afl-cio Building Investment Trust Quarterly Report
On the cover: Dock Street Apartments, currently under construction in Minneapolis, MN. Right: Wolf Point, to be built in Chicago, IL.
Contents Fund Overview... page 4 Portfolio Highlights... page 5 Portfolio Commentary.... page 6 Transaction Activity... page 7 U.S. Real Estate Market Outlook... page 7 Portfolio Summary... page 9 Labor s Pension Capital at Work 13 million construction hours currently underway 68 million construction hours created since inception $5.2 billion invested in 180 projects to date 224 ongoing service contracts with 157 local unions Battery Wharf in Boston, MA. AFL-CIO Building Investment Trust 3
The Fund Structure: Collective Trust Fund, with PNC Bank serving as Trustee, offered to qualified trusts. Minimum Initial Investment: $100,000 Inception Date: July 1, 1988 Fund Type: Core Equity Real Estate Strategy: The BIT s long-term strategy is to build and maintain a stable and diversified pool of assets through the acquisition and development of core properties in target markets throughout the United States. Fund Overview BIT is a bank collective trust servicing qualified union pension plans for which PNC Bank, National Association, serves as trustee. The mission of the BIT is to provide investors with competitive risk-adjusted returns through investments in institutional quality commercial real estate that seeks to generate competitive levels of income and long- term capital appreciation. The BIT also provides collateral benefits such as union job creation and economic development by utilizing one of the most comprehensive union labor policies in the U.S. real estate industry. BIT Key Statistics (As of 3/31/13) Net Asset Value (billions) $2.59 Gross Asset Value (billions) $3.23 1st Quarter Gross Return 2.09% 1st Quarter Net Return 1.85% 1-Year Gross Return 9.98% 1-Year Net Return 8.91% Number of Participants 165 Cash 3.6% Portfolio Leverage 19.8% Number of Properties 58 Total Square Footage (millions) 11.1 Occupancy, Commercial 91.4% Occupancy, Multifamily 95.8% San Pedro Square, to be built in San Jose, CA. 4 AFL-CIO Building Investment Trust
Portfolio Highlights 20% BIT Returns Summary* 15% 10% 5% 0% -5% 2.09 2.57 9.98 10.75 13.72 15.05-0.08-1.23 6.01 6.41 7.39 6.20 1-year 3-year 5-year 10-year Since inception BIT Gross NFI-ODCE-EW (Gross) Quarterly Performance by Property Type* National Square, to be built in Washington, DC. 4% 2.86 2% 0.87 0.23 0% -2% -4% 0.67 1.29 1.25 1.56-0.50 Total 3.53% Total 0.79% Total 2.12% Total 1.79% Total 0.11% Multifamily Office Retail Industrial Hotel 1.79-1.68 Income Appreciation Youngstown Flats in Seattle, WA. Income and Appreciation Summary* 1-year 3-year 5-year 10-year BIT NFI-ODCE (EW) BIT NFI-ODCE (EW) BIT NFI-ODCE (EW) BIT NFI-ODCE (EW) BIT NFI-ODCE (EW) Gross Income 0.97% 1.30% 4.44% 5.35% 4.86% 5.70% 5.36% 5.66% 6.00% 5.92% Appreciation 1.13% 1.26% 5.36% 5.18% 8.56% 8.95% -5.25% -6.60% 0.01% 0.46% Total, Gross 2.09% 2.57% 9.98% 10.75% 13.72% 15.05% -0.08% -1.23% 6.01% 6.41% Total, Net 1.85% 2.34% 8.91% 9.70% 12.62% 14.01% -1.04% -2.11% 4.98% 5.44% * For the periods ended 3/31/13 NCREIF Fund Index - Open End Diversified Core Equity Equal Weight AFL-CIO Building Investment Trust 5
As Portfolio Commentary of March 31, 2013, the BIT had $2.59 billion in net assets, up from $2.54 billion at December 31, 2012. The BIT generated total gross and net returns of 2.09% and 1.85%, respectively for the first quarter. The gross return was comprised of a 0.97% income return and a 1.13% appreciation return. Total one-year trailing returns were 9.98% and 8.91%, on a gross and net basis, respectively. Multifamily was the best performing product, providing over 90% of total fund appreciation for the quarter. Of the ten assets that generated the most appreciation in the quarter, four are located in the New York metropolitan area. The BIT continues to maintain an overweight position to multifamily as compared to its benchmark, the NFI-ODCE (Equal Weight) index. Overall same property net operating income was up nearly 6% for the twelve month period ended March 31, 2013 as compared to the prior twelve month period. Multifamily provided the most robust improvement due to strong operating fundamentals resulting in rent increases and reduced concessions. US Economy Snapshot (as of or for the periods ended 3/31/13) GDP Growth:* Job Growth: Unemployment Rate: CPI: +2.5% d +618K f 7.5% f -0.2% f Fed Funds Rate: 0 0.25% (no change) 10 Year Treasury: + 1.90 d Real Estate Transaction Volume:** Multifamily Occupancy:** Industrial Occupancy:** Office Occupancy:** Retail Occupancy:** * US Department of Commerce US Bureau of Labor Statistics Federal Reserve + US Treasury ** CBRE Econometric Advisors (CBRE-EA) $72.8B d 94.9% f 87.7% d 84.7% d 87.5% d Portfolio occupancy continued to improve across all sectors. Occupancy for commercial property stood at 91.4% at March 31st, an increase from 88.3% from the prior quarter and up from 81.2% a year ago. BIT occupancy stood at 89.6%, 90.4%, and 98.1% for industrial, office, and retail, respectively as of March 31st. Occupancy levels for each commercial property sector are now higher than national averages as published by CBRE-EA. New leasing activity for commercial assets during the first quarter totaled approximately 278,000 square feet. Significant leases included: a 40,845 square foot, 10- year retail lease with a national credit tenant at Preston Shepard in Dallas, a 128,470 square foot, industrial lease at Fountain Lakes in St. Louis, and two 5-year office lease renewals totaling 74,164 square feet at Marin Executive Center in San Rafael, California. Occupancy for multifamily assets increased to 95.8% for the quarter, up 1.3% from the previous quarter, and 1.2% over the prior year. During the quarter, the portfolio leverage ratio increased from 19.6% to 19.8%, a conservative level that is nearly 300 basis points below the NFI- ODCE average. The relatively low leverage ratio provides BIT the flexibility to take advantage of historically low interest rates when prudent to do so. The BIT has three loans maturing in 2013 with an average interest rate of 5.8% and will refinance the loans at lower interest rates or retire the debt at maturity. The average interest rate on portfolio debt is 4.2% at March 31st. This average should fall as higher coupon loans are refinanced or retired this year. There was one acquisition and there were three dispositions during the quarter. These transactions were consistent with the BIT s strategic plan of focusing on newer, larger investments in gateway markets and selling properties located in markets with limited growth prospects or low barriers to entry. 6 AFL-CIO Building Investment Trust
Transaction Activity The BIT closed on a $31 million equity commitment on Wolf Point, a 507- unit multifamily development in Chicago, IL. The site sits on the Chicago River and upon completion the 46-story tower will offer unimpeded views of the river and the surrounding downtown skyline. Wolf Point is a joint venture with Hines and Magellan and represents repeat business with established development partners. Total development cost for this investment is expected to be $153 million, with the remaining funds provided by the partners and a third-party lender. Construction is expected to start in second quarter 2013 with completion expected in early 2015. The BIT sold several small industrial buildings at values consistent with current appraised value. One building in the multi-building Siempre Viva Business Park was sold to a user. The BIT disposed of two industrial assets in Memphis where leasing had been an ongoing challenge due to soft market conditions. The BIT is currently evaluating two new investments which may close in the second quarter. Each investment is a new development opportunity (one multifamily, one office) located in supply constrained markets on the west coast, consistent with the BIT s strategic plan to focus investment in west coast markets. U.S. Real Estate Market Outlook The current pace of national transaction activity continues to be strong with $72.8 billion of transaction volume in the first quarter, up 35% from the same period in 2012, according to Real Capital Analytics (RCA). Multifamily As of March 31, 2013, the national vacancy rate for multifamily properties was 5.1%, up 10 basis points from the prior quarter and unchanged from the same period last year. The strongest rent growth is being realized in large west coast cities although rent growth on a national level has slowed over the past year. New construction continues to accelerate as completion totals approach historical averages. Fortunately, most cities seeing new supply in excess of historic averages are also experiencing outsized population and job growth. Plantation Office Park in