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Sunday, January 17th, 2010

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Overview of UCREC Winter 2010

Educational Components

Finance Basics (i.e Accounting and Valuation)

REIT

s RealE

stateI

nvestmentT

rusts (RE

stocks) Introduction, How they grow, International market of REITs,

Healthcare REITs, Future of REITs etc.

Leasing, Affordable Housing, Gaming, Lodging, and

RealE

stateInvestments

Company Presentations (most are in Fall quarter) Bank of America February 1st

Google -TBA

Mentorship/

Interview Help

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UCREC Member Opportunities

Networking panels, company presentations

Educational Program

Bank of America Affordable Housing ChallengeTeam (4 to 12 people)

Scholarship for Women Members

All members are able to attend Booth Real Estate

Group meetings Members able to attend annual Booth Real

Estate Conference

Hosting of RealE

state Case Competition - 2011

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Accomplishments Fall 2009

Fall 2009 Meetings Included: www.ucrec.com

Morgan Stanley

JPMorgan Associate Investment Banker/Intern ChicagoManaging Director Tishman Speyer

Introduction to REITs / Overview of UCREC

SEO information session

Panel Discussions with Booth alumni

Booth School Real Estate Professor Lecture

Blackstone Group (Park Hill Real Estate Group)

Chicago Office Managing Director.

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Four basic financial statements:

Balance Sheet

Income Statement Statement of Cash Flows

Statement of Retained Earnings Published by public companies in their

annual reports (called 10K's) Remember to read notes/footnotes

Often contain important information

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Presents the financial position of a company

at a given point in time

Comprised of three parts: Assets, Liabilities,and (Ownership/Stockholder's) Equity

Remember the important basic equation:

Assets =L

iabilities +E

quity

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Assets are the economic resources of the

company

Consists of Cash, Inventory, and Equipment Examples: For a farm, Inventory might be the

farmer's crops; Equipment could consist of

things like a barn or a tractor

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Companies normally obtain resources by

incurring debt, getting new investors, or through

re-investing operating earnings Liabilities are the debts owed by the company

Equity is comprised of the claims that investors

have on the company's resources after all debts

have been paid off net worth of the company

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When companies incur debt, they make a

promise to pay over a certain time period

Payment schedule is independent of theoperating performance of the company

When companies make stock offerings

(equity), they don't promise to pay investors

over a certain period

Offer a return on investment contingenton operating performance

No guarantee, so riskier but unlimited upside

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Presents the results of operations over a

period of time

Composed of Revenues, Expenses, and NetIncome

Revenue: source of income normally arisingfrom the sales of goods and services and is

recorded when it occurs

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Expenses: costs incurred over a period of timeto generate the revenues earned over thatsame period of time

Example: Wages

When a company incurs an expense outside ofits normal operations, it is considered a loss

Example: Destruction of a building in a fire

A purchase is only considered an asset if it alsoprovides future economic benefit outside of thecurrent period.

Paying for wages vs. Paying for equipment

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Net Income: Revenue, less Expenses

PositiveNet Income indicates the company

generated a profit (net profit) NegativeNet Income indicates the company

suffered a net loss

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Retained earnings is the amount thecompany reinvests in itself

Remember that this is one of the ways topurchase new assets (aside from incurringdebt and raising new equity)

Reconciliation of the Retained Earnings

account from beginning to the end of year Net Income increases the Retained

Earnings account, while Net Losses anddividend payments decrease it

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Does not provide any new information notalready available

But it does tell you what management is doingwith the company's earnings

Is management more focused on reinvestingearnings within the company? Or is itdistributing profits to shareholders?

Investors can use this knowledge to align theirinvestment style with the strategy of a company'smanagement

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Provides a detailed summary of all the cash in-and outflows during a time period

Three sections-- Cash flows from:

Operating activities- includes transactionsinvolved in calculating net income

Investing Activities- activities outside of thenormal scope of business, such as sale or

purchase of assets Financing Activities- Involves items classified as

liabilities or equity on the balance sheet Examples: Dividends or payment of debt

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Gets all its information from other 3 statements

Net income from the Income Statement shown

in cash flows from operating activities Dividends from Retained Earnings Statement

shown in financing activities

Investments, Accounts Payable, and other

asset and liability accounts from the BalanceSheet are shown in all three sections

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REITS = Real EstateInvestmentTrustsReal Estate Stocks

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Pay consistent quarterly

dividends

Provide the individual

investor a way to invest in

real estate

Comprise only about 10%

of the $4 trillion CRE

market

Liquid assets

Low-to-zero corporate taxrates

90% of income

dividends

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Equity REITs

buys, manages, renovates, maintains, andoccasionally sells real properties

Example: Simon Property Group (NYSE: SPG)owns and manages malls

Mortgage REITs

M

akes and holds loans and bond-like obligationsbacked by real estate

Example: MFA Financial takes out low interestloans to buy higher interest mortgage-backedsecurities

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Over long periods, REITs provide investors

with compounded annual returns close to

that of the S&P 500 At the same time, REITs enjoy benefits not

extended to other stocks that keep pace with

the market:

Low volatility and correlation

Predictability/limited risk

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REITs initially were defined by the Real EstateInvestmentTrust Act of 1960

REITs must:

Hold 75% of assets in real estate/cash

Derive 75% of income from real estate activities

Distribute 90% of income to shareholders

Derive no more than 30% of income from shortterm property sales

REITs avoid double taxation

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Myth #1: REITs are just portfolios of real

properties

REITs are more than just a collection ofproperties held collectively by shareholders.REITs are companies that are actively

managed for profit and to a lesser extent,

growth.

