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Tyler Lynch

2018-2019 AREIT Fall Board Meeting

by Tyler Lynch Monday, October 15, 2018

What is AREIT?

Every year, a select team of second-year real estate MBA students at the University of Wisconsin-Madison have the unique opportunity to join Wisconsin’s Applied Real Estate Investment Track (“AREIT”) program. AREIT is a one-of-a-kind program in which the students have the opportunity to manage a multi-million-dollar U.S. Equity REIT portfolio.

 

The program is led by Tim Pire. Prior to joining the faculty at the University of Wisconsin, Tim spent 24 years as Managing Director and Portfolio Manager for Heitman’s public real estate securities group. The team reports to Tim on a weekly-basis.

 

What is the process?

Each team member is responsible for developing a thorough understanding of one to three real estate sectors over the summer prior to the final year of their MBA. Once the fall semester starts, the team develops a macro-economic outlook and investment strategy. Throughout the fall, the team invests the funds. Throughout the hold period, which is October through May, the team continually monitors the portfolio, capital markets, and real estate markets, and makes any necessary adjustments to the portfolio.

 

This year’s team has seven members:

 

Name

Sector Coverage

Brian Cleary

Office

Bryan Johnson

Retail, Net Lease

Charlotte Du

Industrial

Eric Olson

Health Care

Hans Helland

Lodging

Jared Shoemaker

Residential, Self-Storage

Tyler Lynch

Data Centers, Specialized

 

What is the purpose of the Fall Board Meeting?

At the fall meeting, the AREIT team delivers a 30-minute presentation in which they provide the board a macro-economic thesis, an investment strategy, real estate sector summaries, and four initial stock pitches for the portfolio. If the board finds the team’s analysis compelling, it will approve the overall strategy and initial stock recommendations, and the team may begin investing.

 

On Friday, September 28, the 2018-2019 AREIT team delivered its first of three presentations to the AREIT Board of Directors. The board members, all of whom are real estate industry veterans, draw upon their professional experience in order to offer their advice (and constructive criticism) to the AREIT team.

 

What was in the presentation?

To start off the presentation, Charlotte Du introduced the team, stated the team’s objective (to outperform the fund’s benchmark, the MSCI U.S. REIT index, by 80 bps or more), and provided an update on how the portfolio performed over the summer months.

 

Second, Hans Helland provided macro-economic and commercial real estate market updates. In summary, the team stated their belief that economic growth will remain solid, citing real GDP growth, record-low unemployment rates, and high consumer sentiment. However, the team will keep a close eye on changes in trade policy and monetary policy as inflation continues to rise and the Federal Reserve takes its foot off the gas pedal by raising the Federal Funds Rate and unwinding its balance sheet. The team anticipates two additional rate hikes over the hold period, which lasts until early May.

 

In the commercial real estate market, the team has taken notice of the record amounts of private capital supporting valuations, flattening cap rates across most sectors, and strong REIT market fundamentals, including 15-year high occupancy rates across the core sectors. At the time of the presentation, REITs had been trading at a discount to NAV for three years, leading many to ask whether the private markets or public markets are pricing real estate correctly. The team’s belief is that the REIT market is underpriced, and strong fundamentals will drive valuations over the hold period.

 

Third, Brian Cleary, the team’s portfolio manager, provided the board with an in-depth look at the team’s proposed investment strategy, process, and tactical implementation. The team will target growth-oriented companies trading at attractive valuations with strong balance sheets. Brian then discussed how the team will use a sector weighting model, stock screening metrics, and company analysis to determine which stocks seem most attractive.

 

Given the team’s strong belief in the REIT sector’s fundamentals, they recommended immediately converting the portfolio’s cash holdings (49% of the portfolio) to the Vanguard Real Estate ETF. This recommendation indicates the team’s belief that, despite rising interest rates, the REIT market will improve over the hold period. The board approved.

 

Brian also discussed which REIT sectors the team has decided to overweight and underweight relative to the fund’s benchmark index. The team elected to take an overweight position in the data center, industrial, and residential-specialized sectors, and take an underweight position in the multifamily, net lease, and health care sectors. The team plans to take a neutral position in the remaining sectors, which include self-storage, office, retail, lodging, diversified, and specialized.

 

At the end of the presentation, the team presented a summary on each overweight and underweight sector. Each summary included a discussion on sector demand drivers, the current environment, a sector outlook, and a sector investment strategy. The team then made its first four stock recommendations.

 

Immediately following the presentation, the board provided valuable feedback and asked questions on the team’s macro-economic thesis, investment strategy, sector analyses, and stock pitches. The next meeting will take place in December, when the team will update the board on the fund’s performance. Until then, the team will continue investing the funds, with a goal of being 100% invested by the end of 2018.