F&C Real Estate Equity Long / Short Fund Ray Lahaut & Marcus Phayre-Mudge March 2013 www.fandc.com
Contents The fund & team Investment process Current market conditions / outlook Summary Fund terms Case studies 2
The fund & team
F&C Real Estate Equity Long/Short Fund (REELS): introduction REELS target Longstone current Return* +8-10% +4.4% Volatility 5-8% 4.3% Correlation with EPRA Index 0 +0.09 European focused real estate securities fund with fundamental bias Aim to generate low volatility returns through the combination of alpha generation and the cyclicality of real estate Daily liquidity with five days notice Mostly commercial property (office & retail) Managed by the Thames River Real Estate team Source: Thames River Capital (TRC) as at 31.12.2012 * Yearly annualised net 4
Thames River Longstone Fund: track record Monthly performance (%) BMK* Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD YTD 2012 +2.33 +2.50 +2.44-1.46-2.96-0.24-0.09 +0.22-1.04-1.93-0.46-0.05-0.89 5.81*** 2011 +0.26 +0.37 +0.54 +0.32-0.20 +0.69-0.99 +0.57-3.58 +4.67-1.13 +0.96 +2.31-7.48 2010 +0.20 +0.53 +1.09-0.62 +0.35-0.32-0.17 +1.51 +0.31 +0.14-0.04 +0.22 +3.23 +8.11 2009 +1.07 +1.43-0.15-1.21 +1.27 +0.70 +0.44 +1.58 +1.92 +0.41 +0.92 +1.43 +10.21 +19.22 2008 +0.53 +0.76 +0.80 +1.05 +0.25 +1.45 +1.10 +0.68 +0.58 +1.14-0.12-0.18 +8.32-19.86 Risk/return analysis * Annualised return 4.4% Longstone monthly annualised volatility 4.3% Worst drawdown -7.8% Sharpe Ratio (1.98%)** 0.74 Sortino Ratio (0%) 0.72 EPRA Index monthly annualised volatility 22.3% Correlation of Longstone monthly returns vs EPRA Index +0.09 Dow Jones Credit Suisse Long/Short Equity Hedge Fund Index monthly annualised volatility 9.7% Correlation of Longstone monthly returns vs Dow Jones Credit Suisse Long/Short Equity Hedge Fund Index +0.32 Dow Jones Euro Stoxx 50 Price Index monthly annualised volatility 22.2% Correlation of Longstone monthly returns vs Dow Jones Euro Stoxx 50 Price Index +0.19 Source: TRC, State Street as at 31.12.2012 * Benchmark: Dow Jones Credit Suisse Long/Short Equity Hedge Fund Index ** Risk free rate - Euribor time weighted from inception. 0% = Maximum absolute return. *** As at 30.11.2012 5
Product range TR Property Investment Trust Property Growth & Income Fund Real Estate Securities Fund Longstone Fund Real Estate Equities Long / Short Fund Marcus Phayre-Mudge & George Gay Marcus Phayre-Mudge & Alban Lhonneur Ray Lahaut & Marcus Phayre-Mudge $1,060.1m $109.2m $50.7m $35.1m $88.7m Long only Long only Long bias Long/short Closed ended investment trust London listed Managed by the team since 1996 Open ended Mix of UK physical & European equities Guernsey domiciled Launch March 2005 Unregulated scheme Open ended Dublin listed UCITS Launch April 2010 Very low volatility & correlation Cayman domiciled Unregulated scheme UCITS Daily liquidity Launch November 2007 Launch December 2012 Marcus Phayre-Mudge 21 years experience (MRICS) Knight Frank, Henderson Global Investors Alban Lhonneur 6 years experience (MSC) CitiGroup, Societe Generale Raymond Lahaut 13 years experience (CFA/Masters) Rabobank, Portland Capital, Swiss Finance & Property, Ohra Asset Management, Insinger de Beaufort Data as at 31.12.2012 6
Why a real estate long / short? Inefficient market Limited number of investors, sell side analysts and other hedge funds offers us opportunities to capture above average returns Real estate is a local sector Location is driving factor with regional disparity we have local knowledge Low correlation between sectors, countries and companies Ample opportunities for pair trading 7
Investment process
Our approach Bottom up company analysis proprietary forecasting model covering >60 companies Macro / thematic view of markets Buy/ Sell Decision Regular contact with management over 100 meetings and company visits in 2011 Active management of risk and exposure through use of long / short stock and index positions Knowledge and understanding of the physical property market the team manage 70m of commercial property in the UK and have a pan-european property market contact base 9
Portfolio construction Exposure -20 to +20% Net exposure 80-120% Gross exposure Holdings 20-40 Holdings 1-2% Initial holding. Increase to up to 3-5% Risk Aim to keep portfolio volatility low: 5-8% Note: internal guidelines only Source: TRC as at 31.12.2012 10
Current market conditions / outlook
Investment themes London balanced occupational markets and positive capital flows German residential low risk granular index-linked income in Europe s best performing economy Manufacturers of return value creation in any environment Specialist sectors provide uncorrelated, diversified returns Dispersion of returns continues to provide opportunities for active managers Management capability and trust critical 12
