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HomeMy WebLinkAbout2009 10 27 Regular 600 American Realty Advisory01 Scott Darling 1� Principal, Managing Director, Portfolio Management Richelle Hayes Senior Manager, Marketing and Client Service Winter Springs General Employee Retirement System AMERICAN CORE REALTY FUND Portfolio Review October 27, 2009 2009 American Realty Advisorssm. All rights reserved SM AMERICAN REALTY ADVISORS 801 N. Brand Boulevard Suite 800 Glendale, CA 91203 (818) 545 -1152 www.americanreal.com INSTITLITYONAL. DEAL ESTATE kNVESTM ENT M, NACEM ENT American Realty Advisors American is one of the largest privately -held real estate managers in the country and is 100% owned by its senior investment professionals Over 21 years of firm experience doing only real estate investment management Strong capital structure no firm level debt No exposure to "risky" subprime /off balance sheet debt or derivatives No need for government bailout/support There has been no litigation with clients regarding their investments impacting the firm or its principals and no recent changes in senior management, firm structure or ownership No conflicts of interest related to our investment activities American Realty Advisors 100% employee -owned Clients have direct communication with Principals and Portfolio Managers AMERICAN REALTY APVIUQR9 Transparency Institutional Clients Risk Control INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMENT American Realty Advisors Value Proposition Focus on Middle Market Multi- Tenant Properties Target $20 -$150 million assets Less volatility in income through staggered vacancies and controlled turnover More liquidity in this sector in normal markets greater demand for these assets No style drift Conservative Use of Leverage Specific strategic direction to control downside risk through prudent debt management No "financial engineering" to underwrite deals Hands -on Management Extensive experience in directly managing private real estate assets Strategy implementation combines direct operational skill with understanding market drivers Value is created in core /value -added real estate by managing assets better AMERICAN COMBINES DISCIPLINED RISK CONTROL WITH DIRECT HANDS -ON EXECUTION TO PRODUCE SUPERIOR LONG -TERM RETURNS FOR ITS CLIENTS. AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY APV19QRV 2 One of the Largest Privately -Held Real Estate Managers in the U.S. Over $3.7 billion in assets under management* firm -wide in core and value -added investment strategies Open -end core /value -added real estate funds Closed -end value -added real estate funds Core /value -added separate accounts QPAM /Takeover portfolios of assets Development consulting services Offices in Los Angeles, Atlanta, Chicago, Santa Fe and Orlando Assets under management represent gross value of all assets and accounts managed by American as of June 30, 2009 (excluding partners'share of equity and partner's share of debt on partnership investments). AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY APV19QRV '93 Today's Commercial Real Estate Market Opportunities The "buy high and sell higher" world is gone Return expectations on commercial real estate have increased from historic lows of 2007 -2008 Fundamentals (rents and demand) are weak reflection of the economics of the market 2006 -2007 underwriting called for large growth in rents that never materialized Today's reality is that cash flow will be flat /declining in the short run Retail is very weak given poor consumer demand Less transactions make pricing more attractive Transaction levels down 94% off the peak Prices down as much as 35 -40% from the peak AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY APVIUQR9 4 Lack of Credit Will Force Sales of Assets as Loans Come Due Defaults have recently picked up, despite loose terms that called for little, if any, pay -down of principal Over $1 trillion of commercial real estate loan maturities may occur by 2012 Owners will be required to increase equity contributions to existing assets This is an opportunity for funds with capital to invest AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY APVIUQR9 5 Those With Capital Will Drive Transactions for the Next 18 -36 Months Refinancing will require large equity investments Mortgage Proceeds on a Property Valued at $100 Million in '07 vs Now $40 $20 $0 2007; LTV =75 $38 2009; LTV =60% Property Value Mortgage LTV calculated off the appraised value would have been lower. Appraised values were often inflated during the boom. Source: ARA Research AMERICAN INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT REALTY APVIUQR9 6 A35 -40% decline in value combined $120 with tighter loan terms translates into $100 a $37 million shortfall (50% of the $100 original loan amount) on maturity. Who will write this check? $80 $75 0 $63 $60 $40 $20 $0 2007; LTV =75 $38 2009; LTV =60% Property Value Mortgage LTV calculated off the appraised value would have been lower. Appraised values were often inflated during the boom. Source: ARA Research AMERICAN INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT REALTY APVIUQR9 6 What Does This Mean for Core Real Estate? Market pricing is now based on overly negative outlook and expectation of slow recovery Those with capital who buy on pessimism- based /in -place income not future appreciation have significant advantage Continue to seek quality assets in strong markets Carefully underwrite risk to capture strongest returns and protect downside exposure IN THE MIDST OF UNCERTAINTY, THERE IS A CLEAR OPPORTUNITY TO CAPTURE QUALITY NEW INVESTMENTS AT LOWER PRICES AMERICAN Ih18TITlJTYOF•iAL REAL ESTATE YFJVESTNIEMT N1 ,4hJ,4CENIEMT REALTY Aov194R9 Investing in Downturns Can Generate Higher Returns In previous periods of weak economic performance (1982, 60% 1993 and 2002), new investments made during these markets outperformed 50% existing investments over the following three years. 40% The outperformance of these investments over this period 30% averaged nearly 18 20% 10% 0% Cumulative 3 -Year Total Return 52.5% 55.3% New Acquisitions Existing Investments 0 36.0% 16.0% 1993 2002 Year Source: NCREIF, ARA Research AMERICAN INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT REALTY ^D -54R9 s 1982 Indicators to Look for in Advance of a Recovery Falling Market Minimize Downside Risks Debt Returns Exceed Equity 2QO7 Peak in Real Estate Prices 4Q07 Financing Risk Premiums Skyrocket 3Q08 Energy Prices Decline Financial Industry Fallout 2Q08 Increasing Job Losses Real Estate Sales Volumes Fall Commodity Spike Opportunistic Investing Value -added Strategy Discounted Pricing Distressed Debt High Risk/High Return Potential 4Q08 Deepening Liquidity Crunchl Auto Industry Peril 1Q09 Short -Term Liquidity Returns 2Q09 Stock Market Rally Starts I Risk Minimization AMERICAN REALTY Aov 3Q09 Job Losses Slow but Continue Housing Prices Stabilize Employment Growth Resumes Increase in Global Demand Consumer Spending/ Increasing Liquidity Commercial Real Estate Transactions Resume Forced Sales III Expansionary Economv Core Investment Growth Development /Redevelopment Lease Up Strategies Normal Economic Expansion but not "back to where we were" Best Guess Mid 2010 Market Recovery INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMENT But What Will That Recovery Look Like? f JQ° AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT 10 REALTY APVIUQR9 American Core Realty Fund A Diversified Core Equity Real Estate Strategy 169 clients $1.5 billion Gross Market Value invested in 78 properties nationwide (09/30/09) AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY Aov194R9 Focused on a Pure Core Strategy to Manage Risk The American Core Realty Fund is a open -end core commingled fund risk management is essential in today's market environment Consistent long -term investment strategy no style drift focus on core assets only Fund Strategy: Diversified pool of stable core operating real estate assets: Stable, predictable income Income represents majority of expected long -term total return Diversified rent roll Multi- tenant Economically diverse Staggered lease expirations AMERICAN Ih18TITlJTYOF•iAL REAL ESTATE YFJVESTNIEMT N1 ,4hJ,4CENIEMT REALTY APVIUQR9 1n n �n 15 1f �r 12 High Quality Well- Positioned Assets Nationwide Fund Strategy low risk approach in today's market: Existing institutional quality office, retail, industrial, and multi family properties in strong, growing, and /or supply- constrained diversified metropolitan areas nationwide Geographic, property type, and economic diversification to reduce risk Focus on institutional markets Target properties that: show strong and consistent long -term tenant and buyer demand have limited or no deferred maintenance, minimal need for capital expenditures and no functional obsolescence are substantially leased occupy superior locations within each market Strong focus on "downside" risk control AMERICAN REALTY APVIUQR9 14 INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT 13 American Core Realty Fund Investment Objectives Steady income returns Long -term appreciation Exceed the NCREIF Property Index benchma Fiduciary Responsibility American is an ERISA fiduciary with respect to the investments made by the American Core Realty Fund and acknowledges this in writing NOTE: All investments such as the American Core Realty Fund may be subject to loss of capital and there is no guarantee that the above goals will be achieved over all time periods. AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY APVIUQR9 14 American Core Realty Fund Valuations Each property is appraised by an independent MAI appraiser at least once every 12 months Internal valuations are completed