Annual Investment Review. May 8, 2018

Transcription

1 Annual Investment Review May 8, 2018

2 Agenda Investment Market Overview George Wilson Chief Investment Officer, Boston Foundation Performance Review Bill McCarron President, Prime Buchholz Associates Real Estate Market Update Mike Acton Head of Research, AEW Real Estate 2

3 Investment Oversight Investment Committee Members Andrew Arnott. President and Chief Executive Officer of John Hancock Investments. Richard Burnes. Founding Member and Partner Emeritus of Charles River Ventures, one of the nation s major venture capital firms. Grace Fey. President of Grace Fey Advisors. For 20 years, Ms. Fey was a partner at Frontier Capital Management Co., LLC, a $7 billion investment management firm. Paul Gannon. Former Partner, Chief Operating Officer and member of the management committee of The Baupost Group. Ron O Hanley. President State Street Corporation. Greg Shell. Bain Capital, Managing Director. Previously he was a portfolio manager at GMO. Prime Buchholz & Associates. Institutional Consultant. George Wilson. Chief Investment Officer. 3

4 Interest Rates Stay Low! Nominal Interest Rate History - 10 year Treasury Bond January 1954 March 31, % 15% 14% 12% 10% 8% 6% 4% 2% 0%

5 Global Interest Rates U.S. rates are high 5

6 Inflation History Inflation finally hits Fed 's Target Rate of 2% 15% 13% 13% 11% 9% 7% 5% 3% 2.1% 1% -1%

7 Expect the Unexpected S & P 500 Annual Returns 10 Years Ending Worst Ever-- Down 1% Annually Followed by 9 Years Ending Up 15% Annually 29% 11% 5% 16% 5% 26% 15% 2% 16% 32% 14% 1% 12% 22% % -12% -22% -37% 7

8 Stock Market Returns by Calendar Year 2008 return: -37.0% 2017 return: +22% % % % % % % % -10-0% 0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% Source: Ibbotson. Returns since Annual returns of 20% or more occurred in 41 years during the last 100 years 2013 return: +32% 8

9 International Equities Storm Back! Average Annual Returns Equity Markets As of 12/31/17 37% 22% 25% 16% 8% 4% 9% 2% 2% 10% 8% 12% 8% 5% 7% 1 Year 5 Years 10 Years 15 Years 20 Years S&P 500 EAFE Emerging 9

10 Rolling Ten Year Returns Rolling 10 Year Returns (%) (U.S., Developed International, and Emerging Markets) MSCI EM (avg. 8.3) Russell 3000 (avg. 8.9) MSCI World ex-u.s. (avg. 5.2) 10

11 Second Longest Bull Market S&P 500 Bull Markets Since World War II Time Period Months Lasted Total Percent Gain 10/1990 to 03/ % 03/2009 to???? % 06/1949 to 08/ % 10/1974 to 11/ % 08/1982 to 08/ % 10/2002 to 10/ % 10/1957 to 12/ % 05/1962 to 02/ % 05/1970 to 01/ % 12/1987 to 07/ % 10/1966 to 11/ % 02/1947 to 06/ % 11

12 2018 Landscape: Cycle Length of Economic Expansions Tech Boom ( ) 120 The 60's boom ( ) Current (June 2009-present) We are here "Morning in America" ( ) 92 World War II Economy ( ) Sample Average The Housing Bubble ( ) Post-Vietnam ( ) 58 "The New Deal" Era ( ) Civil War Economy ( ) Post World War II ( ) Months Source: NBER via The Wall Street Journal, As of December 31,

13 S&P 500 P/E Ratios by Calendar Year Current Market Valuations S&P 500 Forward Price/Earnings Ratio Expensive Price/Earnings Ratio Standard Deviation -1 Standard Deviation Cheap 5 0 S&P 500 P/E Average Valuations have returned to long term historical averages Source: FactSet 13

