Duff

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Duff

  1. 1. 1 Duff & Phelps Investment Management Co. THE REIT ASSET CLASS ALTERNATIVE Presentation at the Money Management Institute March 29, 2005 Michael Schatt Senior Portfolio Manager 312.630.4611 michael_schatt@dpimc.com Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  2. 2. 2 REITs 2004 Performance REITs have performed well versus the S&P 500 and the Russell 2000 while maintaining a lower standard deviation Index 1 Year 3 Year 5 Year 10 Year 10 Year Std. Dev. NAREIT Equity 31.56% 23.27% 21.94% 14.81% 12.91% S & P Utilities 24.28% 3.22% 3.71% 5.70% S & P 500 10.86% 3.59% -2.31% 12.11% 15.59% Russell 2000 47.25% 6.27% 7.13% 9.47% 19.66% Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  3. 3. 3 REITs 2004 Performance (con’t.) 2004 NAREIT Equity Return 140 130 120 110 100 90 80 12/31/2003 1/31/2004 2/29/2004 3/31/2004 4/30/2004 5/31/2004 6/30/2004 7/31/2004 8/31/2004 9/30/2004 10/31/2004 11/30/2004 12/31/2004 Source: NAREIT Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  4. 4. 4 Positive Alpha 5.5% 4.0% 3.4% 3.0% 3.0% 3 Years 5 Years 7 Years 10 Years Inception* DPIM REIT As of December 31, 2004. *Inception: January 1, 1995. This material is deemed supplemental and compliments the REIT composite performance in the Appendix. Gross returns include reinvestment of dividends and other earnings. Returns are annualized. Performance figures do not reflect deduction of fees and other expenses. Source: Frank Russell. For additional information on NAREIT Equity Index and DPIM REIT performance, please see notes in Appendix. Past performance is no guarantee of future results. Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  5. 5. 5 REITs 2004 Performance (con’t.) PROVEN ASSET CLASS ATTRIBUTES ! Funds flows reflect asset class identification Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  6. 6. 6 REITs 2004 Performance (con’t.) Cumulative funds flows and % of assets under management Flows ($ MM) Flows as % of AUM Real Estate $6,817 +24.7% Taxable Bonds $61,389 +5.3% General Equities $194,217 +6.1% Utilities ($717) (5.7%) Source: Deutsche Bank and AMG Data. Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  7. 7. 7 REITs 2004 Performance (con’t.) Recent Annual Funds Flows ($ MM) Real Estate All Fixed Income All Equity Utility 2004 $6,900 $51,700 $194,500 ($717) 2003 $4,500 $84,800 $140,200 ($1,100) 2002 $3,400 $150,400 $6,700 ($2,700) 2001 $56 $103,000 $30,800 ($2,000) Source: Smith Barney and AMG Data. Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  8. 8. 8 REITs 2004 Performance (con’t.) PROVEN ASSET CLASS ATTRIBUTES ! Funds flows reflect asset class identification ! Dividends – Visible, Secure, and Exhibited Growth – Attractive yield level versus 10 year Treasury over time – Majority of long-term return from dividend income Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  9. 9. 9 REIT Dividend Yield vs. 10 Year Bond (Feb ‘93 - January ‘05) (bp 400 350 300 250 Average Spread = 127 bps 200 150 100 50 0 -50 -100 Nov-96 Nov-01 Feb-93 Dec-93 May-94 Aug-95 Apr-97 Feb-98 Dec-98 May-99 Aug-00 Apr-02 Feb-03 Dec-03 May-04 Jul-93 Oct-94 Mar-95 Jan-96 Jun-96 Sep-97 Jul-98 Oct-99 Mar-00 Jan-01 Jun-01 Sep-02 Jul-03 Oct-04 Source: Salomon Smith Barney Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  10. 10. 10 REITs 2004 Performance (con’t.) PROVEN ASSET CLASS ATTRIBUTES ! Funds flows reflect asset class identification ! Dividends – Visible, Secure, and Exhibited Growth – Attractive yield level versus 10 year Treasury over time – Majority of long-term return from dividend income ! Low correlation vs. other investment alternatives Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  11. 11. 11 REITs 2004 Performance (con’t.) Correlation of REITs with other asset classes 1974-2004 1994-2004 S&P Utilities Index 0.39 0.40 S&P 500 0.51 0.27 Russell 2000 0.61 0.44 NASDAQ Composite* 0.46 0.16 ML Govt./Corporate Bond 0.20 0.07 *Price appreciation only. Source: NAREIT®, Ibbotson Associates, Frank Russell Company. Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  12. 12. 