Investor concerns Fear of rental decline Occupational markets highly variable Focus on key sub-markets Debt overhang and risk of forced sales Listed companies enjoy favourable access to capital Alternative sources of debt capital emerging Commercial property debt in the UK is down from 280bn in 2007 to 210bn in 2011 Capital value weakness Priced in to equity valuations for those markets where declines expected Fear unwarranted in markets such as Central London and German residential 13
Property clock: office sector Amsterdam, Geneva Paris CBD, London West End Helsinki, London City Oslo, Stuttgart Zurich Milan Berlin, Cologne, Lyon Warsaw Düsseldorf, Moscow, Stockholm Hamburg Copenhagen Rental Growth Slowing Rents Falling Munich Rental Growth Accelerating Rents Bottoming Out Luxembourg St. Petersburg Manchester Barcelona, Brussels, Dublin Bucharest, Edinburgh, Frankfurt, Istanbul, Kiev, Prague Source: Jones Lang LaSalle IP, October 2012 This diagram illustrates where Jones Lang LaSalle estimate each prime office market is within its individual rental cycle as at end October 2012. Markets can move around the clock at different speeds and directions. The diagram is a convenient method of comparing the relative position of markets in their rental cycle. Their position is not necessarily representative of investment or development market prospects. Their position refers to prime face rental values. Markets with a step pattern of rental growth do not tend to follow convenient cycles and are likely to move between the hours of 9 and 12 o clock only, with 9 o clock representing a jump in rental levels following a period of stability. Athens Lisbon, Rome Budapest, Madrid 14
Summary
Why F&C Real Estate Equities Long / Short Fund? One of the few hedge funds in real estate One of the biggest teams in the sector A return to real estate fundamentals will create divergence in returns of real estate securities Low correlation within the sector Longstone: +0.09 vs. EPRA Index Sector offers great opportunities for alpha generation through long/short strategy Strong track record for the Fund and team Longstone: +25.4% since launch Longstone has a proven track record of uncorrelated low volatility returns which should attract investors that are not necessary real estate investors Data as at 31.12.2012 16
Fund terms
Fund terms: F&C Real Estate Equities Long / Short Investment Adviser Min. Investment Subscription Redemption Pricing Thames River Capital LLP /$100,000 ( equivalent) Daily Daily (5 days notice) Daily Management Fee 1.75% Performance Fee Reporting Fund s Derivative Intermediary Fund Domicile 15% above LIBOR hurdle and high water mark Daily NAV, monthly report, annual report Goldman Sachs International, London Ireland 18
Case studies
Case study 1: merger between Nieuwe Steen Investments and Vastned Office Nieuwe Steen Investments Dutch listed real estate company with EUR 1.4bn portfolio Combination of retail and offices constitutes strong balance in current market circumstances Geographic focus on the Netherlands and Switzerland Vastned Office Dutch listed real estate company with EUR 1.0bn portfolio Portfolio of offices and semi-industrial assets Geographic focus on the Netherlands, Belgium and Germany Post merger combination Leading Dutch mid-market fund benefiting from increase in scale Portfolio of EUR 2.4bn Diversified Dutch portfolio No.3 listed Dutch mixed portfolio of mainly offices and retail 20
Case study 1: merger between Nieuwe Steen Investments and Vastned Office December 2010 Initial talks on merger. NSI offers 0.85 NSI shares for 1 VNOI share February 2011 Vastned rejects offer Source: Bloomberg We built a sizable pair trade, i.e. we went long in the target Vastned office and short in the acquirier Nieuwe Steen As we have a close relationship with both management teams we had intense discussions with both. We tried to convince Vastned Office of the merits of the deal and we tried to convince Nieuwe Steen to sweeten the deal and offer a better exchange ratio 21
Case study 1: merger between Nieuwe Steen Investments and Vastned Office 15th April 2011 Talks resumed 20th April 2011 Merger agreed Exchange ratio was increased from the intial 0.85 NSI shares for 1 Vastned Office share to 0.897x Source: Bloomberg 22