14 Volatility Was Low in 2017 VIX (Jan Mar 18) Global Financial Crisis US Election, Global Politics (France, Brazil, China, Korea & UK) 50 Asian/ Russian Financial Crises 9/11 Gulf War II Eurozone Crises, US Fiscal Fights, Chinese Leadership Transition Brexit VIX (right axis) 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 14

15 Three Investment Options Balanced Plus Pool Balanced Pool Short-Term Pool 90% Equity Type Risk 10% Sovereign Debt 75% Equity Type Risk 25% Sovereign Debt 100% Short Term 10% 10% 43% 25% 40% 25% 10% 12% 25% 100% Global Public Equity Private Equity Flexible Captital Real Assets Global Public Equity Flexible Captital Public Real Assets Money Market/Treasury Bills Soverign Debt Soverign Debt 15

16 Asset Allocation Drives Returns Allocation History Plus Pool Asset Class : Global Public Equity 70% 33% 47% Private Equity 1% 11% 11% Flexible Capital 0% 16% 23% Real Assets 0% 23% 9% Sovereign Debt 29% 17% 10% 100% 100% 100% 16

17 Socially Responsible Options Four Socially Responsible Investment Funds Vanguard FTSE Social Index Fund (U.S. stocks) Parnassus Core Equity Fund (large cap U.S. stocks) Walden Small Cap Innovations Fund (small cap U.S. stocks) Boston Common International Fund (international stocks) 17

18 Future Real Return Projections Asset Class Real Return Projections Asset Class Geometric Real Return Standard Deviation Global Public Equity 4.5% 20% Private Equity 6.8% 26% Flexible Capital 4.1% 9% Real Estate - Public 4.0% 22% Sovereign Debt 0.8% 10% Projected Total Portfolio Real Return 5.0% 13.1% 18

19 Investment Return Overview William F. McCarron President, Prime Buchholz & Associates 19

20 Prime Buchholz Overview 29 year old Institutional Consulting firm. Based in Portsmouth, NH and Boston. Owned by its 23 Principals. Deep team with over 100 professionals and support staff. Strong commitment to the endowment and foundation community. Close working relationship with the Boston Foundation. The Foundation is one of our largest and most important clients, with over a twenty year relationship. 20

21 Long Term Performance is Good As of 12/31/ Year 5 year 10 Year 15 Year Standard Deviation Balanced Plus Pool 14.6% 8.0% 4.8% 8.0% 7.7% Balanced Pool 11.9% 6.5% n/a n/a n/a Short Term Pool 0.8% 0.3% n/a n/a n/a 65% MSCI AC Stock Index/35% World Bonds 18.0% 7.1% 4.3% 7.5% 10.4% MSCI All Country Stock Index 24.0% 10.8% 4.7% 9.0% 14.8% S&P 500 Stock Index 21.8% 15.8% 8.5% 9.9% 13.2% 21

22 Domestic Equity What s Worked Well Large allocation (13%) to Adage, which has performed well over the long term. The domestic portfolio has beaten the Russell 3000 by 1.7% annually the past ten years. Global Equity Generation, a socially responsible manager added in July 2014, has produced strong returns, outpacing the global equity benchmark by 7% annualized since inception. Flexible Capital (hedge funds) Large allocation to Baupost, 6%, which has performed well. Varde, our second largest position, 2.5%, is the best performing manager over the past 1 and 3 years. Private Equity Private Equity returned 10.9% annually over the last ten years, during a period when the global stock market was up 4.7%. We invest with a great group of managers that include Advent, American Securities, Bain, Berkshire, Charlesbank, Legacy Ventures, Summit, TA Associates, and Vista. 22

23 What Hasn t Worked Inflation Hedges. Leveraged Real Estate, Timber, and Energy investment performance has been poor. Asset allocation to these area has been reduced to 10%. International and Emerging Stocks. In spite of massive government deficits, the U.S. stock market has been the place to be the last ten years, up 9.6% annually. International markets were only up 3% annually the past ten years. However, International markets rallied in 2017, with Emerging Markets up over 37% last year. 23