12 REITs 2004 Performance (con’t.) PROVEN ASSET CLASS ATTRIBUTES ! Funds flows reflect asset class identification ! Dividends – Visible, Secure, and Exhibited Growth – Attractive yield level versus 10 year Treasury over time – Majority of long-term return from dividend income ! Low correlation vs. other investment alternatives ! Diversification within sector – 153 companies – 13 property types - some may demonstrate strong fundamentals (malls and shopping centers) while others demonstrate soft fundamentals (office and apartments) Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  13. 13. 13 Performance of REITs in 2004 broken down by property sector 50.0% 45.0% 45.0% 40.0% 36.3% 34.1% 34.7% 35.0% 32.9% 32.4% 32.7% 29.7% 30.0% 26.9% 25.0% 23.3% 21.0% 19.6% 20.0% 15.0% 10.0% 6.4% 5.0% 0.0% ce ed lt y g e al d ts e ls es ts rs ag fie n ar t ri al en ix f fi ia te or di m C lM M i O or us ec en es rs tm an Ho th St d ive Sp /R a C St ar In l on ea ed lf Ap g D g e Se in in i H r e eg tu dg p Fr op ac R Lo uf Sh an M Source: NAREIT Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  14. 14. 14 PERFORMANCE OF THE TOP 5 PROPERTY SUB-SECTORS VS. THE NAREIT EQUITY INDEX FOR 2004 Total Return 1. Regional Malls 45.01% 2. Shopping Centers 36.25% 3. Apartments 34.71% 4. Industrial 34.09% 5. Lodgings/Resorts 32.70% NAREIT 31.58% Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  15. 15. 15 REITs 2004 Performance (con’t.) FUNDAMENTAL REVIEW ! Occupancy increases (adding to pricing power in retail and lodging while partially offsetting rent roll down in national office, industrial and to some extent, apartments) ! Concessions in office and apartments have been/will slowdown once targeted levels of occupancy are achieved in markets which were soft ! Operating expense increases can offset initial improved revenue in national office and apartment portfolios ! Earnings growth rates highest in retail and lodging, but other sectors to narrow the gap somewhat in 2005 ! Demand/supply equilibrium varies by sector ! Easy to sell properties / tough to buy Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  16. 16. 16 Outlook for 2005 Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  17. 17. 17 Issues for 2005 ! Level of job growth & types of jobs ! Industrial and Lodging more dependent on GDP and less on job growth ! Apartments and Office could benefit with accelerated job growth ! Interest rate increases + could reduce competitive external growth impact + could reduce new supply deliveries in multifamily - would offer more income alternatives…lack of correlation mitigates risk ! Capital Recycling Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  18. 18. 18 Expectations for 2005 (con’t.) FFO Growth 20.0% 18.0% 17.7% 15.6% 16.0% 14.0% 13.0% 12.0% 10.8% 10.6% 10.0% 9.2% 8.7% 7.6% Average: 8.3% 7.7% 8.0% 5.6% 6.0% 4.0% 2.3% 2.0% 0.0% -0.4% -0.5% -2.0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E Source: Salomon Smith Barney Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  19. 19. 19 Expectations for 2005 ! Total sector return 4 to 6% ! Earnings growth 5 to 8% ! Dividend average 4-5%, growth 2 to 4% ! Contracting Multiples Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  20. 20. 20 Public vs. Private Real Estate — How to Compare ! Core Properties • Private – NCREIF – Office and Retail • Public – NAREIT – Apartment and Retail ! Valuation • Private – Appraisal based – Smoothing • Public – Mark to market – Daily ! Leverage • Private – Unleveraged • Public – Leveraged ! Other Issues • Trophy properties • Large urban markets • Stable properties • Franchise value Duff & Phelps Investment Management Co., A Phoenix Investment Partner
  21. 21. 21 Restated Return Series 1981-2001 16% NAREIT with Core Only 14% Delivered, Core NAREIT NAREIT with Data 12% NAREIT as Realized Return Reported NCREIF Unsmoothed 10% 8% NCREIF as Reported 6% 4% 3% 5% 7% 9% 11% 13% 15% Realized Risk Source: The Journal of Portfolio Management – Special Issue 2003 Duff & Phelps Investment Management Co., A Phoenix Investment Partner

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