Case study 2: Klepierre vs. Corio On the surface quite similar companies: Both companies are pan-european retail specialists We have models of both companies which showed similar valuation on discount to NAV and on implied net initial yield and LTV Main differences: Klepierre had a longer debt duration. Something which (especially early 2011) was a benefit BNP its main shareholder sold part of its stake to Simon Property Group and hence the overhang diminished SPG brings a lot of retail know-how to the table of which Klepierre can profit Klepierre has a larger part of its portfolio in Northern European countries and is hence 'safer' After many discussions with both managements we believed Klepierres's management was stronger than Corio's Corio made a weak acquisition in Germany in 2010. We expected losses to come from this portfolio 23
Case study 2: Klepierre vs. Corio Source: Bloomberg 24
Case study 3: index inclusion / special situation The weighting of ANF increased in the EPRA index after major shareholder decreased its position We built up position and sold on the day of the event Source: Bloomberg 25
Case study 4: Prologis European Properties Short position as we preferred other industrial companies PLD as main shareholder was taking a lot of fees/ external management Corporate governance sub-par Unfortunately, APG tried to resolve above by making a bid for the company PLD topped that bid Source: Bloomberg 26
Contact United Kingdom F&C Management Limited Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) 20 7628 8000 Fax: +44 (0) 20 7770 5487 Website: www.fandc.com Authorised and regulated in the UK by the Financial Services Authority. United Kingdom F&C Management Limited 80 George Street Edinburgh EH2 3BU Scotland Tel: +44 (0) 20 7628 8000 Authorised and regulated in the UK by the Financial Services Authority. United Kingdom Thames River Capital LLP Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) 20 7628 8000 Fax: +44 (0) 20 7770 5487 Authorised and regulated in the UK by the Financial Services Authority. United Kingdom F&C REIT Property Asset Management Plc 5 Wigmore Street London W1U 1PB Tel: +44 (0) 20 7499 2244 F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority. Ireland F&C Ireland Limited Block 5 Harcourt Centre Harcourt Road Dublin 2 Tel: +353 (0) 1 436 4000 F&C Ireland is regulated by the Central Bank of Ireland. Germany F&C Management Limited Oeder Weg 113 60318 Frankfurt Germany Tel: +49 (0) 69 597 99 080 Authorised and regulated in the UK by the Financial Services Authority Germany F&C REIT Property Asset Management GmbH & Co. KG Oberanger 34-36 80331 München Germany Tel: +49 (0) 89 61 46 51 0 F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority. Netherlands F&C Netherlands B.V. Jachthavenweg 109 e 1081 KM Amsterdam Netherlands Tel: +31 (0) 20 582 3000 Regulated in the Netherlands by the Autoriteit-FM. Portugal F&C Portugal, Gestão de Patrimónios, S.A. Rua de Campolide,372 1st floor 1070-040 Lisboa Portugal Tel: +351 (0) 21 003 3200 Regulated in Portugal by the CMVM and the Bank of Portugal. Switzerland F&C Management Ltd Rigistrasse 3 6300 Zug Switzerland Tel: +41 (0) 41 711 6262 Authorised and regulated in the UK by the Financial Services Authority. Hong Kong F&C Management Limited 66th Floor, Suite 01 The Center 99 Queen s Road Central Hong Kong Tel: +852 3965 3160 Authorised and regulated in the UK by the Financial Services Authority. India Indiareit Fund Advisors Pvt. Limited Piramal Tower, Ground Floor Peninsula Corporate Park G.K. Marg, Lower Parel Mumbai 400 013 India Tel: +91 (0) 22 61513440 Indiareit Fund Adivsors Pvt. Limited is a strategic partner to F&C REIT Property Asset Management LLP. Part of the F&C Asset Management Plc Group. United States F&C Management Limited 265 Franklin Street 16th Floor Boston MA 02110 USA Tel: +1 (0) 617 426 9050 Authorised and regulated in the UK by the Financial Services Authority. Past performance should not be seen as an indication of future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time. F&C Group Companies may from time to time deal in investments mentioned herein on behalf of their clients. The source of information in all graphs is F&C unless otherwise stated. F&C Management Limited is authorised and regulated by the Financial Services Authority (FSA) FRN:119230. Limited by shares. Registered in England and Wales, No. 517895. Registered address and Head Office: Exchange House, Primrose Street, London, EC2A 2NY, United Kingdom. F&C Asset Management plc is the listed holding company of the F&C group. F&C Management Limited is a member of the F&C Group of companies and a subsidiary of F&C Asset Management plc. F&C, the F&C logo, REO and the reo logo are registered trade marks of F&C Asset Management plc. F&C INVESTMENTS and the F&C INVESTMENTS logo are trade marks of F&C Management Limited. Copyright F&C Management Limited 2013. All Rights Reserved. Neither this document nor any part of it may be reproduced by any party whether by photocopying or storing in any medium by electronic means or otherwise without the prior approval of F&C Management Limited. CN: 01270 27