Plantation, FL. Sale volume for apartment properties totaled nearly $32 billion in the first quarter, a record high for Q1 volume, though nearly half of this volume was associated with the Archstone sale to Avalon Bay and Equity Residential. Average cap rates declined modestly over last year to 6.1%. Retail The national retail vacancy level continued its slow improvement in 2013, finishing the quarter at 12.5%, a 30 basis point reduction from the prior quarter and the largest quarterly drop since 2005. Despite the improvement, vacancy remains at levels which will prevent any meaningful rent increases. Rents are rising in top markets, but elsewhere remain flat or slightly down. AFL-CIO Building Investment Trust 7
The U.S. Real Estate Market Outlook (continued) housing market rebound and rising employment are expected to provide a boost for retail sales. Sale volume for retail properties was down significantly as compared to last year, due primarily to a decline in large mall transactions. Without the mall sales, retail sales volume was up 9% over last year, with average cap rates remaining relatively stable at 7.3%. Office As of March 31, 2013, the national office vacancy level stood at 15.3%, down 10 basis points from the prior quarter and 70 basis points in the past year. Smaller markets are showing the most improvement while the large gateway markets remain flat to slightly negative in terms of absorption. An ongoing headwind for this sector remains as tenants continue to right-size space needs with lower average square footage per employee. Office property sale volume was up slightly, approximately 2% over last year. Volume trends are higher for suburban than CBD office, as suburban volume has exceeded CBD for each of the past four quarters. Average cap rates for CBD office (6.0%) remain much lower than suburban office (7.5%). Industrial The national industrial vacancy level fell 50 basis points in the first quarter, to 12.3% at March 31, 2013. The industrial recovery remains broad based, as about 80% of the 60 largest markets have recorded flat or lower vacancy compared to December 31, 2012. Sales of industrial property totaled $7 billion in the first quarter, up 16% from the prior year. Sales volume growth in tertiary markets has exceeded that of larger markets for the past three quarters. Average cap rates at 7.7% are consistent with the prior year though remain the highest of the major property sectors. (Source: CBRE-EA and RCA) 199 Fremont in San Francisco, CA. Park Meadows in Littleton, CO. 8 AFL-CIO Building Investment Trust
BIT Portfolio Summary Geographic Diversification* ($ in millions) Region GAV NAV Allocation NFI-ODCE (EW) West $751.8 $625.3 25.0% 40.3% East $1,452.8 $1,229.3 49.1% 31.4% South $336.4 $298.9 12.0% 19.0% Midwest $600.1 $348.5 13.9% 9.3% Total $3,141.1 $2,502.0 100% 100% Property Type Diversification* ($ in millions) Multifamily Office Industrial Retail Hotel Property Type GAV NAV Allocation NFI-ODCE (EW) Target Allocation Multifamily $1,478.9 $962.0 38.4% 24.3% 20 45% Office $748.0 $695.1 27.8% 34.3% 20 45% Industrial $307.9 $307.9 12.3% 20.4% 10 30% Retail $539.0 $469.7 18.8% 16.9% 10 30% Hotel/Other $67.3 $67.3 2.7% 4.1% 0 20% Total $3,141.1 $2,502.0 100% 100% 250 200 BIT Debt Maturity Schedule* $215.3 $194.7 Million Dollars 150 100 $106.9 $122.0 50 0 * As of 3/31/13 $0.0 2013 2014 2015 2016 2017+ AFL-CIO Building Investment Trust 9
Leasing Highlights New leases for commercial assets during the first quarter totaled approximately 278,000 square feet. Significant leases included a 40,845 square foot, 10-year retail lease with a national credit tenant at Preston Shepard in Dallas, a 128,470 square foot, industrial lease at Fountain Lakes in St. Louis and two 5-year office lease renewals totaling 74,164 square feet at Marin Executive Center in San Rafael, California. Portfolio Summary Same Property Net Income, Trailing 12 Months * Million Dollars 60 50 40 30 20 10 0 $54.6 $49.4 $41.1 Change: +10.4% Change: +9.2% Change: -0.4% Change: -0.5% Multifamily Office Industrial Retail $37.6 $19.1 $19.2 1Q12 $40.7 $40.9 * For periods ended 3/31/13. 100% property level, unleveraged. Property net income excludes income from properties that were purchased or sold during the comparative time periods, land and debt investments. Leasing Trends Percent Leased 100% 90% 80% 70% 60% 94.9 95.8 94.5 94.6 84.7 90.4 90.0 85.5 87.7 89.6 85.0 75.0 98.1 96.0 94.6 87.5 Both, Flux Apartments in Minneapolis, MN. 50% Multifamily Office Industrial Retail U.S. BIT BIT 4Q12 BIT 1Q12 Property Type Portfolio Lease Rollover Schedule Square Feet 2013 2014 2015 2016 2017 >2017 Industrial 5.9m 5.8% 8.0% 8.0% 8.6% 5.1% 53.2% Office 3.1m 5.7% 22.6% 14.9% 7.4% 14.4% 25.3% Retail 2.1m 4.0% 10.7% 16.1% 12.4% 2.3% 52.6% Total 11.1m 5.4% 12.5% 11.4% 9.0% 7.2% 45.4% As of 3/31/13 10 AFL-CIO Building Investment Trust
