Guidelines

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 inrev-guidelines">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:

A distributed income return should be disclosed.

Distributed income is defined as the amount of investment income derived from operations that is distributed to investors or credited to investors in the case of investment vehicle dividends or income reinvestment programs that are elected by the investor.

Distributed income does not include the return of capital or principal, the distribution of realised gains from asset sales (capital gains) or proceeds from financing activities. The objective is to present the actual cash distributions that are derived from customary and ongoing investment management operations without the distortions related to disposition and refinancing activities.

Distributions include dividends and interest paid during the period.

Distributed income return is computed as follows:

A vehicle level since inception Internal Rate of Return (SI-IRR) should be disclosed.

Inception IRR is the IRR of the vehicle after all vehicle-level fees, taxes and carried interest are deducted.

The SI-IRR represents the rate of return based on the present value of all of the appropriate cash inflows associated with an investment, with the sum of the present value of all the appropriate cash outflows accruing from it and the present value of the unrealised residual portfolio over the holding period.

SI-IRRs are commonly used to measure the performance of the investment (contrasted with TWRs, which are used to measure performance that can be indicative of investment manager performance). The SI- IRR is also known as the rate of return that results in a net present value of zero.

The SI-IRR formula discounts flows F1 through Fn back to F0 where: F0 is the original investment; and F1 through Fn are the net cash flows for each applicable period. If the entity has not yet been liquidated, the ending cash flow, Fn, will consist of the latest period’s operating cash flows plus an estimate of the net residual value.

SI-IRR at vehicle level net of fees, is computed as follows:

f₀ … f_n  = cash flow for the period 0 through n (Negative values for inflows and positive values for outflows)
IRR =  Internal Rate of return

SI-IRR at vehicle level gross of fees, is computed as follows:

where f’ is cash flow before the deduction of all the fees charged by the investment manager at all levels of the vehicle structure as detailed in the Fee and Expense Metrics module. Typically, fees are added back similarly to distributions to investors, so f’ = f + MF.

In cases where the fee is added on a date other than that of the distribution, or in cases where the fee is paid from outside the account, the same formula can be applied, in which case f’ = f + FM. In the case of accrued fees, the accrual as of time period n should be added from the final net residual market value at f’_n.

MF = Management fees (including performance fees)

Multiples

Multiples are shown as ratios, with one financial input in the numerator and another in the denominator, both of which are typically presented for the entire life of the investment rather than some discrete time period (month, quarter, etc.). Used in conjunction with time-weighted returns and IRRs, multiples provide greater transparency when analysing performance. The four commonly used multiples are presented below (PM09 - PM12).
 

A paid-in capital multiple or paid-in capital to committed capital multiple (PIC) should be disclosed.

This ratio gives information regarding how much of the total commitments have been drawn down. The paid-in capital is the cumulative drawdown amount, or the aggregate amount of committed capital actually transferred to a vehicle. Typically, a number such as 0.80 means that 80% of the vehicle’s capital commitments have been drawn from investors.

PIC is computed as follows:

PIC
CC

PIC (paid-in capital) = Cumulative capital contributed to the vehicle CC (committed capital)
Vehicle CC = Cumulative capital plus undrawn capital.
 

An investment multiple or total value to paid-in capital multiple (TVPI) should be disclosed.

The TVPI, total value to paid-in capital multiple, also known as the investment multiple, gives users information regarding the value of the investment relative to its cost basis, not taking into consideration the time invested. As an example, a multiple equal to 1.50 is typically read to mean that the investors have 1.50 units of value in the vehicle for every unit invested.

TVPI is computed as follows:

TV 
PIC

TV (Total value) = Sum of residual vehicle net assets (NAV) plus aggregate vehicle distributions
PIC (Paid in capital) = cumulative capital contributed to the vehicle
 

Realisation multiple or cumulative distributions to paid-in capital multiple (DPI) should be disclosed.

DPI represents the amount of capital and income returned or repaid to investors, divided by a vehicle’s capital calls at the valuation date. DPI reflects the realised, cash- on-cash returns generated by its investments at the valuation date. It is most prominent once the vehicle starts exiting investments, particularly towards the end of its life.

As the vehicle matures, the DPI will typically increase. When the DPI is the equivalent of one, the vehicle has broken even. Consequently, a DPI of greater than one suggests the vehicle has generated profit to the investors.

DPI is computed as follows:

 D 
PIC

D = Distributions
PIC (paid-in capital) = cumulative capital contributed to the vehicle
Distributions retained in the vehicle and not paid to the investors are considered as realised.
 

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.