On an unusually warm late-September morning, the three second year MBA students in the Applied Real Estate Investment Track (AREIT) program presented their research and recommendations to the AREIT Board of Advisors. This year’s team, Zi Chong, Jonathon Davis, and Jeffrey Grabowski, have been selected to manage $1.5 Million in assets currently held in secure bonds. The AREIT Board is tasked with overseeing the three-member team’s REIT selections, and under the advisement of Michael Brennan, Executive Director of the James A. Graaskamp Center for Real Estate, and AREIT faculty director, Timothy Riddiough, the team successfully presented to the Board its ambitious 10% growth goals. The team members must rely on their fundamental research and portfolio management skills, along with the deep understanding of real estate and capital markets, to successfully maneuver the current volatile market conditions.
The team began preparing for the first AREIT Board Meeting over the summer, while in the prime of their summer individual internships. The group attended NAREIT’s REITWeek in New York City this past June, where over 200 REIT CEOs and management teams met with investors. A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. Attending closed-door management meetings served as learning opportunities outside of the classroom, and provided for a unique experience. At certain times, the things unsaid by senior executives, their tone or demeanor when answering a particular question for example, proved just as insightful as things said, all the while helping each team member produce two research papers on different real estate sectors of interest.
As the summer concluded and fall semester began, the team members continued their preparation with additional research. Taking a domestic macroeconomic view, GDP growth remains at 2% since 2012, with 2-3 million job gains, resulting in a new low level of 5.1% unemployment rate. Manufacturing expansion has led to high capacity utilization, and the housing market has had a resounding recovery from previous economic lows. Looking at the broader world view, China’s economic growth has significantly slowed, reducing demand for commodity, leading to a recession risk, along with Brazil, Canada, and Australia. Japan and Europe have shown growth, but slower than the US, leading to greater deflation risk. Real Estate sectors to invest in are analyzed by weight, that is underweight sectors are more affected by global uncertainty, and overweight sectors are driven by strong US fundamentals. Multi-family is thus deemed overweight, while hospitality is underweight. Finally, funds were selected for a review on their real estate and operations (high quality real estate, proven operational track record, internal & external growth), balance sheet (large institutional ownership, credit ratings), and valuations (price/NAV, Price/FFO). With the picks in mind, the team was ready for its first Board presentation.
The presentation began with the stating of the funds objective, which is to outperform the MSCI US REIT Index and grow the fund by 10%, by fully investing in the selected REITs. This may prove difficult to this year’s team compared to last year’s, as slower economic growth and continued market volatility have shifted the focus from creating growth to a focus on preserving the value. The team made it through a rigorous Q&A session, and with every board member coming into the meeting with a different background and market specialization, the discussion was varied. The Board seemed particularly interested in specifics on REIT selection, but had no qualms with the selections themselves. The teams’ research and knowledge of the sectors was exceptional.
What’s the next step? The team is looking forward to being fully invested in the three chosen REITs by the end of this term, allowing for many months of monitoring before they pass the torch to next years’ AREIT students. This truly is an exceptional Wisconsin MBA experience.