quarterly PwC Independent Valuation Advisor third -party oversight of all valuations American claims compliance with GIPS° on a firm -wide basis and composite returns are externally examined* American Realty Advisors' compliance with the GIPS" standards has been verified on a firm -wide basis for the period January 1, 2001 through June 30, 2009 by Ashland Partners Company, LLP. Please see the Core Equity Real Estate Investments Composite Annual Disclosure Presentation at the end of this presentation. A complete list and description of American's composites and verification reports are available upon request. AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT 15 REALTY APVIUQR9 Diversification Across Major Markets Nationwide 0000° Seattle Portland East Bay San Francisco 7 IN San Jose Los Angeles i Orange County L Inland Empire San Diego oQ a� a Phoenix Denver Austin Property Type A Multi Family Office Industrial Retail Minneapolis Chicago /Cook County Suburban Chicago Cincinnati Boston Long Island, NY Northern NJ Philadelphia Baltimore Washington, DC Northern Virginia Raleigh Nashville Atlanta Jacksonville Dallas Miami Leased as of September 30, 2009 NOTE: Represents the American Core Realty Fund's investments as of September 30, 2009. Information provided is supplemental to the attached Core Equity Real Estate Investments Composite Annual Disclosure Presentation. AMERICAN Ih18TITlJTYOF•iAL REAL ESTATE YFJ1fESTMEMT M,4hJ,4CEMEMT REALTY APVIUQR9 16 Broad Property Type, Size and Geographic Diversification Property Type Industrial 22.7% Office 38.4 Multi- Family Retail 24 9 14.0% Property Size Geographic Region $50 M $25 M $100 M East $50 M 24.8% West 2.3 0 29.5 32.3 /o 47. $0 $25 M 27.3% South Midwest 26.4 11.8% Additional Fund Metrics As of September 30, 2009 NOTE: Portfolio Diversification is based on the American Core Realty Fund's gross market value of properties. The Information presented above is based on data as of September 30, 2009. Information provided is supplemental to the attached Core Equity Real Estate Investments Composite Annual Disclosure Presentation. AMERICAN INERTITLITIE3NAL REAL ESTATE INVESTMEMT M,4NAE;EMEMT REALTY APVIUQR9 17 American Core Realty Fund Highlights rY 150 N. Wacker Drive 243,616 sq. ft. Office Building Chicago, IL Percent Leased: 87% Year Built: 1970 Major Tenants: Transwestern Investment Hometown America HDI Gerhling ALARA° Harbour Pointe 230 -Unit Multi Family Community Mukilteo, WA Percent Leased: Year Built 93% 1998 150 North Wacker is strategically located in the prestigious West Loop submarket of the Chicago Central Business District. The West Loop is widely considered to be the dominant submarket in Chicago. Property situated one block from Ogilvie Station and two and a half blocks from Union Station, providing quick and convenient transportation to downtown Chicago. American is continuing to upgrade building finishes to maintain the property's historically high occupancy and rent levels ALARA Harbour Pointe is located near Everett, Washington, home to a diverse range of corporate employers, including Boeing, TRW, JanSport and Allied Technology. Property has an appealing location at the north end of Seattle's Technology corridor. Strategically positioned location with high barriers -to- entry limiting potential competition, severe shortage of multi family land, and arduous environmental regulations. ALARA® is a registered service mark owned by American Realty Advisorssm and is used under license. AMERICAN Ih18TITlJTYOF•iAL REAL ESTATE YFJVESTNIEMT N1 ,4hJ,4CENIEMT REALTY APV19QRV 18 American Core Realty Fund Highlights w i Multi -state Industrial Portfolio Over 1,000,000 sq. ft. Industrial Portfolio Cincinnati, Chicago and Atlanta Percent Leased: 100% Year Built: 2005 -2007 Major Tenants' Uniform Direct The Pampered Chef GSI Commerce Lincoln Electric AMERICAN REALTY APV19QRV Waldorf Marketplace II 168,177 sq. ft. Shopping Center Waldorf, MD Percent Leased' 98% Year Built: 2007 Major Tenants: Home Goods Kincaid All of the properties in the portfolio contain state -of- the -art ESFR sprinkler systems and a minimum 50'x 50' interior column spacing providing tenants with considerable storage capacity and flexibility. Each of the properties is well located in proven warehouse distribution markets in the central regions of the U.S. Each of the properties has long -term leases in place with contracted rentals that are generally subject to annual or periodic escalation. Waldorf Marketplace II is a newly constructed retail shopping center located approximately 15 miles south of the Capital Beltway (1 -495) in Waldorf, MD. Property is anchored by major, national retail tenants including TJ Maxx/Home Goods, DSW, and Kincaid Home Furnishings and include two out parcels ground leased to TGI Fridays and Mimi's Cafe. This investment complements Waldorf Marketplace I, a community