US Capital Markets: REITs - Portfolio Analysis and Optimization

US Capital Markets: REITs Portfolio Analysis & Optimization

Nick Kunz

David Kruth, CFA US Capital Markets: REITs Columbia GSAPP MSRED

Dec 15, 2018

The NK Fund is a theoretically investable REIT only fund containing revolving public equity positions in REITs containing direct ownership and operations of commercial real estate. The fund does not engage in investing in Mortgage REITs or other banking and credit activities. As an independent fund, the research and investment approach is specifically tailored for this thesis.

Market Outlook

The fund’s macroeconomic outlook forecasts changing behaviors in both production and consumption in the broader economy. Our research indicates high market growth and consumer demand in online retail and commerce, internet of things (IoT) and mobile, autonomous vehicles, and overall computation storage and processing power. In addition, with the likelihood of rising interest rates, private market housing ‘flight to quality’, and the fundamentals associated with relocation, the fund anticipates firm demand in multifamily housing, mobile home land leases, and personal storage. In addition, the fund sees minority opportunities in traditional real estate sectors in office and retail from best in-class assets and management that can be adapted to broader shifts in economic activity. These trends have shaped the investment strategy outlined in the following section.

Macroeconomic Growth Sectors Technology

eCommerce

Housing

Investment Strategy

As a long-term total return fund, the portfolio is focused on concentrated growth sectors with high risk adjusted rewards. The composition contains 20 different publicly equity REITs throughout 9 different real estate sectors. The sectors include: Multifamily, Manufactured Housing, Office, Industrial, Storage, Retail - Malls, Cell Towers, Data Centers, and Specialized Micro-Cap.

● Portfolio Weighted Positions - Sector The most highly concentrated sector of the portfolio is in Industrial at 26.50%. Other notable sector concentrations of the portfolio are in Manufactured Housing at 18.50%, Multifamily Housing at 14.00%, Data Centers at 13.50%, and Cell Towers at 10.00%.

The lowest concentrated sector of the portfolio is in an highly specialized micro-cap sector of information storage at 3.00%. Other notable sectors of the portfolio containing the lowest concentrations are in Office at 4.00%, Retail - Malls at 4.00%, and Storage at 6.50%.

Sectors that have been given consideration, but have been elected either uninvestable or outside of the scope of the fund are: Single Family Rental, Retail - Shopping Centers, Healthcare, Hotel, NNN, and Mortgage REITs.

● Portfolio Weighted Positions - Stock There are 3 individual REITs that share the most highly concentrated positions in the portfolio; they are Sun Communities (NYSE: SUI), American Tower (NYSE: AMT), and East Group Properties (NYSE: EGP) all at 10.00% each. Other notable concentrated positions are Equity Lifestyle Properties (NYSE: ELS) at 8.50%, and Rexford Industrial Realty (NYSE: REXR) and Terreno Realty Corp (NYSE: TRNO), both at 7.00% of the portfolio.

There are 3 individual REITs that share the least concentrated positions in the portfolio; they are Avalonbay Communities (NYSE: AVB), Alexandria Real Estate Equities (NYSE: ARE), and Boston Properties (NYSE: BXP) all at 3.00% each. Other notable least concentrated positions are Apartment Investment & Management Co (NYSE: AIV), Prologis (NYSE: PLD), National Storage Affiliates Trust (NYSE: NSA) all at 2.50% of the portfolio.

1

Anticipated Returns

The anticipated returns of the fund based on current price expectations for the end of 2019 are outlined in the following table. Of the weighted average total expected return of 11.01%, roughly 71.20% is from the anticipated equity price appreciation, where the remaining 28.80% is from the current dividend yield.

Weighted Average Return Category

Weighted Average Return Metrics

Anticipated Equity Price Appreciation

7.84 %

Current Dividend Yield

3.17 %

Expected Total Return

11.01 %

Portfolio Metrics

The fund’s performance based on current price expectations for the end of 2019 are outlined in the following table. Although acquisition prices slightly exceed estimated NAV, it is believed the existing price premium is prudent for the expected growth rate. Also, a slight Dividend Yield is expected in the future in contribution to the fund’s total return.

