Investors Diversified Realty, LLC ( IDR ) February 2015

Transcription

1 Investors Diversified Realty, LLC ( IDR ) February 2015

2 Investors Diversified Realty, LLC ( IDR ) SEC Registered Investment Adviser exclusively focused on providing institutional investors a Multi-manager Real Estate Platform ( Platform ) Experienced investment professionals with over 110 years and $59 billion of diversified real estate investment experience Investors: Pensions, Foundations, Endowments, Trust Companies and HNW Platforms (e.g. US Bank, BMO) Advise CalSTRS and CalPERS on non-discretionary basis (Independent Fiduciary) IDR Fund I, LP has returned an 11.94% net IRR to Investors since inception Source: IDR. Fund inception date of October 1,

3 Topics Market Fundamentals PERE & REIT Comparisons Rising Interest Rates 3

4 Market Fundamentals Market Cycles Diversification & Attribution Supporting Fundamentals 4

5 Real Estate Market Cycle Analysis Analysis of Real Estate Indices Guides Strategy Development GDP & Employment Vacancy & Rental Rates Transaction Data Property Type Fundamentals Appreciation Cycle Commercial Mortgage Flows Replacement Cost Supply Cycle 2015 NOI Growth Rental Growth Equilibrium Occupancy Declines Cap Rate Expansion Population Growth Trends Capital Markets Increased Occupancy Cap Rate Compression ABSORPTION EXPANSION EQUILIBRIUM CONTRACTION ABSORPTION 5

6 Manager Return Dispersion Manager return performance can be volatile Despite being Core manager return dispersion is significant Non-core manager return dispersion is even higher volatility with annual return performance varying by as much as 46.3% Over the past 10 years, non-core vintage year dispersion averages 11.3% Core Manager Annual Dispersion ( ) Year NFI-ODCE Max Min Dispersion % 16.17% 9.12% 7.05% % 13.51% 5.63% 7.88% % 16.30% 9.83% 6.47% % 18.06% 10.18% 7.88% % % % 29.00% % -4.80% % 12.88% % 18.93% 8.36% 10.57% % 18.43% 10.02% 8.41% % 23.90% 15.89% 8.01% % 17.60% 4.02% 13.58% % 11.03% 4.01% 7.02% % 8.29% 0.92% 7.37% % 9.93% 0.86% 9.07% 25% Manager Quartile Dispersion by Strategy Source: NFI-ODCE Index, Fund Managers, IDR , Net of Fees. Townsend Index, Fund Managers, IDR. Net of Fees. 0% -25% 8.6% 3.3% Core Median return 5.9% 12.5% -18.4% 3.8% 24.3% -22.0% 4.6% Value Add Opportunity 6

7 Property Type Annual Returns Annual return performance varies by property type sector Emphasizes importance of diversification Office and retail sectors tend to perform opposite of each other Hotels are most volatile and worst performing sector Property Type Return Attribution (YTD) OFF HOT OFF MF RET RET RET MF HOT OFF RET RET MF MF RET RET RET 19.6% 12.7% 14.1% 9.4% 13.7% 17.2% 23.0% 21.2% 23.6% 20.5% (4.1%) (11.0%) 18.2% 15.5% 11.6% 12.9% 10.2% 16.3% 15.9% HOT 15.8% MF 14.1% RET 12.9% OFF 12.2% 11.7% MF 11.7% 11.4% RET 9.6% 14.0% MF 13.0% 12.3% RET 7.8% HOT 7.6% 9.3% 7.3% RET 6.7% OFF 6.2% HOT (3.6%) MF 8.8% HOT 7.6% 6.8% 6.7% OFF 2.8% 9.0% MF 8.9% 8.2% HOT 6.1% OFF 5.7% 14.5% MF 13.0% 12.1% OFF 12.0% HOT 10.2% 20.3% 20.1% RET 20.0% OFF 19.5% HOT 19.0% OFF 19.2% 17.0% 16.6% MF 14.6% RET 13.4% HOT 18.1% 15.9% 15.0% RET 13.5% MF 11.4% (5.8%) (6.5%) MF (7.3%) OFF (7.3%) HOT (9.4%) (16.9%) MF (17.5%) (17.9%) OFF (19.1%) HOT (20.4%) 13.1% RET 12.6% OFF 11.7% 9.4% HOT 9.0% 14.6% 14.3% RET 13.8% OFF 13.8% HOT 11.8% MF 11.2% 10.7% 10.5% OFF 9.5% HOT 8.2% 12.3% 11.0% MF 10.4% OFF 9.9% HOT 7.7% 9.2% 8.5% OFF 8.2% MF 7.3% HOT 6.5% Source: IDR, NPI Q