shopping center that American purchased for the Fund in 2005. INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT 19 Winter Springs General Employee Retirement System $1,000,000 commitment with initial investment made October 1, 2007 Account Balance as of September 30, 2009: $639,006.49 CONTPJBUTIONS 2007 250,000 2008 750,000 AMERICAN REALTY APVIUQR9 Year -to -Date Inception -to -Date Beginning Net Asset Value 904,042 Contributions 1,000,000 Distributions/Withdrawals (18,104) (59,834) Income Returns Income (Dividends /Interest) 25,533 60,544 Market Value Gains /Losses (272,465) (361,704) Ending Net Asset Value 639,006 639,006 INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT 20 Winter Springs General Employee Retirement System Gross of Fees Since Inception* 3Q09 Year -to -Date One -Year (10/01/2007) Income 1.34% 3.97% 5.04% 4.74% Appreciation 10.94% 30.00% 35.98% 19.65% Total Return -9.60% 26.86% 32.36% 15.60% NFI -ODCE -7.41% 27.30% 35.26% 18.26% Net of Fees Since Inception* 3Q09 Year -to -Date One -Year (10/01/2007) Income 1.10% 3.23% 4.04% 3.71% Appreciation 10.94% 30.00% 35.98% 19.65% Total Return -9.84% 27.45% 33.08% 16.48% NFI -ODCE -7.51% 27.79% 35.76% 18.94% '`Annualized PERFORMANCE DISCLAIMER: The returns above are for the Winter Springs General Employee Retirement System and include leveraged returns before (gross) and after (net) the deduction of investment management fees and reflect the reinvestment of some income. The above performance is considered supplemental information and complements the Core Equity Real Estate Investments Composite performance in the attached Annual Disclosure Presentation. The sum of annualized component returns may not equal the total return due to the chain linking of quarterly returns. The NFI -ODCE is an unmanaged index published by the National Council of Real Estate Investment Fiduciaries. NFI ODCE returns are shown before (gross) and after (net) the deduction of any investment management fees and include leverage. The returns for the NFI -ODCE are preliminary and subject to revision. Although the Fund may invest in similar property types as the NFI -ODCE, the weighting of each property type will differ from the NFI -ODCE in any measurement period. Past performance is not a guarantee of future results and it is important to understand that investments of the type made by the Fund pose the potential for loss of capital over any time period. AMERICAN INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT REALTY ^o gVQR9 Historically, the income return for core real estate is in the 6% to 8% range Appreciation represents only 20% of the long -run return for core real estate investments Note: the volatility of appreciation returns is 8 times greater than income returns Return 7.7% 1.9% 9.6% of Return 80.0% 20.0% 100.0% Standard Deviation 0.5% 3.8% 3.9% of Return Rolling 5 -Year Annualized Return 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% ti d ti d ti d ti d ti d ti d ti d ti d ti d ti d ti d ti d ti d ti d Source: NCREIF, ARA Research AMERICAN INSTITUTIONAL REAL ESTATE INVESTMENT MANACEMEMT REALTY APVIUQR9 22 Long Term Perspective: Core Real Estate Income is Stable Representing 80% of Total Return American Realty Advisors Real Estate Focus: Firm philosophy and process focused exclusively on private real estate transactions 21 -year firm track record Working with Decision Makers: Firm is 100% owned by senior management Disciplined Process: Research -based investment management focusing on risk control and value realization Client Orientation: Core and value -added strategies available in separate accounts and commingled funds to meet specific needs Performance: Strong long -term performance. Experience in investing in all phases of the real estate cycle Risk Control: Long -term record of understanding and underwriting risk DISCIPLINE COMMITMENT EXCELLENCE AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT REALTY APVIUQR9 23 American Realty Advisors Mission Statement Our mission is to create and implement client focused institutional real estate investment strategies providing superior returns, capital preservation and growth, delivered with the highest level of integrity, communication, and service. 