Weighted Average Valuation Category

Weighted Average Valuation Metrics

P / FFO

20.6

P / NAV

1.03

Implied Cap Rate

5.40 %

MGR

4.6

Dividend Yield

3.54 %

2

Risk Analysis

●

Sharpe Ratio As a part of evaluating the fund’s risk adjusted return, the following table outlines the portfolio's Alpha (above the Risk Free Rate), the Standard Deviation of Alpha, and Sharpe Ratio. The fund has a competitive risk adjusted performance with and relatively low volatility.

Sharpe Ratio Year

Annual Return

Risk Free Rate

Alpha

2016

10.61 %

2.50 %

8.11 %

2017

5.49 %

2.50 %

2.99 %

2018

6.72 %

3.00 %

3.72 %

Average Alpha

4.94 %

Standard Deviation of Alpha

2.77 %

Sharpe Ratio

●

1.79

Information Ratio As a part of evaluating the fund’s returns above the industry standard, the following table outlines the portfolio's Alpha (above the NAREIT return), the Standard Deviation of Alpha, and Information Ratio.

The fund has a prudent risk adjusted performance to the industry standard and consistency with relatively low volatility.

Information Ratio Year

Annual Return

NAREIT Equity Return

Alpha

2016

10.61 %

8.53 %

2.08 %

2017

5.49 %

8.67 %

-3.18 %

2018

6.72 %

2.90 %

3.82 %

Average Alpha

0.91 %

Standard Deviation of Alpha

3.64 %

Information Ratio

3

0.25

Property Sector

2.50% 2.50% 3.00%

10.61% 5.49% 6.72%

Average Excess Return Standard DeviaQon of Excess Return Sharpe RaQo

2016 2017 2018

Risk Free Rate

Por-olio Annual Return

Risk Analysis - Sharpe RaQo

Sector ComposiQon Summary MulQ-Family (Includes Student Housing) Manufactured Housing Single Family Rental Office Industrial Storage Retail - Malls Retail - Shopping Centers Towers Data Centers Health Care NNN + Other Hotel CRE Mortgage Total

1 AIV MulQfamily 2 AVB MulQfamily 3 ESS MulQfamily 4 ACC MulQfamily 5 ELS Manufactured Housing 6 SUI Manufactured Housing 7 ARE Office 8 BXP Office 9 AMT Towers 10 DLR Data Centers 11 EQIX Data Centers 12 CONE Data Centers 13 SPG Retail - Malls 14 IRM NNN + Other 15 EGP Industrial 16 PLD Industrial 17 REXR Industrial 18 TRNO Industrial 19 EXR Storage 20 NSA Storage Totals OR Weighted Averages

Stock #

Stock Ticker

Final Exam Por-olio Spreadsheet US REIT Class - Fall 2018 PLAN 6259 Student Name UNI

8.9% 8.3% 8.6% 9.9% 8.8% 13.3% 4.7% 4.5% 17.2% 10.5% 9.5% 9.9% 8.7% 15.2% 16.5% 9.0% 8.4% 8.5% 7.7% 8.1% 11.01%

Expected Total Return

Por-olio Weight 14.0% 18.5% 0.0% 4.0% 26.5% 6.5% 4.0% 0.0% 10.0% 13.5% 0.0% 3.0% 0.0% 0.0% 100.0%

2.5% 2.0% 4.0% 5.5% 8.5% 10.0% 2.0% 2.0% 10.0% 6.5% 3.5% 3.5% 4.0% 3.0% 10.0% 2.5% 7.0% 7.0% 4.0% 2.5% 100.0%

Selected Por-olio Weight

AIV AVB ESS ACC ELS SUI ARE BXP AMT DLR EQIX CONE SPG IRM EGP PLD REXR TRNO EXR NSA

2.45 8.45 11.91 2.31 3.60 4.17 6.02 6.22 6.72 6.14 18.53 3.12 11.21 2.13 4.26 2.81 0.96 1.09 4.37 1.24

