1. Fresno County Employees’ Retirement Association Private vs. Public Real Estate Investing January 4, 2005 SEATTLE 999 Third Avenue Suite 3650 Seattle, Washington 98104 206.622.3700 telephone 206.622.0548 facsimile LOS ANGELES 2321 Rosecrans Avenue Suite 2250 El Segundo, California 90245 310.297.1777 telephone 310.297.0878 facsimile Jeffrey MacLean President www.wurts.com

2. WURTS & ASSOCIATES PAGE 2 C ontents Private vs. Public Real Estate Investing:  Why Real Estate?  Types of Real Estate Investments:  Public – Real Estate Investment Trust  Private – Commingled Funds/Limited Partnerships/Separate Accounts  Public or private?  Private vs. Public Real Estate  Developing a Real Estate Strategy

3. WURTS & ASSOCIATES PAGE 3 W hy Real Estate?  Real estate makes up approximately 20% of domestically invested assets  $5.6 trillion in value (U.S. commercial real estate) as of 9/30/05  Can be accessed through a range of available investment approaches  Low correlation to stocks and bonds leads to higher diversification benefits  Historically proven to be a good hedge against inflation  Construction costs typically rise in an inflationary environment  Rental income increases with inflation  High current income  A large portion of real estate returns is the stable income component Source: JP Morgan Asset Management

4. WURTS & ASSOCIATES PAGE 4 T ypes of Real Estate Investments In general, there are two types of real estate markets: I. Public real estate market  Real Estate Investment Trusts (REITs)  Real Estate Operating Companies (REOCs) II. Private real estate market  Direct  Separate Accounts, Joint Ventures/Partnerships  Commingled Funds  Operating Companies

5. WURTS & ASSOCIATES PAGE 5 T ypes of Real Estate Investments Risk Return Opportunistic – Total Return (20% or higher) Value Added – Total Return (12% - 16%) Publicly-Traded REIT – Total Return (9%-11%) Core – Total Return (7% - 9%)  Real estate investment portfolios can be categorized in four different styles which varies in leverage usage and return objectives:  Core  Publicly Traded REITs  Value-Added  Opportunistic

6. WURTS & ASSOCIATES PAGE 6 P ublic Real Estate Real Estate Investment Trusts Advantages  Greater liquidity – Trade on a major exchange on a daily basis  Daily pricing – Priced or valuation varies as investor sentiments are tied into REIT prices  Transparency – Has to be transparent in order to qualify as a REIT Drawbacks  Higher volatility – Due to greater liquidity, other factors besides underlying fundamentals tend to influence returns  Higher correlation – Higher correlation to major asset classes than private real estate  Most common public real estate investment vehicle is the Real Estate Investment Trusts (REITs).  REIT is a special type of company created securities which allow investors to participate in the commercial property markets through readily traded shares of a public company.  Simply, REITs can be viewed as shares of companies in the real estate business.

7. WURTS & ASSOCIATES PAGE 7 P ublic Real Estate Real Estate Investment Trusts  Publicly traded  Required to distribute 90% of income as dividends  Ownership must include 100 shareholders or more (with a prohibition against five or fewer shareholders owning 50% or more of the shares)  Required to have 75% of assets in real estate investments  Required to earn 75% of income from real estate investments  Must hire independent real estate professionals to execute certain management activities  Risk/return profile similar to that of a small cap value equity investment

8. WURTS & ASSOCIATES PAGE 8 P ublic Real Estate Real Estate Operating Companies REOCs are similar to REITs but have fewer restrictions:  Do not have to pay specific level of income as dividends – can be reinvest like a corporation  Do not share the same tax advantage as REITs  No minimum on the number of owners and no restriction on ownership concentration  Can invest in any real estate assets of its choosing  Income may be derived from any investment combinations  Do not need to hire outside management

9. WURTS & ASSOCIATES PAGE 9 P rivate Real Estate Commingled Funds/Limited Partnerships/Separate Accounts Advantages  Low volatility – Less frequent valuation; prices are more inline with the value of the underlying real estate assets  Lower correlation with stocks and bonds – Returns are less driven by investors’ sentiments Drawbacks  Less transparency – Less required disclosure  Infrequently priced – Valued once a month or once a quarter  Limited liquidity (some restrictions on redemptions - generally quarterly)  Private real estate assets typically trade through individually negotiated transactions.  Institutions may make use of separate accounts or commingled funds to participate in this form of real estate investing.