24 Relative Asset Class Performance Average annual returns as of 12/31/17 Five Years Ten Years Fifteen Years Balanced Plus Pool 8.0% 4.8% 8.0% Balanced Plus Pool Asset Class Performance: Global Equity 11.4% 5.4% 9.3% Private Equity 14.9% 10.9% 11.7% Flexible Capital (research driven hedge funds) 6.2% 5.0% 5.3% Real Assets -1.1% -1.6% 1.6% Sovereign Debt 0.2% 2.8% 5.1% Benchmarks: 65% MSCI AC Stock Index/35% World Bonds 7.1% 4.3% 7.5% MSCI AC Stock Index 10.8% 4.7% 9.0% S&P 500 Stock Index 15.8% 8.5% 9.9% 24

25 First Quarter Performance 2018 Quarter Ending 3/31/18 Balanced Plus Pool (0.4%) Balanced Pool (0.5%) Short-Term Pool 0.3% Benchmarks: 65% MSCI AC Stock Index/35% Citi. Bonds 0.3% MSCI All Country Stock Index (1.0%) Citigroup World Bond Index 2.5% 25

26 Questions? Please send any questions to or call George Wilson at Thanks! 26

27 MAY 2018 CURRENT STATE AND NEAR-TERM OUTLOOK FOR U.S. PROPERTY FOCUSED ON THE FUTURE OF REAL ESTATE

28 MAY 2018 CURRENT STATE & NEAR-TERM OUTLOOK FOR U.S. PROPERTY This material is intended for information purposes only. It does not constitute investment advice or a recommendation. The information and opinions presented in this material have been prepared internally and/or obtained from sources which AEW believes to be reliable, however AEW does not guarantee the accuracy, adequacy, or completeness of such information. Opinions expressed reflect prevailing market conditions at the time this material was completed and are subject to change. Neither this material, nor any of its contents, may be used for any purpose without the consent and knowledge of AEW. Focused on the Future of Real Estate 28

29 CURRENT STATE OF U.S. PROPERTY MARKETS U.S. economic growth U.S. property Property earnings (NOI) Go-forward returns will during now markets largely in growth unlikely to be lower than recent expected to be roughly supply/demand accelerate from here past and largely shaped 0.5%-0.7% stronger equilibrium by degree and speed of due to tax cuts and any changes in broader federal spending interest rate and credit increases spread environment Focused on the Future of Real Estate 29

30 100 MILLION MORE AMERICANS? U.S. TOTAL POPULATION AND 10-YEAR POPULATION GROWTH RATE % 20% 15% 10% U.S. will need: 40 million new residences > one billion square feet of new retail space > one billion square feet of new office space % 0% U.S. Population (left axis) 10-Year Percentage Increase (right axis) Source: U.S. Census Focused on the Future of Real Estate 30

31 THE U.S. IS THE DEVELOPED WORLD S GROWTH MARKET U.S. TOTAL POPULATION AND 10-YEAR POPULATION GROWTH RATE U.S. will add more people than any other developed economy Source:OECD Focused on the Future of Real Estate 31

32 U.S. EMPLOYMENT GROWTH SLOWING AVERAGE MONTHLY CHANGE IN EMPLOYMENT OVER THE PRIOR YEAR (000S) U.S. was adding 250,000 jobs per month at the beginning of Over past 12 month, U.S. added an average of 190,000 jobs per month The slowdown is mostly due to lack of people to hire U.S. now has nearly six million open positions Source: Bureau of Labor Statistics Focused on the Future of Real Estate 32

33 IMPROVEMENT IN PROPERTY MARKETS SLOWING AVERAGE VACANCY RATE* 17.0% 16.0% 15.0% 14.0% Steady demand is being matched by supply in all property types 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 2012 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 Source: CBRE-EA, 2017 Q4 * Industrial and retail reflect availability rates Apartment Industrial Office Retail Focused on the Future of Real Estate 33