2.55 8.85 12.87 2.30 3.88 4.60 6.61 6.38 7.75 6.59 20.46 3.27 12.12 2.12 4.68 3.02 1.09 1.31 4.63 1.36

From JMS or Other FFO PS FFO PS 2017 2018

2.53 9.26 13.10 2.42 4.18 4.97 6.97 6.85 7.89 6.69 22.89 3.55 12.53 2.33 4.83 3.16 1.16 1.39 4.88 1.48

FFO PS 2019

18.9 22.4 22.0 18.9 27.1 24.7 20.4 20.9 24.3 18.6 20.7 17.9 16.5 15.9 23.5 24.0 34.3 35.9 21.7 22.2 23.8

18.3 20.4 20.0 18.0 23.3 20.7 17.7 19.0 20.7 17.0 16.8 15.7 14.8 14.5 20.8 21.3 28.4 28.1 19.4 18.6 20.59

P/FFO 2019

4.1% 4.7% 8.1% -0.4% 7.8% 10.3% 9.8% 2.6% 15.3% 7.3% 10.4% 4.8% 8.1% -0.5% 9.9% 7.5% 13.5% 20.2% 5.9% 9.7% 9.3%

FFOG 2018

10.61% 5.49% 6.72%

Por-olio Annual Return

8.53% 8.67% 2.90%

NAREIT Equity Return

Risk Analysis - InformaQon RaQo

18.2 21.4 20.3 18.9 25.2 22.4 18.6 20.4 21.1 17.3 18.8 17.1 15.3 16.0 21.4 22.3 30.2 29.9 20.4 20.2 21.7

Calculates P/FFO P/FFO 2017 2018

Average Excess Return Standard DeviaQon of Excess Return InformaQon RaQo

3.3% 3.1% 2.8% 4.2% 2.3% 2.8% 3.2% 2.9% 2.1% 3.5% 2.4% 3.3% 4.3% 11.9% 2.9% 2.8% 1.9% 2.5% 3.6% 4.4% 3.17%

Current Dividend Yield

4.94% 2.77% 1.79

5.6% 5.2% 5.8% 5.6% 6.6% 10.6% 1.6% 1.6% 15.2% 7.0% 7.1% 6.6% 4.4% 3.3% 13.7% 6.1% 6.4% 6.1% 4.0% 3.7% 7.84%

Expected Price AppreciaQon

ValuaQon Metrics

2016 2017 2018

1 Yr. Price Target Column AC $49.00 $199.00 $277.00 $46.00 $104.00 $114.00 $125.00 $132.00 $188.00 $122.00 $411.00 $59.50 $193.00 $35.00 $114.00 $71.50 $35.01 $41.50 $98.50 $28.50

AREA THAT WILL CALCULATE BASED ON INPUTS

DATA THAT NEEDS TO BE HARD INPUT

8.11% 2.99% 3.72%

Por-olio Excess Return

$46.38 $189.21 $261.80 $43.55 $97.60 $103.09 $123.07 $129.94 $163.22 $114.02 $383.75 $55.79 $184.90 $33.89 $100.29 $67.37 $32.90 $39.12 $94.68 $27.48

11/30/18 Recent Price

NHK2119

Nick Kunz

12/15/18

0.91% 3.64% 0.25

2.08% -3.18% 3.82%

Por-olio Excess Return

-0.8% 4.6% 1.8% 5.2% 7.7% 8.0% 5.4% 7.4% 1.8% 1.5% 11.9% 8.6% 3.4% 9.9% 3.2% 4.6% 6.4% 6.1% 5.4% 8.8% 5.3%

4.5 4.5 2.5 -43.7 3.2 2.2 1.9 7.9 1.4 2.4 1.8 3.5 1.9 -34.0 2.2 3.0 2.2 1.5 3.4 2.1 -1.1

Calculates FFOG MGR 2019 2018 -23.4 4.4 11.2 3.4 3.0 2.6 3.2 2.6 11.5 11.2 1.4 1.8 4.4 1.5 6.5 4.6 4.4 4.6 3.6 2.1 4.6

