that is not in line with the proposed methodology set out in this module, this should be fully disclosed and explained.

Investment managers should disclose any significant assumptions used to compute the performance measures and their components. The use of the INREV NAV is encouraged. When the INREV NAV is not used and adjustments are made to the vehicle NAV, these should be properly disclosed.

Presentation of the vehicle and asset level performance should be accompanied by adequate disclosures. The purpose of such disclosures is to provide present and potential investors with a precise and complete picture of the vehicle’s historic performance, having due regard to applicable regulatory requirements, e.g. MiFID II, as appropriate to the vehicle.
 

Performance measures of a vehicle should be calculated at the same frequency as the published NAV valuation of the vehicle, with annual being the minimum frequency.

It is expected that the investments held by a vehicle are measured at fair value, whatever GAAP is used by the investment manager to determine the NAV of the vehicle.

Periods for which a vehicle does not perform valuations can still be used to provide a data point, as long as an NAV is determined. For instance, a vehicle may provide quarterly NAVs, but only annual property valuations. In interim periods the NAV would reflect all changes to the balance sheet while holding the value of the property portfolio constant.

Some measures required in the guidelines may be less relevant during the investment/ disinvestment period. However, investment managers are still required to provide the measures included in this module. Investment managers may provide comments alongside the measures to explain that they may be distorted since the vehicle is in its investment/ disinvestment period

Performance measures at the asset level should be calculated at the same frequency as the property valuation.
 

Vehicle level performance measures should be computed in the vehicle currency in order to reflect the true performance of the vehicle. Asset level performance measures should be computed on a currency-neutral basis. Nevertheless, the group of assets performance measures should be determined using the vehicle currency, either on a currency-neutral basis or taking into account the currency effect.
 

Time-weighted returns (TWR) are the preferred performance measures to use when an investment manager does not have control over the cash flows of the investment. This is typically seen in open end vehicles and non-discretionary single-client account portfolios. The Modified-Dietz Method is used to calculate TWRs throughout the financial industry.

In closed end vehicles, the investment manager has control over the drawdown of capital into the vehicle and the eventual distribution of capital and profits back to investors. Therefore, TWR may be less useful for presenting performance for such vehicles. In this context, TWR may be disclosed but it is not a required element for closed end vehicles.
 

A total vehicle level return on a time-weighted basis should be disclosed in the annual report. This measure should be provided for a one, three, five, and ten year period (where the track record exists) and since inception, on an annualised basis.

When a return for longer than or equal to one year is annualised, it is also allowed to account for the exact number of days.

Investment managers may also disclose a total vehicle level return gross of fees by using the above formulae computations and excluding fees, as appropriate.

A total vehicle level return net of fees is computed as follows:

TwdC = Time weighted (daily) contributions for the measurement period
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period

A total vehicle level return gross of fees is computed as follows:

TwdC = Time weighted (daily) contributions for the measurement period
TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period

The fees to be considered are all the fees charged by the investment manager at all levels of the vehicle structure. See Fee and Expense Metrics module for the definition and description of fees typically charged to a vehicle.

When fees are charged on distributions, the investment manager should be careful at not double counting those fees into the return computation. When fees are amortised, the amortised portion should be taken into account in the vehicle return gross of fees.

See the Fee and Expense Metrics module for specific guidelines on fees and costs. 

Annualisation is computed as follows:

where there is a return that is for longer than one year, but not a full year period (e.g., one year and two months)

For full years the formula is as follows:

AR_p = Annualised return for the measurement period p
R_p = Return for the measurement period p (non-annualised)
DHP = Number of days in the measurement period
y = number of full year periods
 

A vehicle level income return should be disclosed. This measure should be provided for a one, three, five, and ten year period (where a track record exists) and since inception, on an annualised basis.

Net investment income is a measure of the net operational income of a vehicle, on an accrual basis, comprising the income and costs described below. It is intended to provide a measure of operating activity, exclusive of capital transactions or movements in the reported period, excluding valuation gains or losses on assets and liabilities, transaction costs, sale proceeds and taxes on capital profits and losses, and other replacement costs that can be capitalised if in accordance with GAAP. Rental income is recognised in accordance with accounting standards. Certain expenses may be based on the investment vehicle’s unrealised change in net asset value, including, for example, incentive management fees, and are recognised as a component of the unrealised gain or loss.

