2. Real Estate Boot Camp

3. John A. Isakson Chief Investment Officer Preferred Apartment Communities

4. Real Estate and The Economy: What is important and why? What are the primary economic factors that drive real estate? What are they doing today? Why is real estate an economic hedge against inflation? What does that mean? What is happening in individual sectors of real estate today? How is the environment in Washington affecting the economy? What could the government do that would impact the economy further?

5. Why are these things important for Real Estate? Inflation = What is happening to Prices Interest Rates = Return on/Cost of money GDP = How is the economy growing generally Employment = How many people are working

6. The Economy Today: What are these measures doing? Inflation:1.5% (Aug. 2013 NSA) Unemployment:7.3% (Aug. 2013) GDP:2.5% (Q2 2013) Interest Rates:2.64% (10yr UST 10/4/13)

7. Trends in the Economy Today: Inflation and Interest Rates

8. Trends in the Economy Today: Inflation and Interest Rates Why is inflation so low when the Fed has been printing money at such a high rate (to buy US Treasuries/Quantitative Easing)? Typically Fed increases in money supply/bond buying leads to excess reserves at bank. Fed required certain % of reserves on bank deposits, excess reserves didn’t earn interest. Now excess reserves earn interest (2008 rule change)

9. Trends in the Economy Today: Inflation and Interest Rates

10. Trends in the Economy Today: Employment and Real GDP

11. Trends in the Economy Today: Employment and Real GDP

12. Trends in the Economy Today: Inflation and Employment

13. Trends in the Economy Today: GDP Growth Comparisons

14. Trends in the Economy Today: GDP Growth Comparisons

15. Trends in the Economy Today: GDP Growth Comparisons

16. Trends in the Economy Today: Employment and Real GDP Unemployment has improved tepidly in the last five years for several reasons: Companies are keeping higher cash reserves rather than expand. Lack of leadership and uncertain regulatory environment have kept expansion down.

17. Trends in the Economy Today: Conclusions Inflation is inevitable but the timing is very difficult to gauge Interest Rates are headed up and sooner rather than later GDP growth is being restrained systemically and by lack of corporate growth Unemployment is better but improvement is anemic compared to years past

18. Why is Real Estate a Hedge Against Inflation? A rise in inflation causes a reduction in purchasing power and a decrease in the value of currency. People can purchase less with the same amount of income. Assets with intrinsic value increase in value. Real estate along with precious metals, natural resources and other commodities have intrinsic value.

19. Why is Real Estate a Hedge Against Inflation?

23. As inflation rises so does the value of real estate. Landlords have a greater ability to raise rents. Effect is somewhat offset by potential increases in interest rates and increases in cost of operating assets.

24. Why is Real Estate a Hedge Against Inflation?

25. Portfolio diversification includes allocation into hard assets as a hedge against inflation and a complement to fixed income strategies. Real Estate provides income and appreciation upside in inflationary environments and insulates against erosion of values in cash and fixed income products

26. What is happening in specific sectors of the commercial real estate market?

27. Why is Real Estate a Hedge Against Inflation?

28. What is happening in specific sectors of the commercial real estate market? Transaction volume in residential and commercial real estate has rebounded significantly in the last 3 years. Pricing has increased due to three primary factors Increased Cash flow from rebounding rental rates Low interest rates on debt Compressed CAP rates due to increased demand for property

29. What is happening in specific sectors of the commercial real estate market?

30. There is a wide variance in pricing by property type which primarily reflects occupancy trends. While apartment cap rates have surpassed levels of the previous peak in pricing and CBD office cap rates are back to peak levels, pricing for suburban office in particular is lagging.

31. What is happening in specific sectors of the commercial real estate market? Because apartments have been a popular investment over the past several years, there is also a relatively low spread between apartment cap rates and mortgage interest rates. Employers are fitting more employees into the same or fewer square feet. Internet sales of consumer goods have risen astronomically in the last ten years.

32. What is happening in specific sectors of the commercial real estate market?

33. How to invest in real estate companies? Strong management team with deep operational experience. Diverse portfolio geographically Strong financial structure

34. What is Washington DC doing and why? What is happening? Ideological brinksmanship, bright lines in the sand(box). Redistricting has created very safe seats. Frustration over partisanship and lack of ability/willingness to negotiate creating roadblocks.

35. What is Washington DC doing and why? How can Washington help? Get out of the way. Consistent regulatory policy evenly administered. Tax reform and consistent tax policy with favorable treatment for offshore earnings.

36. What is Washington DC doing and why? When is the shutdown going to end and why? Egos get under control on both sides October 17-25 is the real D-Day Both sides “lose” something, both sides “win” something. Public outcry becomes so deafening on both sides that congress and administration are forced to compromise.