8 Limited New Supply New supply at historical low; forecasted <1.5% supply growth through 2015 Limited pre-recession supply allowing real estate fundamentals to recover 14% Real Estate Supply Growth & Vacancy Analysis 12% 10% 8% Long-Term Avg. 9.0% 11.9% 10.0% 10.1% 6% 4% 4.8% New Supply Remains Low Long-Term 2% Avg. 2.4% 2.2% 1.5% 0% Supply Pre-Recession Supply Growth Periods Vacancy Post-Recession Vacancy Periods Source: IDR,, CBRE-EA. Data Illustrates Averages for Traditional Property Types (Office, Industrial, Retail and Multifamily). Data from 1981 to 3Q

9 Selected Analysis: Replacement Cost Real estate is priced approximately 14% below the cost of construction (29% peak discount in 2009) New construction is more expensive than acquiring existing assets 14% Source: IDR,, Turner. As of 3Q

10 Annual Growth Real Estate Appreciation is Correlated to Construction Real estate appreciation is strongly correlated to the cost of new construction (0.76) Construction Cost & Real Estate Appreciation (Annual Growth %) 15% 10% Construction Cost & Real Estate Appreciation Exhibit Strong Positive Correlation = % 0% % -10% -15% -20% Construction Costs (%) Appreciation (%) Source: IDR,, Turner. As of 3Q

11 Real Estate Offers Attractive Returns Over Treasuries Property cap rate spreads to 10-Year Treasury at 1 SD above LT avg. Historically, 5-year forward returns have been attractive Positive leverage accretive to property returns 6% 5% 4% 3% Cap Rate Spread to 10-Year Treasury 5 Year Forward Total Return if Invested at Peak Spread 14.9% 10.0% 6.4% 12.8% 4.33% Current Spread 2% 1% 0% % Spread Long-Term Avg Spread Source: IDR, Transaction Cap Rates, Federal Reserve Bank. Data as of January

12 NOI Vacancy Rates Decreasing and Rents Increasing Improving macroeconomic conditions strengthen real estate fundamentals Historically, as vacancy rates decrease NOI growth trends positive 14% 12% 10% 8% 6% 4% 2% NOI & Vacancy Rates 8.2% 5.9% Trend V A C A N C Y 0% -2% 3Q Q Q Q Q Q Q Q Q Q Q Q % -6% Vacancy NOI Growth 1-Yr Trailing Source: IDR,. As of 3Q

13 Growth in Rents & NOI Driving Returns Rent growth and resulting NOI growth will drive future returns Office forecasted to be top performer (4.8% CAGR) Multifamily rents still strong but likely to moderate; Retail growth will be strongest in best locations (core) Rent Growth Forecast by Property Type Sector Forecast CAGR % 4.8% 4.6% 4.9% 4.0% 3.1% 2.3% 1.5% 3.2% MF 4.3% 4.5% 4.6% 3.6% 1.7% 2.0% 3.7% 4.7% 3.1% OFF 2.4% 2.7% 5.7% 8.0% 6.9% 4.8% 2.6% 2.0% 4.8% RET -0.3% -0.2% 2.5% 4.5% 4.3% 3.7% 2.9% 2.4% 3.6% Source: Deutsche Asset & Wealth Management. Data as of 3Q CBRE-EA. Office Rents are Forecasted for CBD Assets Only. CAGR is the expected compounded annual growth grate. 13

14 Private Equity Real Estate ( PERE ) & REITs Comparison of PERE & REITs Benchmarks Investment Style Differences Property Type Weightings Results of Differences 14

15 What is Private Equity Real Estate ( PERE )? What investment characteristics does the PERE asset class provide? Provides either Alpha or Beta Portfolio diversification Non-correlation to stocks & bonds Less volatility than public markets Inflation protection in hard assets with adjusting cash flows Institutionally used for specific attributes (current income and long term appreciation) How do I invest in PERE? Large institutions invest directly through limited partnerships or separate accounts Smaller investors (<$50 million) utilize multi-manager funds Diversification is very important by manager, property type, geography, strategy and vintage year 15

16 (Low) Expected Return (High) PERE Investment Strategies by Risk/Return Opportunistic Value-Add Core Return: 7-9% Leverage: 0-35% Core-Plus Leasing Risk, Repositioning Return: 10-12% Leverage: 35-55% Repositioning, Redevelopment, Leasing Risk Return: 12-16% Leverage: 40-70% Development, Financial Engineering, Distressed Assets/Sellers, Liquidity Strategies, High-Yield Debt, Loan to Own Return: 16%+ Leverage: 60-80% (Low) Risk (High) Return Assumptions are Nominal 16