Portfolio Summary Top 10 BIT Holdings* Investment Name MSA Type Tysons East Washington DC Metro Office Fremont Office San Francisco Bay Area Office Curling Club New York Metro Multifamily Riverside Center New York Metro Multifamily Hacienda Crossings San Francisco Bay Area Retail Fair Lakes Washington DC Metro Office Town Center One & Two Houston Metro Office Riverhead Centre New York Metro Retail One Tower Bridge Philadelphia Metro Office Carlisle Industrial I Philadelphia Metro Industrial Transactions New Investments Wolf Point, Chicago IL Development of 507 apartments BIT Investment = $31 million Total Development Costs = $153 million Dispositions Siempre Viva, San Diego, CA = $4 million Weingarten Crowfarn and Outland, Memphis, TN = $10 million Top 10 MSAs* ($ in millions) MSA NAV Percent New York Metro $526.7 21.1% Washington DC Metro $318.0 12.7% San Francisco/Bay Area $315.7 12.6% Chicago $246.5 9.9% Philadelphia $171.5 6.9% Miami/Ft. Lauderdale $146.8 5.9% Seattle $115.2 4.6% Boston $89.8 3.6% Ovaltine Court in Villa Park, IL. Richmond $87.5 3.5% Houston $77.9 3.1% Total $2,095.7 83.8% * Based on NAV, excluding cash (as of 3/31/13) AFL-CIO Building Investment Trust 11
PNC Bank, National Association Trustee 249 Fifth Avenue, 1 PNC Plaza Pittsburgh, PA 15222 412.762.2000 PNC Realty Investors, Inc. Investment Advisor 1601 K Street, NW, Suite 1100 Washington, DC 20006 202.496.4700 The AFL-CIO Investment Trust Corporation Marketing, Investor Relations, Labor Relations 815 Connecticut Ave, NW, Suite 320 Washington, DC 20006 202.898.9190 www.aflcio-bit.com AFL-CIO Building Investment Trust (the BIT or the Trust ) is a bank collective trust for which PNC Bank, National Association ( PNC Bank ) is the trustee. PNC Bank is a subsidiary of The PNC Financial Services Group, Inc. PNC Bank has retained PNC Realty Investors, Inc. ( PRI ) to provide real estate investment advisory and management services, and the AFL-CIO Investment Trust Corporation (the ITC ) to provide marketing and investor and labor relation services, in connection with the BIT. PNC Bank licenses the ability to use the AFL-CIO name in the name of the Trust and in connection with the activities of the Trust. The participant interests in the BIT are not bank deposits, and are not insured by, issued by, guaranteed by, endorsed by or obligations of the FDIC, the Federal Reserve Board or any other governmental agency, PNC or its affiliate, or any bank. Except as otherwise disclosed in the materials, the materials, representations and opinions presented herein are those of PNC Bank, and are of a general nature and subject to change. They do not constitute the provision by PNC Bank of investment, legal, tax or accounting advice to any person or entity, or a recommendation to participate in the BIT. Information and figures, upon which the materials, representations and opinions may be based, may be obtained from independent sources deemed reliable, but have not been independently verified by PNC Bank, and their accuracy and completeness cannot be guaranteed. Information regarding past performance should not be considered representative, and is no guarantee, of future performance. Investors should consider BIT s investment objectives, risks and expenses before investing therein. Investors should consult their own advisors and investment professionals to evaluate the merits and risks of investment. The PNC Financial Services Group, Inc. ( PNC ) uses the name PNC Institutional Investments to provide investment management and fiduciary services, FDIC-insured banking products and services and lending of funds through its subsidiary, PNC Bank which is a Member FDIC. PNC does not provide legal, tax or accounting advice. PNC Institutional Investments is a registered trademark of The PNC Financial Services Group, Inc. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value. 2013 The PNC Financial Services Group, Inc. All rights reserved. 12 AFL-CIO Building Investment Trust