34 DEMAND REMAINING CONSISTENTLY HEALTHY ANNUAL NET ABSORPTION GROWTH (% CHG. IN OCCUPIED STOCK) 4.0% 3.0% 2.0% Slowing demand growth typical of late cycle More pronounced slow down in retail absorption 1.0% 0.0% -1.0% -2.0% -3.0% 05Q4 06Q4 07Q4 08Q4 09Q4 10Q4 11Q4 12Q4 13Q4 14Q4 15Q4 16Q4 17Q4 Apartment Industrial Office Retail Source: CBRE-EA, 2017 Q4 Focused on the Future of Real Estate 34

35 SUPPLY RISK REMAINS LOWER THAN PRIOR CYCLES YEAR-OVER-YEAR GROWTH IN PROPERTY STOCK 4.0% 3.5% 3.0% 2.5% Deliveries of new space are peaking during 2018 Current pipeline shows significant drop off in 2019 and beyond 2.0% 1.5% 1.0% 0.5% 0.0% 90Q4 91Q4 92Q4 93Q4 94Q4 95Q4 96Q4 97Q4 98Q4 99Q4 00Q4 01Q4 02Q4 03Q4 04Q4 05Q4 06Q4 07Q4 08Q4 09Q4 10Q4 11Q4 12Q4 13Q4 14Q4 15Q4 16Q4 17Q4 Apartment Industrial Office Retail Source: CBRE-EA, 2017 Q4 Focused on the Future of Real Estate 35

36 U.S. NOT BUILDING ENOUGH HOUSING HOUSING STARTS AND NEW HOUSEHOLDS (000S, THREE YEAR MOVING AVERAGE) 2,000 1,800 1,600 1,400 U.S. built more houses than added households for many years prior to the financial crisis 1,200 1, Source: Commerce Department Multifamily Housing Starts New Households Single Family Houing Starts New households have outpaced new housing units for past seven years Housing affordability is becoming acute in numerous markets Focused on the Future of Real Estate 36

37 STRONGEST NOI GROWTH OF THE CYCLE IS NOW NOI GROWTH OVER PRIOR FOUR QUARTERS (%) Positive but slower NOI growth expected over the next two to three years Q Q Q Q Q Q Q4 Source: NCREIF 2017 Q3 Focused on the Future of Real Estate 37

38 ALL PROPERTY TYPES DELIVERING POSITIVE NOI AVERAGE NOI GROWTH OVER PRIOR FOUR QUARTERS (%) 15 Industrial and office showing late cycle strength 10 5 Apartment and retail slowing quickly 0-5 It is difficult to see NOI growth accelerating materially from current levels -10 Apartment Industrial Office Retail Source: NCREIF, 2017 Q4 Focused on the Future of Real Estate 38

39 CREDIT SPREADS WIDENING AND BASE RATES RISING? TREASURY YIELD AND CREDIT SPREAD Credit spreads no longer compressing How long before this shows up in loan quotes and cap rates? Baa Corporate Spread (bp, Left Axis) 10 year Treasury Yield (%, Right Axis) Source: Bloomberg Focused on the Future of Real Estate 39

40 DIRECT PROPERTY PREMIUM/DISCOUNT TO REIT NAV INVERTED REIT PREMUM/DISCOUNT TO NAV 70.00% 60.00% 50.00% 40.00% 30.00% RESEARCH Adrienne D. Ortyl 19 years of experience 14 years at AEW Property is generally more expensive on Main Street than Wall Street Time to buy REITs or warning sign to sell property? 20.00% 10.00% 0.00% % % % Source: Green Street Focused on the Future of Real Estate 40

41 PUBLIC MARKET VS PRIVATE MARKET PRICING NCREIF APPRAISAL CAP RATE AND REIT IMPLIED CAP RATE 10.00% 9.00% 8.00% 7.00% Apartment 12.00% 10.00% 8.00% Industrial RESEARCH Adrienne D. Ortyl 19 years of experience 14 years at AEW Property is generally more expensive on Main Street than Wall Street Time to buy REITs or warning sign to sell property? 6.00% 5.00% 6.00% 4.00% 3.00% 4.00% 2.00% 2.00% 1.00% 0.00% % Source: Green Street, NCREIF NPI REIT NPI REIT Focused on the Future of Real Estate 41