17 Investor Benchmarks NFI-ODCE Index ( Core Private Equity Real Estate) Institutional Class A stabilized core real estate (96% of index) Diversified property type funds (~95% traditional property types) Primarily held by Pension Funds & Institutional Investors 22 open-end private funds (liquidity) with 20-30% leverage Focus on income NAREIT Equity REIT Index Mix of property strategies (core, value add, development, etc.) and asset quality/markets Mix of property types (traditional, specialty & diversified) often specific property type focused operating companies (e.g, Retail only REIT) 140 publicly traded companies (daily pricing & liquidity); ~$750B market cap Leverage 35-55%; Value Add/Development investment style 20-40% Source: IDR,, NAREIT. 17

18 Index Comparison: NFI-ODCE vs. Equity REIT NFI-ODCE and Equity REIT Indices were both relatively small from Equity REIT Index grew exponentially post-1991 and has remained approximately 5 times larger than NFI-ODCE since the mid-1990 s Sources: NFI-ODCE Index, NAREIT Equity REIT Index. Data year end Weighted average net asset used for data. Dollar figures in billions. 18

19 Investment Style Differences NFI-ODCE is comprised of 96% stabilized Core properties Individual REITs vary by Value Add property composition, but typically range from 20-40% of their portfolios NFI-ODCE Index Property Life Cycle % of Index Stabilized "Core" 95.6% Development 2.0% Leasing 1.1% Pre-Development 0.7% Re-Development/Conversion 0.5% Total 100% Source: IDR, NFI-ODCE. As of March 31, Research Committee. NOTE: NAREIT does not publish Property Life Cycle data for the Equity REIT index. Industry professional estimates 19

20 Property Type Weighting Differences The NFI-ODCE and Equity NAREIT indices are not similar in property type weightings; Key factor of long-term real estate performance over time Equity REITs have highest exposures to Retail, Health Care & Self-Storage (48%); NFI-ODCE highest exposures to Office & Multifamily (56%) NFI-ODCE & Equity REIT Property Type Weightings Sources: NFI-ODCE, NAREIT Equity REITs. Data as of year end

21 Property Type Return Dispersion Equity REIT exposure to Retail, Health Care & Self-Storage (48% of index) are also top 3 performing REIT property type sectors over 20-year period; REIT outperformance is significantly influenced by property type weightings to retail (regional malls) and specialty sectors (self-storage) Return dispersion is very high between Self-Storage (top performer) and Hotel (bottom performer) over 20-year period (10.8%) REIT Property Type Return Performance Sources: NAREIT Property type weightings fluctuate over time. 21

22 Property Type Comparison Comparing traditional property type performances provides insight to return composition given effect of: (1) property type weightings; (2) use of leverage; (3) investment style; and (4) timing 20-Year Total Returns by Traditional Property Types (Regular Index Weightings) Index Weighting Sources: NFI-ODCE, NAREIT Four traditional property types (RET, OFF, & MF). Annualized returns. Specialty property types excluded (Health Care, Timber, Self-Storage, etc.). 22

23 NFI-ODCE Investment Style Across all property types at acquisition, Core funds in NFI-ODCE index underwrite 6-8% unleveraged returns (7-9% levered) over 10-year periods Return dispersion is extremely narrow between Multifamily (top performer) and office (bottom performer) over 20-year period (0.6%); Illustrates uniform core style of investment NFI-ODCE Property Type Return Performance Sources: NFI-ODCE Property type weightings fluctuate over time. There is no 20-year figure for hotel as data was not aggregated. 23

24 Property Type Comparison REITs outperform NFI-ODCE by 150bps over 20-year period Accounting for leverage (~120bps of REIT performance); REITs slightly outperform 30% NFI-ODCE & REIT Index Returns 28.0% 25% 20% 15% 10% 13.8% 12.5% 16.5% 7.3% 7.2% 8.4% 10.2% 8.7% 5% 0% 2.5% Year 10-Year 20-Year NFI-ODCE Equity REITs Sources: NFI-ODCE, NAREIT Historical study updated annually NFI-ODCE Preliminary 1-year return added after the conclusion of the study for illustration purposes. Four traditional property types (RET, OFF, & MF). Annualized returns. Specialty property types excluded (Health Care, Timber, Self-Storage, etc.) 24

25 Summary Conclusion Comparing apples to oranges Key factors of performance: (1) property type weightings; (2) leverage; (3) investment style; and (4) timing Short term results vary while long-term results are comparable PERE Institutional Investors Private Equity Structures; Limited Partnerships REITs Mostly Retail & Some Institutional Publicly Traded; Operating Companies Leverage: 20-30% Leverage 30-55% Generally 4 Traditional Property Types Concentrated in top 35 MSA s Current Income or Appreciation Highly Focused by Property Type Smaller Assets; Larger % Secondary Markets Enterprise Value Focus 25

26 Real Estate During Periods of Rising Interest Rates Cap Rate & Interest Rate Relationship Cap Rate Yield Changes Real Estate Performs Well Compared to Stocks and Bonds 26

