1. NCREIF Database for Appraisers Jeffrey D. Fisher, Ph.D. NCREIF Consulting Director of Research Professor, Indiana University

2. What we will Discuss Contents of NCREIF Database Calculation of NPI Calculation of Property Value Trends  Cash flow and NOI Indices  Vacancy trends  IRRs  Capitalization (cap) rates Update on Valuation Database

3. NCREIF Database Properties acquired on behalf of tax exempt institutions and held in a fiduciary environment 1977Q4 to Present, Property Descriptor and Quarterly Financial Performance Data Currently over 4,000 properties with a market value of about $135 billion included in the NCREIF Property Index (NPI) Starting to collect data on non”core” properties, e.g., pre- development land, development properties, initial lease-up, senior living, parking, etc. and properties in taxable accounts Also over 4,000 properties which have been sold over time

5. Simplified Total Return Formula Return = (MV 1 - CapX - MV 0) + NOI MV 0 Return based on change in Value plus NOI (no leverage) Same as a single period IRR if all the NOI came at the end of the period, e.g. end of the quarter. Assumes property can be sold each period Appraised value used to estimate sale price Returns for year are based on chain linking quarterly returns, e.g., [(1 + R 1 ) x (1 + R 2 ) x (1 + R 3 ) x (1 + R 4 )] -1

6. Income Return Return = NOI MV 0 Analogous to a cap rate except actual accounting NOI Some CapX may be expensed May not include reserve allowance

7. Capital Return Return = (MV 1 - MV 0 - CapX ) MV 0 Measures change in value (+/-) NET of Capital Expenditures Can not be used to calculate a Price Index – need to use capital return before subtracting CapX (available on NCREIF website)

8. Actual formula Return = (MV 1 - MV 0) + NOI - CapX MV 0 - 1/3 NOI + 1/2 CapX NOI received monthly CapX occurs mid quarter Partial sales omitted from above formula for simplicity This is the formula for unleveraged returns (even if property is leveraged)

9. NCREIF Index - return for all properties (calculated on an unleveraged basis)

11. 3.2% average annual price appreciation

14. Unfavorable leverage Favorable leverage

16. NOI is not Cash Flow

18. Appraisal Lag in the NPI Not all properties actually revalued every quarter even though value reported to NCREIF Appraisals tend to lag transaction prices when there is a turn in the market

19. Appraisals vs. Transaction Prices When there is a rapid change in market conditions appraised values tend to lag transaction prices –Is the most recent transaction representative of “market value”? –Need to wait for some additional transactions to confirm a shift in market values –Because private real estate trades infrequently compared to publicly traded assets, confirmation of shifts in the market take time. This causes a lag in appraisal based indices like the NPI and a lag in appraisal vs. transaction cap rates.

22. Cap Rates Calculate Two Ways using NCREIF Database 1) Based on transaction price for those properties that sell. 2) Based on appraised value for those properties that ARE revalued during a quarter. (Only properties revalued are used.) –External appraisal or internal with a change in value beyond just adding cap ex to last appraised value.

23. Sold Properties in NCREIF Database

24. Sold Properties as percent of sales vs. NPI

25. Based on sold props

26. Based on properties that are revalued

34. IRR Cohorts from NCREIF Database

35. IRR Attribution for all props assuming sale at last appraised value Additional IRR Breakdown

36. Operating Database Trends in NOI Trends in expense and expense ratios Trends in cap ex Now includes data from REITs (Equity Office and Prologis).

37. Market Coverage Similar to BOMA Source: NCREIF, BOMA

38. Tax and Operating Costs Similar to BOMA Source: NCREIF, BOMA NCREIF BOMA 2002 2003 $ Per Occupied Portfolio SF

39. General Expenses Source: NCREIF 2002 2003 $ Per Occupied Portfolio SF Difference Between 2002 & 2003 Shows Need for Same Store Analysis

40. Competitive Commission & TI Costs Source: NCREIF, Equity Office NCREIF Equity Office 2002 2003 $ Per Occupied Portfolio SF

41. NCREIF Valuation Database Data Submission Program

42. Uses of Valuation Data Input Program Executive summary of valuation assumptions and conclusions –Based on existing leases (leased fee) –Based on market rents (fee simple) Validation tests of valuation assumptions, e.g., original Argus or Dyna file assumptions Peer group comparisons Serve needs of many users, e.g., NCREIF, IPD, PWC

43. Portfolio Analysis Tools (Coming Soon) View executive summary of valuation parameters for groups of properties in your portfolio Compare individual property valuation assumptions with properties in your portfolio –Existing property –Proposed acquisition Compare your property or portfolio with peers from the NCREIF Valuation Database (online)

44. Valuation Data Input Program Four versions: –1) Enter data yourself –2) Import data from ARGUS –3) Import data from DYNA –4) Use a simple DCF program from NCREIF All have same “look and feel” Will also be compatible with Appraisal Institute’s Commercial Appraisal Report Standards

45. ARGUS Version

46. “View Results” Screen – Same for all input programs Based on appraisal Mark to market

49. Data Entry Version (if not importing from ARGUS or DYNA)

51. Mini DCF Program (option for non-ARGUS non-DYNA users) Value Property and get same Executive Summary

52. Conclusion Great opportunity for NCREIF to add to the availability of information on valuation trends (discount rates, cap rates, expected NOI and value growth rates, vacancy rate projections, effective rents, etc. etc. The more effort members are willing to put into providing timely data in a standardized format and following “best practices” the better the database and the greater the benefits to NCREIF members. NCREIF truly becoming “data central” for information on the performance of institutional real estate including historical returns, income and expense trends, performance of funds and valuation trends.

53. Conclusions NCREIF database can be used for much more than just the NCREIF Property Index (NPI) NCREIF becoming “data central” for institutional real estate –NOI indices –Cap rates –Vacancy rates –Expense ratios –Valuation assumptions –Etc. – stay tuned!