1. SIM Sector Presentation
Real Estate
March 20, 2018
Drake Tharp | Pooja Shah | Wesley Smith

2. Table of Contents Section Title 1. Overview 2. Business Analysis 3.
Economic Analysis 4.
Financial Analysis 5.
Valuation Analysis 6.
Recommendation 7.
Appendix

3. 1.
Overview

4. Overview: Sector Review
Summary
Sector Breakdown
The real estate sector includes mortgage companies, property management companies, and REITs. Each of the companies may have a portfolio of residential, commercial, or industrial properties. The companies involvement may be as a developer or operator.
The real estate group is dominated by equity REITs
Required to pay out to shareholders at least 90% of their taxable income
Attractive investment in a low-interest-rate environment, as investors look for income
REAL ESTATE
REAL ESTATE COMPANIES
REITS
Recent Trends
REITs: Publicly traded or private company whose primary operation is to buy and own properties
-entities that invest in physical property and typically receive rental income from their investments
Urbanization – apartments and office markets are strong
Department store markets face headwinds
Interest rate increases may lead to higher purchase prices for real estate companies, potentially hurting margins
New tax reform could help make REITs more attractive due to taxation of passive income
Developers
Operators

5. Companies by Market Cap and Assets
Overview: Companies
Major Players
SIM Holdings
Companies by Market Cap and Assets
S&P 500 Portfolio
Real Estate
2.6%
Source: Company Filings

6. Overview: Sector Performance
Relative Performance YTD
S&P 500
-0.2%
Sector Performance
TTM
YTD
-5.8%
-9.1%
Source: Bloomberg

7. 2.
Business Analysis

8. Business Analysis: Property Types
Industrial
Retail
Office
Multifamily
Used for industrial purposes
Small, medium, large
Higher rents and yields generally provided
Longer leases
Used for a store, shopping center, or service business
Higher rents and yields generally provided
Longer leases
Draining business recently
Used for business purposes to produce income
Includes single-tenant and larger buildings
Broken into class A, B, C buildings
Used for multiple separate housing units
Strong cash inflows
Easier to finance, but generally more expensive

9. Business Analysis: Property Trends
Industrial
Retail
Positive: increase in inventory space in the U.S. due to consumer demand of faster delivery rates that leads to increased inventory volume1
Negative: FDI, which is traditionally high, may decrease due to heightened global regulatory environment under current administration
Positive: shallow-bay buildings will become more popular to satisfy last-mile logistics
Negative: e-commerce will encourage brick-and-mortar retailers to consolidate services2
Neutral: pop-up stores with shorter lease terms may increase in number for retailers interested in showcasing a new product or a seasonal offering
Neutral: Omnichannel retailing is expected to dominate the industry to meet convenience of click-and-collect
Office
Multifamily
Demographic tailwind
Positive: pro-business spending tax reform may result in increased CAPEX spending for purchases of new or used developments3
Positive: strong U.S. market growth and employment numbers present unique expansion opportunities for previously lower-performing companies and markets
Positive: evolution of co-working spaces will increase tenant demand
Positive: millennials and empty nesters are pushing urbanization to all-time highs, leading to stronger tenant demand4
Positive: increase in micro-apartments to lower price on luxurious apartment complexes, leading to stronger supply
Positive: more transaction activity than any other property sector in the U.S. in 2017
Sources: 1 BISNOW Research; 2 Buxton Company Research; 3 PWC Emerging Trends; 4JLL Research

10. Business Analysis: Macro Environment
Tax Reform
Interest Rates2
Decreased mortgage interest deduction caps will likely cause home prices to drop
20% deduction for REIT dividends provides more favorable investment opportunity than corporations
First-year depreciation deduction in personal property increases to 100% before 2023
Increased interest expenses hurt real estate market because of large debt portfolios with floating rates
Jerome Powell announced 3-4 rate hikes in 2018
Mild correlation between real estate and interest rate movements, but generally inverse
Sources: 1 PWC Emerging Markets; 2Bloomberg