An income return is computed as follows:

TwdR = Time weighted (daily) redemptions for the measurement period
TwdD = Time weighted (daily) distributions for the measurement period

The main components of net investment income are:

Rental and other income from direct investments and indirect investments (being the net investment income equivalent of a vehicle’s interest/holding in another vehicle):

• Rental revenue from (direct and indirect) real estate investments
• Interest income
• Distributions, dividend income
• Other income from other real estate investments

Vehicle costs:

• Audit costs
• Interest income
• Bank charges
• Custodian costs
• Dead deal costs (charged by third party)
• Transaction-based management fees
• Transfer agent costs
• Valuation costs
• Vehicle administration costs
• Vehicle formation costs (amortisation for the period)
• Debt arrangement costs
• Transaction based property service costs
• Other professional service costs
• Other/miscellaneous vehicle costs
• Financing costs

Vehicle fees:

• Asset management fees
• Fund management fees
• Wind-up fees
• Debt arrangement fees

Property costs:

• External leasing commissions
• Property insurance costs
• Property management costs
• Utilities, repair and maintenance costs
• Other/miscellaneous/sundry costs
• Acquisition fees
• Internal leasing commissions
• Property management fees

Taxation expenses:

• Corporation tax
• Income tax
• Non-resident landlord tax
• Other taxes based on gross profit
• Net wealth tax
• VAT or other sales tax (only recoverable portion)
• Withholding tax

A vehicle level capital return should be disclosed. This measure should be provided for a one, three, five, and ten year period (where a track record exists) and since inception, on an annualised basis.

When component returns (both net and gross of fees) are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable and no adjustment is further required.

INREV’s method for dealing with this inconsistency is to calculate the returns as explained. The total return is correct and the income and capital returns are approximations.

The difference between the returns net and gross of fees do represent the time-weighted impact of fees on the returns of the vehicle.

A capital return is computed as follows:

An unrealised multiple or residual value to paid-in capital multiple (RVPI) should be disclosed.

This ratio provides a measure of how much of the return is unrealised. As the vehicle matures, the RVPI will increase to a peak and then decrease as the vehicle eventually liquidates to a residual fair value of zero. At that point, the entire return of the vehicle has been distributed. Residual value is defined as the remaining equity in the vehicle or asset.

An RVPI of 0.70 would indicate that an amount equal to 70% of the vehicle’s paid-in capital remains unrealised.

RVPI is computed as follows:

RV 
PIC

RV (residual value) = Net asset value (NAV) of the vehicle
PIC (paid in capital) = cumulative capital contributed to the vehicle
 

The following items should be disclosed alongside the performance measures:

• The date to which the performance measures have been calculated;
• The currency used to express the performance measure;
• Whether fees are to be deducted to reach the net performance;
• The accounting standards applied; and
• The methodology for determining the date of cash flows.

Disclosures may also include explanations for restrictions on cash flows, such as distributions that are restricted and affected by regulations.
 

Points of reference with the same vintage year or inception year should be disclosed if available and meaningful.

Given the limited universe of vehicles in several markets, it may not be appropriate to use available main- or sub-real estate vehicle indices as points of reference. An investment manager should take reasonable care not to apply points of reference where the investment manager or vehicle in question accounts for a significant share of the underlying universe. When no appropriate point of reference exists, this must be disclosed. Where there is a difference between the performance objective and the point of reference (such as the fund style as defined by INREV), the objective may be used as a primary reference point as long as clearly disclosed.
 

Where a composite and a point of reference are disclosed, they should be described.
 

Vehicles should disclose their vintage year.
 

Where a composite is presented, a composite description must be disclosed.
 

The time period and frequency of cash flows used in the calculation should be disclosed.
 

The following considerations and methodologies are to be used when determining performance measures:

Unitised basis versus NAV basis

In some countries, the performance of vehicles may be reported at a unit level. The Guidelines have been developed on the basis that performance has been determined on an aggregate NAV and cash flow basis.

Dates of cash flows

Dates used for performance calculations should be based on the dates of cash flows between investors and the vehicle as determined for accounting purposes. As a minimum, annual cash flows should be used, but it is now common to use higher frequencies such as quarterly, monthly or daily cash flows, especially for open end vehicles. For capital calls, the deadline of the capital call should be used.

Open end vehicles are subject to potentially constant in- and out-flows of capital. To accommodate for the large flows of capital, cash flows can be rolled up periodically, ideally on a monthly basis to the end of each month.

In the case of distributions for unitised vehicles, the declared date should be used. Closed end vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls when the capital should be paid in and for distributions when the capital was paid out by the vehicle.

Fees

Performance measures are computed net of all fees and any materialised carried interest (or any other kind of performance fee) and forecasted future (provisions for) carried interest payments.