42 PUBLIC MARKET VS PRIVATE MARKET PRICING NCREIF APPRAISAL CAP RATE AND REIT IMPLIED CAP RATE 10.00% 9.00% 8.00% 7.00% Office 12.00% 10.00% 8.00% Shopping Center RESEARCH Adrienne D. Ortyl 19 years of experience 14 years at AEW Property is generally more expensive on Main Street than Wall Street Time to buy REITs or warning sign to sell property? 6.00% 5.00% 6.00% 4.00% 3.00% 4.00% 2.00% 2.00% 1.00% 0.00% % NPI REIT NPI Strip Centers (REIT) Source: Green Street, NCREIF Focused on the Future of Real Estate 42

43 SLOWING APPRECIATION SUGGESTS LOWER GO-FORWARD RETURNS NCREIF PROPERTY INDEX INCOME AND APPRECIATION RETURN 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 PREA consensus survey calls for 5.2% total return over next five years Most of expected return will be income, not appreciation Income Return Appreciation 2018 Q1 Survey to 2022 NPI Total Return 6.0% 5.3% 4.8% 5.2% Income Return 4.7% 4.8% 4.9% 4.8% Capital Appreciation 1.3% 0.5% -0.1% 0.3% Source: NCREIF, PREA Focused on the Future of Real Estate 43

44 RETURNING TO NORMAL INCOME RETURN, APPRECIATION AND INCOME SHARE OF TOTAL RETURN 7.00% 6.00% 5.00% 110.0% 100.0% 90.0% Historically, 75% of property returns comes from income, not appreciation 4.00% 80.0% 3.00% 70.0% 2.00% 60.0% 1.00% 50.0% 0.00% 40.0% -1.00% 1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 25 Year 30.0% Income Return (Left Axis) Income Share of Total Return (Right Axis) Capital Appreciation (Left Axis) Source: Bloomberg Focused on the Future of Real Estate 44

45 SOME THOUGHTS ON BOSTON America s Millennial Drive Cities Source: Politco, Pew Research Focused on the Future of Real Estate 45

46 SOME THOUGHTS ON BOSTON Boston Gaining at Other s Expense? SourceLinkedIn, Focused on the Future of Real Estate 46

47 AEW CORE PROPERTY TRUST PORTFOLIO OVERVIEW Gross Property Value $8.3 B Net Asset Value $6.2 B Leverage Ratio 24% Number of Investments 69 Non-Core Allocation 9% of NAV Trailing 12-Month Dividend 4.2% Entrance Queue $56 M Redemption Queue $0 M Multifamily Industrial Retail Office DIVERSIFICATION BY PROPERTY TYPE DIVERSIFICATION BY REGION Los Angeles 15% Office CORE PROPERTY TRUST 32% 36% East CORE PROPERTY TRUST ODCE 29% 31% New York 12% Industrial Retail Multifamily Other 2% 4% 16% 16% 23% 20% 27% 24% As of December 31, Gross property value, net asset value and leverage ratio shown at Fund s ownership share. Diversification is based on Fund s ownership share of net value. Midwest South West 4% 9% 19% 27% 40% 41% Boston Atlanta 7% 7% Seattle 7% These markets comprise nearly 50% of CPT s assets Focused on the Future of Real Estate 47

