University of Chicago Real Estate Club ucrec

1. University of Chicago Real Estate Clubwww.ucrec.com Sunday, January 17th, 2010

2. Overview of UCREC Winter 2010 Educational Components Finance Basics (i.e Accounting and Valuation) REITs � Real Estate Investment Trusts (RE stocks) Introduction, How they grow, International market of REITs, Healthcare REITs, Future of REITs etc. Leasing, Affordable Housing, Gaming, Lodging, and Real Estate Investments Company Presentations (most are in Fall quarter) Bank of America � February 1st Google - TBA Mentorship/ Interview Help

3. UCREC Member Opportunities Networking � panels, company presentations Educational Program Bank of America Affordable Housing Challenge Team (4 to 12 people) Scholarship for Women Members All members are able to attend Booth Real Estate Group meetings Members able to attend annual Booth Real Estate Conference Hosting of Real Estate Case Competition - 2011

4. Accomplishments Fall 2009 Fall 2009 Meetings Included: www.ucrec.com Morgan Stanley JP Morgan � Associate Investment Banker/Intern Chicago Managing Director � Tishman Speyer Introduction to REITs / Overview of UCREC SEO information session Panel Discussions with Booth alumni Booth School Real Estate Professor Lecture Blackstone Group (Park Hill Real Estate Group) Chicago Office Managing Director�.

5. Basic Accounting Concepts

6. Overview of Financial Statements Four basic financial statements: Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings Published by public companies in their annual reports (called 10K's) Remember to read notes/footnotes Often contain important information

7. The Balance Sheet Presents the financial position of a company at a given point in time Comprised of three parts: Assets, Liabilities, and (Ownership/Stockholder's) Equity Remember the important basic equation: Assets = Liabilities + Equity

8. Assets Assets are the economic resources of the company Consists of Cash, Inventory, and Equipment Examples: For a farm, Inventory might be the farmer's crops; Equipment could consist of things like a barn or a tractor

9. Liabilities and Equity Companies normally obtain resources by incurring debt, getting new investors, or through re-investing operating earnings Liabilities are the debts owed by the company Equity is comprised of the claims that investors have on the company's resources after all debts have been paid off �net worth� of the company

10. Example Balance Sheet

11. More About Liabilities and Assets When companies incur debt, they make a promise to pay over a certain time period Payment schedule is independent of the operating performance of the company When companies make stock offerings (equity), they don't promise to pay investors over a certain period Offer a return on investment contingent on operating performance No guarantee, so riskier but unlimited upside

12. The Income Statement Presents the results of operations over a period of time Composed of Revenues, Expenses, and Net Income Revenue: source of income normally arising from the sales of goods and services and is recorded when it occurs

13. The Income Statement (2) Expenses: costs incurred over a period of time to generate the revenues earned over that same period of time Example: Wages When a company incurs an expense outside of its normal operations, it is considered a loss Example: Destruction of a building in a fire A purchase is only considered an asset if it also provides future economic benefit outside of the current period. Paying for wages vs. Paying for equipment

14. The Income Statement (3) Net Income: Revenue, less Expenses Positive Net Income indicates the company generated a profit (net profit) Negative Net Income indicates the company suffered a �net loss�

15. Example Income Statement

16. The Statement of Retained Earnings Retained earnings is the amount the company reinvests in itself Remember that this is one of the ways to purchase new assets (aside from incurring debt and raising new equity) Reconciliation of the Retained Earnings account from beginning to the end of year Net Income increases the Retained Earnings account, while Net Losses and dividend payments decrease it

17. Ex. Statement of Retained Earnings

18. The Statement of Retained Earnings (2) Does not provide any new information not already available But it does tell you what management is doing with the company's earnings Is management more focused on reinvesting earnings within the company? Or is it distributing profits to shareholders? Investors can use this knowledge to align their investment style with the strategy of a company's management

19. The Statement of Cash Flows Provides a detailed summary of all the cash in- and outflows during a time period Three sections-- Cash flows from: Operating activities- includes transactions involved in calculating net income Investing Activities- activities outside of the normal scope of business, such as sale or purchase of assets Financing Activities- Involves items classified as liabilities or equity on the balance sheet Examples: Dividends or payment of debt

