IRR-Based Property-Level Performance Attribution

Abstract

In this article, the author reviews the concept and practice of property level investment performance attribution. A new approach for performance attribution based on the property level since-acquisition internal rate of return (IRR) is presented, including numerical examples and usage recommendations. A methodology is presented for parsing the IRR into three components: Initial Yield, Cash Flow Change, and Yield Change; and for benchmarking performance in these attributes against NCREIF properties. The relationship is discussed between the three IRR attributes and the four fundamental property level investment management functions of: Property Selection, Acquisition Transaction Execution, Operational Management, and Disposition Transaction Execution. Resulting information and insights should be useful for entities managing large portfolios of real properties, including pension fund advisors and REITs.