MGR 2019 $51.63 $196.54 $265.83 $48.20 $81.15 $90.85 $137.67 $143.44 $73.40 $115.68 $443.69 $67.11 $199.02 $40.89 $86.85 $68.92 $33.21 $37.79 $86.72 $22.76

JMS Report Or Other NAV 6.00% 5.10% 4.90% 5.20% 4.20% 4.60% 5.20% 5.10% 6.40% 6.50% 6.50% 7.20% 5.00% 6.00% 4.70% 4.80% 4.75% 4.70% 4.90% 6.60% 5.4%

JMS Report Implied Cap Rate AIV AVB ESS ACC ELS SUI ARE BXP AMT DLR EQIX CONE SPG IRM EGP PLD REXR TRNO EXR NSA

18.5 21.4 20.8 18.6 25.2 22.6 18.9 20.1 22.0 17.6 18.7 16.9 15.5 15.5 21.9 22.5 30.9 31.3 20.5 20.3 22.0

Applied P/FFO 2019 $46.81 $198.16 $272.48 $45.01 $105.34 $112.32 $131.73 $137.69 $173.58 $117.74 $428.04 $60.00 $194.22 $36.12 $105.78 $71.10 $35.84 $43.51 $100.04 $30.04

FFO Target Price $51.56 $194.58 $264.55 $47.98 $80.72 $91.60 $136.82 $143.14 $172.81 $114.88 $440.37 $66.94 $197.59 $40.56 $86.27 $68.34 $33.04 $37.61 $86.39 $22.68

0.89 0.96 0.98 0.90 1.19 1.13 0.89 0.91 1.06 0.98 0.87 0.83 0.93 0.83 1.15 0.97 0.99 1.03 1.09 1.21 1.03

Student ValuaQon Analysis Student Applied NAV P/NAV 2019 RaQo $45.89 $186.80 $259.26 $43.18 $96.06 $103.51 $121.77 $130.26 $183.18 $112.58 $383.12 $55.56 $183.76 $33.66 $99.21 $66.29 $32.71 $38.74 $94.17 $27.44

NAV Target Price $46.35 $192.48 $265.87 $44.10 $100.70 $107.92 $126.75 $133.97 $178.38 $115.16 $405.58 $57.78 $188.99 $34.89 $102.49 $68.69 $34.28 $41.12 $97.10 $28.74

Student Price Target YE 2019 AIV AVB ESS ACC ELS SUI ARE BXP AMT DLR EQIX CONE SPG IRM EGP PLD REXR TRNO EXR NSA

$1.52 $5.88 $7.44 $1.84 $2.20 $2.84 $3.88 $3.80 $3.36 $4.04 $9.12 $1.84 $8.00 $4.04 $2.88 $1.92 $0.64 $0.96 $3.44 $1.20

Dividend Input Annual Dividend AIV AVB ESS ACC ELS SUI ARE BXP AMT DLR EQIX CONE SPG IRM EGP PLD REXR TRNO EXR NSA

9.9% 4.2% 6.5% 6.5% 18.7% 18.8% 13.1% 3.8% 20.1% 20.6% 11.3% 19.2% 3.2% 12.5% 23.5% 19.2% 28.3% 21.9% 7.9% 24.3% 14.7%

9.3% 5.9% 7.0% 7.4% 15.4% 17.2% 6.4% 6.0% 17.7% 11.2% -1.5% 4.2% 12.9% 1.2% 17.9% 12.9% 18.2% 14.3% 11.6% 17.0% 10.6%

8.1% 6.8% 6.5% 7.1% 11.3% 14.2% -0.8% 6.6% 13.6% 0.7% -16.0% -11.4% 21.9% -11.0% 10.3% 4.6% 7.9% 6.4% 15.1% 8.0% 5.5%

Sharpe & InformaQon RaQo Data Input Total Return Data Calendar Calendar Calendar 2015 2016 2017

9.5% 8.2% 10.0% 10.9% 11.4% 13.3% -4.2% 1.9% 16.0% 2.6% -13.3% -3.9% 12.7% -5.9% 16.0% 6.5% 14.3% 13.6% 10.9% 3.9% 6.7%

YTD 2018