27 Real Estate Cap Rate Basis Points Selected Analysis: Cap Rate & Interest Rate Relationship U.S. Treasury yields typically rise during periods of economic growth & expanding employment (moderate to strong GDP growth in all six rising rate periods) Both are catalysts for improving real estate market fundamentals GDP Growth 10% 9% Real Estate Cap Rates and Treasury Spreads 2.9% 7.7% 4.0% 4.4% 3.3% 3.0% % 200 7% 6% 5% 4% 3% 2% Rising Interest Rate Period Cap Rate Spread to 10-Yr Treas (bps, RHS) Cap Rate (%, LHS) Historical Study. Sources: IDR, Federal Reserve Bank,. GDP Data from NBER and is seasonally adjusted annual rates in 2005 dollars. 27

28 Yield Change (%) Selected Analysis: Cap Rate Yield Changes During Rising Rate Periods Real estate cap rates are not correlated to movements in interest rates or spread relationships Historically, strengthening macroeconomic environments offset adverse effects of higher rates through adjustments to occupancy and rents 8% Yield Change Comparison During Periods of Rising Interest Rates (%) 6% 4% 10-Year Treasury Bonds Cap Rates 2% 0% -2% Period 1 ( 1978 to 3Q 1981) Period 2 (4Q 1982 to 2Q 1984) Period 3 (4Q 1986 to 1989) Period 4 (3Q 1993 to 4Q 1994) Period 5 (4Q 1998 to 2000) Period 6 ( 2004 to 2Q 2006) Source: Historical Study, IDR,, Federal Reserve, Barclays. 28

29 Total Return (%) Selected Analysis: Performance During Rising Rate Periods Real estate delivered the highest or second-highest total returns in each rising interest rate period and the highest average total returns (12.2%) over the six periods Bonds fared the worst with average returns of 1.7% per year 35% 30% 25% Asset Class Total Returns During Periods of Rising Interest Rates (%) Real Estate S&P 500 Bonds 20% 15% 10% 5% 0% -5% Period 1 ( 1978 to 3Q 1981) Period 2 (4Q 1982 to 2Q 1984) Period 3 (4Q 1986 to 1989) Period 4 (3Q 1993 to 4Q 1994) Period 5 (4Q 1998 to 2000) Period 6 ( 2004 to 2Q 2006) Source: Historical Study, IDR,, Federal Reserve, Barclays. 29

30 Disclaimer This presentation (the Presentation ) is being furnished on a confidential basis to a limited number of accredited investors on a one-on-one basis for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security. Any such offer or solicitation shall be made only pursuant to a confidential private placement memorandum (as amended or supplemented from time to time, the Memorandum ) of Income & Growth Strategy (the Fund ), which describes risks related to an investment in the Fund as well as other important information about the Fund and its sponsor. Offers and sales of interests in the Fund will not be registered under the laws of any jurisdiction and will be made solely to qualified investors under all applicable laws. The information set forth herein does not purport to be complete and is subject to change. This Presentation is qualified in its entirety by all of the information set forth in the Memorandum and Addendum, including without limitation all cautionary statements set forth in the front of the Memorandum and the Investment Considerations and Risk Factors section of the Memorandum. The Memorandum and the operative documents of the Fund must be read carefully in their entirety prior to investing in the Fund. This Presentation does not constitute a part of the Memorandum. The information contained herein must be treated in a confidential manner and may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of Investors Diversified Realty, LLC and/or West Point Partners, LLC ( WPP ). Past or projected performance is not necessarily indicative of future results. There can be no assurance that the Fund will achieve comparable results, that targeted returns, diversification or asset allocations will be met or that the Fund will be able to implement its investment strategy and investment approach or achieve its investment objective. Actual returns on unrealized investments will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, legal and contractual restrictions on transfer that may limit liquidity, any related transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which the valuations used in the prior performance data contained herein are based. Accordingly, actual returns may differ materially from the returns indicated herein. Statements contained in this Presentation that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of the Fund s sponsors. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Presentation contains forward-looking statements. Actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. Certain economic and market information contained herein has been obtained from published sources prepared by third parties and in certain cases has not been updated through the date hereof. None of Investors Diversified Realty, LLC, West Point Partners, LLC the Fund, its general partner nor their respective affiliates nor any of their respective employees or agents (collectively, IDR and WPP ) assumes any responsibility for the accuracy or completeness of such information. IDR and WPP has not made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties), and they expressly disclaim any responsibility or liability therefore. IDR does not have any responsibility to update or correct any of the information provided in this Presentation. Prior to investing in the Fund, prospective investors should consult with their own investment, accounting, regulatory, tax and other advisors as to the consequences of an investment in the Fund. Trade Secret & Confidential Not for Reproduction or Redistribution 30