0 AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT 24 REALTY APVIUQR9 Today's Presenters Scott W. Darling, Principal, Managing Director, Portfolio Management Scott Darling is a Principal of the firm and is a Managing Director for the firm's Portfolio Management Team. Mr. Darling is responsible for the portfolio management of American Realty Advisors' pension fund clients, and the implementation of their investment strategies. Mr. Darling is also a member of the firm's Investment and Executive Committees. He has over 31 years of experience in the acquisition, management, and disposition of income producing investment real estate. Prior to joining American, Mr. Darling was employed by the Resolution Trust Corporation. At RTC, he was Director of Asset Management and Sales for the California Office, where he was the senior asset officer, responsible for the management and sale of over $60 billion in assets from failed savings and loans. Mr. Darling graduated from Florida State University with a B.S. in Real Estate and Finance and received his J.D. from the University of Southern California. Richelle Hayes, Senior Manager, Marketing and Client Service Richelle Hayes is responsible for developing and expanding client and consultant relationships for American's commingled fund clients, and is based out of American's Orlando office. She has over 19 years of experience in the financial services industry. Most recently, she was Vice President of Client Services for ICC Capital Management in Orlando, where she worked closely with clients and consultants based in the Southeast. Prior to joining ICC, she was Vice President, Corporate Relations with the American Hospital Association in Florida, and was responsible for developing client relationships with senior executives of member hospitals, following various positions in financial relationship management within the national managed health care industry. Ms. Hayes graduated from University of Central Florida with a degree in Business Administration and a concentration in Finance, and earned an M.A. in Health Services Management and an M.B.A. from Webster University. AMERICAN Ih18TITYJTYOF•iAL REAL ESTATE YFJVESTNIEMT M,4hJ,4CEMEMT 25 REALTY APV19QRV Disclosures This presentation is for your information only and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments. The information in this presentation has been obtained or derived from sources believed by American Realty Advisors "American to be reliable but American does not represent that this information is accurate or complete. Any opinions or estimates contained in this presentation represent the judgment of American at the time this presentation was prepared and are subject to change without notice. Performance analysis is based on certain assumptions with respect to significant factors that may prove not to be as assumed. You should understand these assumptions and evaluate whether they are appropriate for your purposes. Performance results are often based on mathematical models that use inputs to calculate results. As with all models, results may vary significantly depending upon the value of the inputs given. Models used in any analysis may be proprietary, making the results difficult for any third party to reproduce. This presentation should be considered confidential and may not be reproduced in whole or in part, and may not be circulated or redelivered to any person without the prior written consent of American. This presentation is intended for Fund investors, their consultants, and prospective investors only. Past performance is not a guide to or otherwise indicative of future results. As with all investments there are associated inherent risks. The investments made by the Fund and described herein are not FDIC insured, are not bank guaranteed, are not guaranteed by American and may lose value. Forward Looking Statements This presentation may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to future financial or business performance, strategies or expectations. Forward looking statements are typically identified by words or phrases such as "trend," "potential," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" or similar expressions. American Realty Advisors "American cautions that forward- looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward- looking statements speak only as of the date they are made, and American assumes no duty to and does not undertake to update forward looking statements. Actual results could differ materially from those anticipated in forward looking statements and future results could differ materially from historical performance. In addition to factors previously disclosed in the Fund's disclosure documents and those identified elsewhere in this presentation, the following factors, among others, could cause actual results to differ materially from forward looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies by American on behalf of the Fund and /or by others in its industry; (2) changes in political, economic or industry conditions, the interest rate environment or financial and capital markets; (3) the relative and absolute investment performance and operations of the Fund's investments; (4) the impact of increased competition in the financial, capital and real estate markets; (5) the impact of capital improvement projects in the real estate markets; (6) the impact of future acquisitions and divestitures by the Fund, its competitors and other participants in the financial, capital and real