However, fees charged to investors as a result of the redemption of units or exit of the investors should not be considered when they are earned by the investment managers rather than the vehicle. Even though not required, performance measures may also be computed gross of management fees and carried interest payments.

When fees are charged to investors outside the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.

Composites

To illustrate the combined performance of multiple vehicles, composite performance may be presented, combining the performance of each vehicle in a standardised way over time.

Investment managers may consult other industry performance guidelines such as GIPS for further guidance on composites.

Grouping criteria

The term ‘grouping’ is used to describe the process of aggregating/disaggregating two or more vehicles to evaluate performance using the time-weighted return.

To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attributes.

Composites should be defined by common attributes. A suggested hierarchy of grouping criteria is provided below:

• Style (please refer to the INREV Style classification paper, not investment manager defined);
• Structure (open vs closed end);
• Strategy;
• Points of reference; and
• Leverage

For closed end vehicles, composite performance should preferably be defined by the combination of vintage year and one of the above-mentioned attributes.

Further considerations for multiple computations

Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiples calculation purposes, any distributions that are included as a return of equity or return on equity for the purpose of the calculation (‘nominator’) should, if reinvested (recycled), also be added to the amount of drawn capital (‘denominator’) to give a fair reflection of the true ratio of returned equity to investors. This should be the case whether the recycled equity is actually, distributed and recalled, or reinvested directly by the investment manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).
 

Asset level returns on a time-weighted basis reflect the performance of an operating asset or a group of assets. The asset level return relates strictly to asset operations and attempts to strip out all structure-related activity, usually including advisory fees, use of working capital and income and expenses. As such, asset level returns on a time-weighted basis reflect the appreciation and operating income that are generated by the asset.

Asset level returns should be reported on an unleveraged basis, as not all assets are leveraged and those that are, are leveraged within the vehicle structure, which makes the comparison of leveraged returns among different assets difficult.
 

A total return at an aggregate asset level may be disclosed.

The asset level, unleveraged return formulas are as follows:

TR = Asset total return
MV = Market value at the end of the period
D = Dispositions, net of disposal costs
A = Acquisitions, including acquisition costs
p = Period
k = Asset

Denominator (unleveraged):
When component returns are presented for any period, the sum of the income return and capital return will generally equal the total return. When component returns are geometrically linked to create cumulative returns, the simple addition of the cumulative income return plus the cumulative capital return will not usually equal the cumulative total return. The difference is acceptable, and no adjustment is required to any of the total return components.

For the estimation of an asset’s monthly market values, the following approach is proposed:
INREV's proposal

Value change adjustment:

E [MV_km] = Estimated market value at the end of the month
MV_kQ = Market value at the end of the quarter
D = Dispositions
A = Acquisitions
Q = Quarter
k = Asset
 

The asset level return should reflect the investment manager experience and not that of the investor and therefore the acquisition costs should not be capitalised or amortised for asset level return computation purposes. The acquisition costs should be expensed.

Under the fair value model, acquisition expenses for an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property.

For INREV NAV calculation purposes, the capitalisation and the amortisation of the property acquisition cost over the first five years after the acquisition of the property should be used.
 

Should the positive effect of saving on Stamp Duties as a result of a share deal sale of a property be taken into account when calculating the performance of the asset?

When determining the market value of a property, the valuer should take into account any saving on Stamp Duties and the positive effect of these savings. The valuer should make the same allowance for transaction costs that a normal purchaser of the property would make in the market, regardless of the exit strategy.
 

The valuation should be done at the asset level (valuation of the building) regardless of the SPV. The roll-up of income taxation within the SPV should be captured at the vehicle level.
 

An income return at an aggregate asset level may be disclosed.

IR = Asset income return
MV = Market value at the end of the period
A = Acquisitions
p = Period
k = Asset

Net operating income numerator (unleveraged):
The net operating income (NOI) numerator is the net operating income (before interest expenses) that was reported by the asset during the period. Vehicle or investment level income and expenses should be excluded from NOI because the asset level returns focus on asset operations.
 

When CAPEX and NOI are collected over a quarter period, to estimate the monthly values, the following two options are possible.

1.Equally distribute quarterly NOI and CAPEX to the months based on the number of days an asset is owned during the month

2. Allow contributors provide monthly NOI and CAPEX for more precise performance calculation
 

A capital return at an aggregate asset level may be disclosed.

CR = Asset capital return
MV = Market value at the end of the period
D = Dispositions
A = Acquisitions
p = Period
k = Asset

Capital return numerator (unleveraged):
The appreciation numerator measures the change in asset value (increase or decrease) not caused by capital improvements or sales.