10. WURTS & ASSOCIATES PAGE 10 P ublic vs. Private Real Estate: Historical Performance Data as of 6/30/05 Source: Ibbotson * Not annualized  NAREIT Index (benchmark for REITs) has outperformed the NCREIF Property Index (benchmark for private real estate investments) over the short run and the long run.  Over the 20 year period, NAREIT Index returned 10.2% (with leverage) while NCRIEF Property Index returned 7.8% (without leverage). Cumulative Annualized Return

11. WURTS & ASSOCIATES PAGE 11 P ublic vs. Private Real Estate: Volatility In Returns Source: Ibbotson NAREIT Index started in 1972 and the NCREIF Index started in 1978 Annual Consecutive Returns  Since REITs trade publicly on a daily basis, the returns are more volatile.  REIT returns are influenced by investor sentiment as well as the value of the underlying real estate investments.

12. WURTS & ASSOCIATES PAGE 12 P ublic vs. Private Real Estate: Rolling Average 12 Quarter Rolling Average 1/1978 – 6/2005 Source: Ibbotson  On a rolling 12 quarter basis, REITs and private real estate investments have traded leadership.

13. WURTS & ASSOCIATES PAGE 13 P ublic vs. Private Real Estate: Leverage  Use of Leverage:  Core Private - below 50%  REIT - 50% on average  Value Added - 50%-60%  Opportunistic - 60%-80%  Benchmark Comparison:  The NAREIT Index returns include historical levels of REIT leverage whereas NCREIF Property Index returns are reported on an unleveraged basis  The effects of leverage has enhanced the returns of the NAREIT Index especially in more recent times Source: Bloomberg, RREEF

14. WURTS & ASSOCIATES PAGE 14 P ublic vs. Private Real Estate: Dividend/Income Yields NAREIT All Index Dividend YieldNCREIF Property Index Income Yield  Current yields on REITs have decreased significantly, falling from 8.99% in 1999 to 5.02%.  Private real estate yields have decreased more moderately, falling from 2.23% in 1997 to 1.61%. Source: Bloomberg, RREEF As of 9/30/05

15. WURTS & ASSOCIATES PAGE 15 P ublic vs. Private Real Estate: Return vs. Risk Annualized Return/Risk 1/1978-6/2005 Source: Ibbotson NAREIT Index started in 1972 and the NCREIF Index started in 1978  Historically private real estate investments have behaved more like fixed income while REITs are more similar to equities

16. WURTS & ASSOCIATES PAGE 16 P ublic vs. Private Real Estate: Historical Correlation Ten Year Correlation S&P 500Russell 2000MSCI EAFELB AggregateNAREITNCREIF S&P 5001 Russell 20000.881 MSCI EAFE0.860.821 LB Aggregate-0.40-0.38-0.411 NAREIT0.330.560.290.091 NCREIF0.140.010.100.040.001 Correlation as of 6/30/05 Source: Ibbotson  Core private real estate has been less correlated to other major asset classes than REITs.  Though higher in correlation than core private real estate, investing in REITs does provide diversification benefits.  As of 9/30/05, Russell 2000 Index had approximately 6.5% in REITs.  REITs are currently a permissible investment for FCERA’s small cap managers as 6.5% of the Russell 2000 Index is composed of REITs.

17. WURTS & ASSOCIATES PAGE 17 D eveloping a Real Estate Strategy  Public vs. Private Investments  FCERA’s existing real estate allocation is made up of all private real estate  As of 6/30/05, core private real estate is underweighted relative to other styles  If FCERA decides to invest in REITs as a designated assets class, Wurts & Associates recommends patience as yields will likely to rise in the future TA Realty JER Heitman JMB Sentinel Data as of 6/30/05