estate markets; (7) the favorable or unfavorable resolution of legal proceedings affecting the Fund's investments; (8) the impact, extent and timing of technological changes; (9) the impact of legislative and regulatory actions and reforms and increasing regulatory, supervisory or enforcement actions of government agencies relating to the Fund's investments; (10) terrorist activities, which may adversely affect the general economy, real estate, financial and capital markets and specific industries; (11) the ability of American to attract and retain highly talented professionals; and (12) the impact of changes to the tax code and tax legislation in general. AMERICAN Ih18TITlJTYOF•iAL REAL ESTATE YFJVESTNIEMT N1 ,4hJ,4CENIEMT 26 REALTY APVIUQR9 Core Equity Real Estate Investments Composite Annual Disclosure Presentation Year End Total Firm Assets* (millions) Composite Assets Annual Performance Results U.S. Dollars (millions) Number of Accounts* Composite NPI Dispersion High Low Income Appreciation Total 2008 4,219 3,264 94 4.94% (10.04 (5.48%) (6.46%) 16.98% (60.84 2007 4,363 3,337 88 5.50% 14.65% 20.74% 15.85% 69.41% (18.27 2006 3,392 2,622 84 5.71% 9.94% 16.07% 16.60% 51.17% (26.60%) 2005 2,523 2,038 74 6.16% 14.61% 21.43% 20.06% 1 73.93% (35.67 2004 1,423 1,290 51 7.37% 1 4.23% 1 11.83% 14.49% 53.78% (39.46%) 2003 1,194 896 46 8.71% 1.50% 10.31% 9.00% 249.64% (49.65%) 2002 983 690 37 8.69% (1.12%) 7.50% 6.75% 23.77% (15.07 2001 1,058 589 35 9.49% (2.23%) 7.10% 7.28% 14.58% Assets under management represent the gross value of all assets and accounts managed by American Realty Advisors (excluding partners' share of equity and partners' share of debt on partnership investments). Prior to March 31, 2008, American reported total firm assets as the amount of assets under management plus undrawn capital commitments and noted the amount of such undrawn commitments in a footnote. Effective March 31, 2008, American has restated year end total firm assets from 2001 -2007 to omit such undrawn commitments. Each account in the composite represents a single property investment. Core Equity Real Estate Investments Composite is comprised primarily of fully operational, stabilized, income producing properties of four property types: institutional office, industrial, retail and multi family, diversified nationwide in markets with above average growth potential. For comparison purposes this composite is measured against the NCREIF Property Index (NPI). The NPI is an unmanaged index published by the National Council of Real Estate Investment Fiduciaries. NPI returns are calculated unleveraged and are shown before (gross) the deduction of any investment management fees. Although the Core Equity Real Estate Investments Composite may invest in similar property types as the NPI, the weighting of each property type will differ from the NPI in any measurement period. Unlike the NPI, the portfolios in the composite are actively managed. Furthermore, the portfolios are invested in substantially fewer assets than the number of investments comprising the NPI. The NPI does not reflect payment of investment management or other fees or expenses. Because of these differences, the NPI should not be relied upon as an accurate measure of comparison. It is important to understand that investments of the type included in the composite pose the potential for loss of capital over any time period. American Realty Advisors has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). American Realty Advisors, founded in 1988, is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 and has qualified as a Qualified Professional Asset Manager (QPAM), investment manager and fiduciary under ERISA. The firm maintains a complete list and description of composites, which is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. All accounts managed by American Realty Advisors are considered "discretionary" for purposes of determining composite membership, except those that contain investment guidelines significantly restricting the management team's ability to manage the assets according to the applicable product mandate. Past performance is not a guarantee of future results and it is important to understand that investments of the type included above pose the potential for loss of capital over any time period. AMERICAN Ih18TITIJTYOF•iAL REAL ESTATE YFJ1fESTMEMT M,4hJ,4CEMEMT 27 REALTY APV19QRV Core Equity Real Estate Investments Composite Annual Disclosure Presentation The U.S. Dollar is the currency used to express performance. Income and capital appreciation component returns are presented, in addition to the total composite. The income return measures the portion of the composite's total return that is generated by the income from the operations during the period. The appreciation return measures the portion of the composite's total return that is generated