21. The Statement of Cash Flows (2) Gets all its information from other 3 statements Net income from the Income Statement shown in cash flows from operating activities Dividends from Retained Earnings Statement shown in financing activities Investments, Accounts Payable, and other asset and liability accounts from the Balance Sheet are shown in all three sections

22. Introduction to REITs

23. Overview of REITs Pay consistent quarterly dividends Provide the individual investor a way to invest in real estate Comprise only about 10% of the $4 trillion CRE market Liquid assets Low-to-zero corporate tax rates 90% of income ? dividends

24. Types of REITs Equity REITs buys, manages, renovates, maintains, and occasionally sells real properties Example: Simon Property Group (NYSE: SPG) owns and manages malls Mortgage REITs Makes and holds loans and bond-like obligations backed by real estate Example: MFA Financial takes out low interest loans to buy higher interest mortgage-backed securities

25. Performance Over long periods, REITs provide investors with compounded annual returns close to that of the S&P 500 At the same time, REITs enjoy benefits not extended to other stocks that keep pace with the market: Low volatility and correlation Predictability/limited risk

26. Laws Regarding REITs REITs initially were defined by the Real Estate Investment Trust Act of 1960 REITs must: Hold 75% of assets in real estate/cash Derive 75% of income from real estate activities Distribute 90% of income to shareholders Derive no more than 30% of income from short term property sales REITs avoid double taxation

27. Some Myths Regarding REITs Myth #1: REITs are just portfolios of real properties REITs are more than just a collection of properties held collectively by shareholders. REITs are companies that are actively managed for profit and to a lesser extent, growth.

28. Myths (continued) Myth #2: Bad real estate markets mean bad news for REITs Real estate is sub-divided further into sectors; not all sectors are equally hit by a real estate bubble Furthermore, REITs that are especially well-managed with a solid business plan can actually excel in times that are bad for the overall real estate market

29. Myths (Part III) Myth #3: REIT stocks are for active trading Quite the contrary, REITs are close to the ultimate for the �buy and hold� strategy; they provide solid returns over many years

30. REIT Valuation Dividend yield Funds from operations (FFO) yield Adjusted funds from operations (AFFO) yield Net asset value (NAV) Dividend discount or discounted cash flow (DCF) model

31. Dividend Yield Easy to calculate and compare Also easily manipulated Can be substantially increased on a temporary basis (for example, using leverage) Ignores true recurring cash flow Does not take growth prospects into account

32. FFO Yield Widely used method FFO = Net income + Depreciation � Gains from sales on depreciated properties Accounting treats depreciation as an expense, charged against the bottom line Ignores maintenance costs of business Ignore development of land

33. AFFO Yield AFFO = FFO � recurring maintenance items (and possibly other deductions) Better measure of operating performance However does not use standardized method of calculation since it does not use standardized accounting techniques Other disadvantages of FFO also apply; ignores growth and development of land

34. Net Asset Value Total value of underlying real estate Relies on prices in private real estate market Assumed to be an efficient market since there are many buyers and sellers REITs have a long term tendency to revert back to parity with NAV NAV = Assets � Liabilities (adjusted for depreciation for REITs)

35. Discounted Cash Flow Closest model to intrinsic stock value Takes into account both near and long term growth prospects Almost all determinants of stock boiled down to quantifiable inputs for this model However, it is only as good as its assumptions (and there are many) Principle of �garbage in, garbage out�

36. Ibanking Interviews INSIDERS GUIDE REMEMBER: INTERVIEWING IS HARD AND TAKES PRACTICE

37. COMMON MISTAKES:

38. INSIDER�S GUIDE COMMON INTERVIEW QUESTIONS

39. MORE INTERVIEW QUESTIONS:

40. Walk me through a DCF THIS WILL ONLY BE ASKED IF YOU HAVE EVIDENCE ON YOUR RESUME THAT YOU SHOULD KNOW HOW TO DO THIS�

41. DCF Continued///

42. QUESTIONS?