48 AEW CORE PROPERTY TRUST PORTFOLIO OVERVIEW 15% 10% 5% CPT OCCUPANCY 96% ODCE OCCUPANCY 92% 8% CPT occupancy has exceeded ODCE by more than 300 bps since early 2015 ROLLOVER EXPOSURE (% of Total Square Footage) 13% 14% 10% 11% $460.0 $440.0 $420.0 $400.0 $380.0 $360.0 $340.0 $320.0 $300.0 $340.4 $344.7 Q Actual $34 PROJECTED SAME-STORE NOI Q Projected 35% Growth $375.7 $342.9 $353.9 Q Projected $410.4 $ % Growth Q Projected $433.9 $378.2 Q Projected $461.6 Q Projected $ % Office Retail Industrial Average remaining lease term of 5.9 years FAVORABLE LEVERAGE PROFILE Leverage Ratio 24% Average Interest Rate 3.7% Current Portfolio on Same-Store Basis Current Portfolio plus Build-to-Core Investments Well-occupied, stable portfolio generating solid NOI growth Strategic use of non-core allocation leading to meaningful capital appreciation Six total build-to-core investments representing 7% of the Fund s NAV (capped at 15% of Fund s NAV) Weighted Average Maturity 4.7 Years Fixed- / Floating-Rate Debt % 76% / 24% As of December 31, Statistics are based on the Fund s ownership share. There can be no assurances the Fund will achieve its objective. Focused on the Future of Real Estate 48

49 AEW CORE PROPERTY TRUST Q4 HIGHLIGHTS CPT delivered a gross return of 2.2% for Q4 comprised of 1.3% income and 0.9% of appreciation. CPT s income yield has outpaced that of the ODCE Index for 31 straight quarters. CPT s portfolio continues to have one of the highest occupancy rates in the ODCE Index at 96% which continues to drive a strong income return. The Fund completed one new acquisition in the fourth quarter investing $93 million of new equity and two dispositions which returned $45 million of equity. Q4 Gross Returns CPT ODCE INCOME 1.3% 1.1% APPRECIATION 0.9% 1.0% TOTAL 2.2% 2.1% One Year Gross Returns CPT ODCE INCOME 5.1% 4.3% APPRECIATON 2.7% 3.2% TOTAL 8.0% 7.6% RECENT TRANSACTIONS ACQUISITION SW COMMERCE CENTER Reno, NV ACQUISITION 330 HUDSON New York, NY ACQUISITION TOWERS CABALLERO INDUSTRIAL Southern, CA As of December 31, There can be no assurances that the Fund will achieve its objective. The above transactions are presented to show current AEW Core Property Trust investments. While these transactions represent the type we may pursue in the future, no representation is made that similar opportunities will be available. Past performance is not indicative of future results. Returns are compared to the NCREIF Fund Index Open-end Diversified Core Equity (NFI-ODCE), which is a leveraged, net of fee, time weighted index. Focused on the Future of Real Estate 49

50 AEW CORE PROPERTY TRUST FUND PERFORMANCE TOTAL ANNUALIZED RETURN NET OF FEE CPT VS. ODCE (ANNUALIZED NET-OF-FEE INCOME RETURNS) 4.2% 4.4% 3.4% 3.6% Q Year 3-Year 5-Year 4.6% 3.8% 5.0% 4.3% Year (Since Inception) CPT 2.0% 7.1% 9.1% 9.9% 5.0% ODCE 1.9% 6.7% 9.4% 10.5% 4.2% Over/(Under) 0.1% 0.4% (0.3%) (0.6%) 0.9% CPT s income returns have outperformed the ODCE index for 31 consecutive quarters Core returns continue to moderate Income as a percentage of total return is increasing and returning to historical levels (70-75%) CPT s current dividend yield of 4.2% remains one of the highest in the ODCE index 1-Year 3-Year 5-Year Year CPT ODCE (SI) As of December 31, The inception date of the Fund is October 1, AEW returns are leveraged, net of fee, investment level returns for the AEW Core Property Trust. Returns are compared to the NCREIF Fund Index - Open-End Diversified Core Equity (NFI-ODCE), which is a leveraged, net of fee, time weighted index. Past performance is not indicative of future results. Focused on the Future of Real Estate 50

51 THANK YOU Please feel free to contact Mike regarding MANAGING DIRECTOR Michael Acton, CFA any of the information contained here in or AEW RESEARCH Focused on the Future of Real Estate 51

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