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Myth #2: Bad real estate markets

mean bad news for REITs

Real estate is sub-divided

further into sectors; not allsectors are equally hit by a

real estate bubble

Furthermore, REITs that are

especially well-managed with

a solid business plan canactually excel in times that

are bad for the overall real

estate market

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Myth #3: REIT stocks are for active trading

Quite the contrary, REITs are close to the ultimate for the buy andhold strategy; they provide solid returns over many years

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Dividend yield

Funds from operations (FFO) yield

Adjusted funds from operations (AFFO) yield Net asset value (NAV) Dividend discount or discounted cash flow

(DCF) model

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Easy to calculate and compare

Also easily manipulated

Can be substantially increased on atemporary basis (for example, usingleverage)

Ignores true recurring cash flow

Does not take growth prospects into account

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Widely used method

FFO = Net income + Depreciation Gains

from sales on depreciated properties Accounting treats depreciation as an expense,

charged against the bottom line

Ignores maintenance costs of business

Ignore development of land

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AFFO = FFO recurring maintenance items(and possibly other deductions)

Better measure of operating performance However does not use standardized

method of calculation since it does not usestandardized accounting techniques

Other disadvantages of FFO also apply;ignores growth and development of land

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Total value of underlying real estate Relies on prices in private real estate market

Assumed to be an efficient market sincethere are many buyers and sellers REITs have a long term tendency to revert

back to parity with NAV N

AV = Assets L

iabilities (adjusted fordepreciation for REITs)

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Closest model to intrinsic stock value Takes into account both near and long term

growth prospects Almost all determinants of stock boiled

down to quantifiable inputs for this model However, it is only as good as its

assumptions (and there are many) Principle ofgarbage in, garbage out

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INSIDERS GUIDE

REMEMBER: INTERVIEWING IS HARD ANDTAKES PRACTICE

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COMMON MISTAKES:

Majoring in Econ/Business with no passion

Believing going to Uchicago is enough Relying on CAPS Believing you dont need a high GPA Believing you dont need leadership Believing that getting an interview is enough READ WSJ EVERYDAY KNOW WHAT IS ON YOUR RESUME WE GO TO A LIBERAL ARTS SCHOOL IT ISOK IF YOU ARE NOT FAMILIAR WITHFINANCE, IT IS NOT OK TO NOT BE FAMILIARWITH WORLD EVENTS AND HOW THEY

RELATE TO INVESTMENT BANKING UNDERESTIMATING COMPETITION Believing you are SPECIAL Not being PROACTIVE

This is your life!DO NOT LIE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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COMMONINTERVIEWQUESTIONS

WALK ME THROUGH YOUR RESUME WHY DID YOU CHOOSE UNIVERSITY OF CHICAGO? TELL ME WHERE THE HOUSING MARKET IS HEADED PITCH A STOCK TO ME WHAT DO INVESTMENT BANKERS DO? WALK ME THROUGH A DCF WHATS THE BIGGEST RISK YOU HAVE TAKEN? WHAT ARE YOU PASSIONATE ABOUT? What sector are you following and why and then they ask spinoff questions

so just be well read If there were no college textbooks and every college student had to have a

kindle guess how many kindles would be sold to students at 4 yearcolleges in 2012 does the number go up or down the next year

Read a newspaper article on a merger and acquisition and tell me whats themost important news

Why is gas prices going up but oil prices going down?

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MORE INTERVIEW QUESTIONS:

What sectors are you following and why? How would you invest 100 million dollars When would you issue Bond vs. Equity which is cheaper? Know what industry groups you are interested in and what has been

happening in them What is a Tombstone? What is BETA? Provide an example of a situation in which you had multiple

competing deadlines how did you prioritize? Were the deadlinesmet? What did you do or would have done if you were unable to meetthe deadlines?

Why this company?

What motivates you? Why did you choose your major? ( 1st phone interview) Tell me about a moment where you were a problem solver? Whats the biggest risk youve taken? Know about balance sheet/ income statement/ statement of cashflows

and links between them What commodities would you invest in and why? What are your SAT scores?

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DCF Continued///

To calculate terminal value we multiply the last years free cash flow (year5) by 1 plus the chosen growth rate, and then divide by the discount rateless growth rate.The second method, the Terminal Multiple method, is the one that is moreoften used in banking. Here we take an operating metric for the lastprojected period (year 5) and multiply it by an appropriate valuationmultiple. This most common metric to use is EBITDA. We typically selectthe appropriate EBITDA multiple by taking what we concluded forour comparable company analysis on a last twelve months (LTM) basis.

Now that we have our projections of free cash flows and terminal value,we need to present value these at the appropriate discount rate, alsoknown as weighted average cost of capital (WACC). For discussion of

calculating the WACC, please read the next topic. Finally, summing upthe present value of the projected cash flows and the present value of theterminal value gives us the DCF value. Note that because we usedunlevered cash flows and WACC as our discount rate, the DCF value is arepresentation of Enterprise Value, not Equity Value.

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QUESTIONS?