from the change in the market value of the assets during the period. Performance returns are computed using the NCREIF mandated property level return formulas, which calculate time weighted returns for real estate investments by geometrically linking component returns. The sum of income return and the capital return may not equal the total return for annualized periods due to the chain linking of quarterly returns. Real estate values are based upon independent appraisals performed for commingled funds annually on or about the asset's acquisition anniversary date and for separate accounts every three years, or otherwise as required by each account's Investment Management Agreement. Internal valuations are conducted quarterly and are used on an interim basis. Market values represent the value at which a willing buyer and seller would agree upon in an arm's length transaction, without any pressure to consummate the transaction on the imposed deadline. The market value does not include costs to consummate the transaction. Various approaches have been used to determine market value, including the Cost, Sales Comparison and Income approaches. Additional information regarding valuation methods is available upon request. All valuations of real estate involve subjective judgments, as the actual market price of real estate can be determined only by negotiations between independent parties in sales transactions. As of December 31, 2008, December 31, 2007 and December 31, 2006, 82 53% and 51 respectively, on a market value basis, of the real estate assets in the composite had been appraised by independent appraisal firms during the year ended on such dates. All composite returns are presented gross of management fees. Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. The collection of fees produces a compounding effect on the total rate of return net of management fees. As an example, the effect of investment management fees on the total value of a client's portfolio assuming (a) quarterly fee assessment, (b) $1,000,000 investment, (c) portfolio return of 8% a year, and (d) 1.00% annual investment advisory fee would be $10,416 in the first year, and cumulative effects of $59,816 over five years and $143,430 over ten years. The highest and lowest annual gross of management fee property returns are shown as a measure of composite dispersion. Additional information regarding the policies for calculating and reporting returns is available upon request. As discussed below, asset management fees vary for each fund and portfolio managed by American Realty Advisors. The fees are based on a variable which generally consists of original acquisition cost, net asset value, net operating income or gross value. Some fee arrangements provide for the lower or higher of two variables. The low end of the range is equal to 0.45% of acquisition cost with the high end of the range based on 0.80% of gross value. The fee structure for the largest fund that American Realty Advisors manages is dependent on the level of commitment made by the investor and ranges from 0.85% to 1.10% of net asset value. Incentive fees may also be charged. Incentive fee structures differ for each client; however, such fees are generally based upon achieving stipulated internal rate of return hurdles. In most cases, the use of leverage is not a primary component of the investment return strategy. Leverage is used primarily for making additional acquisitions. While fixed rate leverage is preferred, floating rate debt with interest rate caps is considered when pricing is favorable. The firm's leverage strategy takes into account a wide variety of factors and is designed to control for risks associated with the operating and leasing strategies of the underlying properties. Leverage in separate account portfolios would only be used if approved by the client's investment guidelines and only when there is a significant positive spread between the capitalization rate for the acquisition of the asset and the cost of the loan. Fixed rate leverage would be used, but only if it enhances the overall yield of the investment and provides for enhanced disposition opportunities associated with the use of leverage. The Core Equity Real Estate Investments Composite was created on January 1, 1992. American Realty Advisors' compliance with the GIPS standards has been verified for the period January 1, 2001 through June 30, 2009 by Ashland Partners Company LLP. In addition, a performance examination was conducted on the Core Equity Real Estate Investments Composite beginning January 1, 2001. A copy of the verification report is available upon request. F: \F \W\PowerPoint \Stable Value Fund \Client Reviews \Winter Springs General Employee Retirement System \Winter Springs GERS_10- 27- 09.pdf 10/21/2009 4:59 PM AMERICAN INSTITUTIONAL REAL ESTATE INVESTMENT M, NAOEMEMT 28 REALTY APVIUQR9