11. Business Analysis: Business Life Cycle
Real Estate Market1
Cover
Analysis
Most real estate markets are in expansion phase, soon to be approaching the hypersupply phase
Overall, industry is expected to enjoy a long period of expansion before it hits hypersupply
Experts in real estate expect a peak similar to the recent financial crisis around 2024
Sources: 1 Harvard University
Cover

12. Business Analysis: Competitor Landscape
Industrial
Retail
Office
Multifamily

13. Business Analysis: Opportunities and Risks
Hotels and apartments are in the best position to take advantage of a growing economy
Industrial sector continues to enjoy the largest valuations relative to price of the major property types
$170bn of U.S. CMBS loans maturing through the end of 2018 present opportunities for sophisticated investors1
Increased migration to and development of secondary markets, such as Philadelphia, Atlanta, Austin, Dallas, and San Diego
The Federal Reserve is expected to increase short-term interest rates
Potential black swan events could lead to a major market correction, similar to that in early February 2018
Most real estate lives on debt to the tune of 50% or higher, being a highly-levered asset class
Properties with longer-term leases offer more interest rate risk
Sources: 1 Ares Market Insights

14. 3.
Economic Analysis

15. Economic Indicators Indicator Correlation Coefficient S&P 500 +0.700
GDP
+0.244
US Unemployment
-0.374
Fed Funds Rate
-0.066
Consumer Confidence
+0.303
US Wage and salary
+0.330

16. S&P 500

17. GDP

18. US Unemployment

19. Fed Funds Rate

20. Consumer Confidence

21. Us Wage and Salary

22. 4.
Financial Analysis

23. Financial Data - REITs
S5REITS index’s current sales and earnings growth rate are lower compared to past.

24. Sales and Earnings - REITs

25. S&P 500 Comparison

26. S&P 500 Comparison

27. Profit Margin

28. Operating Margin

29. Return on Common Equity

30. S&P 500 Comparison

31. S5REITS index generated negative cash flow in five of last nine years.
Free Cash Flow
S5REITS index generated negative cash flow in five of last nine years.

32. Free Cash Flow Yield
S5REITS index has lower free cash flow yield compared to S&P 500 index

33. Dividend

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

35. Valuation Analysis

36. Valuation: Absolute Basis
High
Low
Median
Current
P/E
48.4
44.16
45.3
45.56
P/B
3.41
3.04
3.24
3.14
P/S
7.09
6.26
6.77
6.52
P/EBITDA
15.29
13.76
14.61
14.20

37. Valuation: Absolute Basis
Large fall over the last year due to rate hikes

38. Valuation: Relative to S & P 500
High
Low
Median (Avg.)
Current
P/E
2.41
1.88
2.12
1.90
P/B
1.22
.92
1.06
.93
P/S
3.66
2.74
3.31
2.77
P/EBITDA
1.39
1.18
1.32
1.19

39. Valuation: Relative to S & P 500
Real Estate: each metric about 5-10% below S & P

40. Valuation: Sub Sector Performance
Retail has done the worst,
Some REITS value down 94%
Valuation varies by sub industry, however no industry has performed well.

41. Technical Analysis

42. Technical Analysis
Possible to see resistance because the sector has fallen below lower band of moving averages

43. 6.
Recommendation

44. Recommendation
Since we are currently underweight in real estate for the portfolio, we recommend that we stay underweight.
Negatives:
We believe that interest rates will continue to rise which will undercut companies that are used as bond proxies.
Higher interest rates raise the cost of borrowing for commercial and homeowners
Online shopping hurts retail space
Positives:
Growth in economy/corporate tax cut: office space demand
Higher wages/lower unemployment: housing/apartment demand, retail demand, increased need for inventory space.
Currently the negatives outweigh the positives as real estate demand tends to lag a growing economy.