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, who previously 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.
This is the second of three blog posts about the AREIT program. The first blog post, published on October 10, 2018, offers a more in-depth introduction to AREIT and the investment process.
What is the purpose of the Winter Board Meeting?
The winter board meeting is the second of three annual AREIT meetings. In the first meeting, the board members are introduced to the team, their macro-economic outlook, and their performance goals and strategy to achieve them. The winter board meeting is an opportunity for the team to update the board on their macro-economic outlook, portfolio investment strategy, portfolio performance, select investments, and their adjustments for the remainder of the hold period.
What was in the presentation?
The team began the presentation with a summary of their activities over the fall semester. They spoke with board members, met with analysts and REIT management teams, listened to earnings calls, attended industry conferences including PREA, NAREIM, NIC, and REITworld, and visited several companies while on a trip to Hong Kong. Overall, the team has been busy learning as much as they can about the REIT industry, capital markets, and real estate markets.
In the first section of the presentation, the team reiterated their objective, which is to outperform its benchmark, the MSCI U.S. REIT Index, by 80 basis points or more. In addition to the fund objective, the team set out to achieve three goals during the fall semester: (1) Immediately convert their cash holdings to the Vanguard Real Estate ETF in order to capitalize on projected real estate industry outperformance, (2) Invest at least 90% of the portfolio in individual REITs by December 31, and (3) Achieve the first two goals while maintaining the fund’s control parameters.
By the time of the board meeting on February 1, the team had achieved its goals. Since becoming fully invested on December 21, the team has outperformed its benchmark by 107 basis points.
In the second section of the presentation, Hans Helland, the team’s macro-economic specialist, provided a macro-economic update. Hans reiterated the team’s thesis, discussed what has happened over the past three months, and provided insight on how the macro-economic environment will affect their investment strategy over the spring semester. One significant change to the macro environment is the dovish tone recently struck by Fed Chairman Jerome Powell. As a result, market consensus is that further increases in the Federal Funds Rate may be placed on hold, representing an accelerated end to the financial tightening cycle. The team has kept a close eye on interest rates and will continue to monitor the spreads, particularly between the ten-year U.S. Treasury and implied cap rates.
Next, Brian Cleary, the team’s portfolio manager, discussed the portfolio’s composition and sector weight balances. The team is targeting growth-oriented stocks trading at attractive valuations with strong balance sheets. To find these stocks, the team has used six different screening metrics, including projected AFFO Multiple and AFFO/Share Growth. To illustrate whether the team has actually been investing along those parameters, Brian created a slide showing Isthmus Fund’s metrics relative to the fund’s benchmark. Brian was proud to say that Isthmus Fund compares favorably to the RMZ in each of its screening metrics, indicating that the team adhered to its investment strategy.
As part of his portfolio update, Brian also created an attribution analysis, showing how each sector and stock has contributed to Isthmus Fund’s return. The analysis showed that, so far, the team has been slightly better at choosing sector weights than choosing stocks.
After the portfolio update, the team provided a more detailed analysis on seven select investments. For each select investment, a member of the team introduced the stock, stated their thesis for the stock, showed how it screens relative to its peers, and provided analysis on the company’s operations, catalysts, risks, and total contribution to the portfolio’s performance.
In the final section of the presentation, Jared Shoemaker provided an outline for the team’s investment strategy over the coming semester. First, he explained the criteria the team will be using to evaluate and monitor their stocks. Jared then provided context by detailing a few of the stocks the team has been watching, and the factors that may lead the team to adjust the stocks’ weighting in the portfolio.
Finally, Jared concluded the presentation by thanking the board members for their time and assistance over the past semester. The team has had the privilege of meeting with several board members already and plans to meet with the rest of them during the spring semester. The final AREIT board meeting is scheduled to occur in April, at which time the team will provide a final update on how Isthmus Fund performed.