Student Investment Management – Sector Presentation: Real Estate Presented By: Mark Wilson, Rohit Kejriwal, Shuocun Yang

Agenda Overview Business & Economic Analysis Financial Analysis Valuation Analysis Recommendations

REIT Overview Real Estate Investment Trust (REIT) is a collection of real estate assets REITs can focus on various industries, such as: healthcare, industrial, office, hotel, mall, residential, etc. They can also own a diverse portfolio of assets; most REITs primarily focus on one type of property The largest public REIT is Simon Property Group(SPG), based out of Indianapolis Market cap of $56.3b - 56% larger than the next biggest REIT: Public Storage (PSA) SPG focuses on shopping malls and is the largest shopping mall operator in America.

REIT Overview: Size of Sector

Business & Economic Analysis

Life Cycles The 4 stages of the real estate cycle: 1) Recovery Phase: interest rates lowered as a result of recession; vacancy in existing properties begins to decline compared to the recession time peak 2) Expansion: economy is recovering, vacancy on existing properties continues to declines, new construction projects begin 3) Hyper supply: economy is strong, new projects continue to come online, vacancy remains strong, but goes down as a result of increasing supply 4) Recession: economy declines, projects from expansion phase continue to come online, vacancy is at peak level

Life Cycles

Effect of Interest Rates Interest rates are negatively correlated with REIT returns. The correlation is -.66, which is moderate-high. Interest rates are currently at very low levels, and will inevitably increase in coming years.

Current Trends in Real Estate Construction activity is currently at peak levels, implying that REITs are either in the expansion stage on hyper supply stage However, REIT occupancy rates are at the highest levels since 2000, which implies that REITs are in the expansion stage, since hyper supply range is correlated with declining occupancy Given the large development pipeline in real estate right now, it seems likely that the hyper supply stage is imminent

Financial Analysis

Financial Data S5REITS index’s current sales and earnings growth rate are lower compare to past.

Sales & Earnings

S&P 500 Comparison

Profit Margin

Operating Margin

Return on Common Equity

S5REITS index has stable margins and return. S&P 500 Comparison S5REITS index has stable margins and return. Its margins are higher and ROE is lower compare to S&P 500 index.

Turn Over

S5REITS index generated negative cash flow in six of last eight years. Free Cash Flow S5REITS index generated negative cash flow in six of last eight years.

S5REITS index has lower free cash flow yield to S&P 500 index.

Dividend

S5REITS index has higher dividend yield to S&P 500 index.

Valuation Analysis

REITs vs. S&P 500 REITs Date Price to Earning Price to Book Price to Sales Price to EBITDA 7/9/2017 45.3367 3.1823 7.5880 14.6155 12/31/2016 44.2197 3.2190 7.2816 14.1131 12/31/2015 34.0640 3.2748 7.3707 15.0043 12/31/2014 35.3746 3.3312 7.5478 14.6910 12/31/2013 41.4948 2.6529 6.2572 12.7896 12/31/2012 46.7751 2.9284 6.8358 14.1180 12/31/2011 50.0111 2.5020 5.9380 12.5805 12/31/2010 33.8770 2.6010 5.3618 11.9727 12/31/2009 52.2484 2.0648 4.8536 9.2307 12/31/2008 25.3364 1.6592 2.7124 6.0662 12/31/2007 27.8860 2.8285 4.1727 9.2671 S&P 500 Date Price to Earning Price to Book Price to Sales Price to EBITDA 7/9/2017 21.4363 3.1285 2.0876 57.6814 12/31/2016 20.6214 2.9338 1.9722 52.8588 12/31/2015 18.8471 2.7740 1.8427 44.2553 12/31/2014 18.3258 2.8232 1.8114 46.1040 12/31/2013 17.4402 2.5782 1.6839 52.8373 12/31/2012 14.3758 2.1366 1.3376 43.5818 12/31/2011 13.4340 2.0474 1.2321 42.0251 12/31/2010 15.4189 2.1744 1.3390 43.9500 12/31/2009 19.1676 2.1535 1.2351 38.0358 12/31/2008 16.6636 1.9983 0.9107 27.6901 12/31/2007 17.4539 2.7674 1.5484 49.3419 REITs - Realtive to S&P Date Price to Earning Price to Book Price to Sales Price to EBITDA 7/9/2017 111.5% 1.7% 263.5% -74.7% 12/31/2016 114.4% 9.7% 269.2% -73.3% 12/31/2015 80.7% 18.1% 300.0% -66.1% 12/31/2014 93.0% 18.0% 316.7% -68.1% 12/31/2013 137.9% 2.9% 271.6% -75.8% 12/31/2012 225.4% 37.1% 411.0% -67.6% 12/31/2011 272.3% 22.2% 381.9% -70.1% 12/31/2010 119.7% 19.6% 300.4% -72.8% 12/31/2009 172.6% -4.1% 293.0% -75.7% 12/31/2008 52.0% -17.0% 197.8% -78.1% 12/31/2007 59.8% 2.2% 169.5% -81.2%

FFO - Valuation Analysis

P/E Ratio vs. SPX

P/B Ratio vs. SPX

P/S Ratio vs. SPX

P/EBITDA vs. SPX

Current Price vs. SPX

Recommendation

Recommendation Current SIM exposure to REIT is 2.16%; REITs are 2.92% of S&P Recommendation: Make OSU’s exposure to REITs equal to S&P – increase REIT exposure by 0.76% Focus on industrial and healthcare REITS, since these have strong returns in the past 5 years and are poised to continue growing Example stocks: Prologic – Large Cap Industrial REIT Bellweather – Large Cap Healthcare REIT

Thank You! Questions???

Sources: http://www. investopedia. com/articles/04/110304 Sources: http://www.investopedia.com/articles/04/110304.asp https://www.crowdstreet.com/education/article/four-phases-real-estate-cycle/ http://www.lazardnet.com/docs/sp0/4915/Lazard_USRealEstateIndicatorsReport_201403.pdf Bloomberg Terminal