Equity Valuation

Self-Paced Tutorial

Online tutorials for mini classes at: http://tradingroom.bentley.edu

2004 © Hughey Center for Financial Services. All Rights Reserved.

Equity Valuation Tutorial Hughey Center for Financial Services © 2003 Introduction: This tutorial is to be used in conjunction with the FI 640A Final Project or any other equity valuation. In it we will introduce the Gordon growth, Free Cash Flow to Equity, and Free Cash Flow to the Firm models, as well as Relative Value analysis. We will discuss when to use these models, the variables associated with their employment, and how to search for those variables using Bloomberg, Multex, Reuters, and First Call. A cautionary note: the data this tutorial will lead you to analyze is, with the exception of earnings estimates, historical data. You will apply growth rates to these historical data to estimate future revenues and costs. What must be remembered throughout this tutorial is that future revenues and future costs are what we seek to analyze, and that we download historical data to estimate these figures. Our valuation is thus based on estimated future data, not historical data alone! The instructions provided for the retrieval of input variables suggest the repeated opening of Multex and other software. If you seek to retrieve more than one variable over the course of your analysis it is not necessary to repeatedly open and close these software. You must simply leave the application running and change the required ticker information. Gordon Growth Model: The Gordon Growth model (a.k.a the Dividend Growth Model) relies on the principle that the value of a stock is equal to the present value of its future cash flows. These cash flows take the form of dividends. Use this model if your stock meets the following criteria:

• It pays out 90% or more of its Net Income in dividends • Its leverage is expected to remain stable into the future • Its growth rates are expected to remain stable.

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DPSPkk nn

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ne

nn gk

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Gordon Growth Model Variables: DPSt = expected total dividends per share in year t

1. Open First Call 4.2

2. Click , enter the company’s ticker symbol (i.e. HD for Home Depot), and click ok

3. Click , and towards the top of the page you will see EPS forecasts and actual EPS broken down by quarters. Numbers in the Earnings Estimates section with the letter A next to them (i.e. 0.36A for the 1st quarter of 2003 for Home Depot) are actual recorded earnings. Numbers without an A next to them represent the consensus estimates of the analysts following the stock.

4. You can use these estimates to predict Dividends Per Share (Earnings Per Share * Payout Ratio = Dividends Per Share), or you can grow the dividends at what you believe to be realizable growth rates.

Ke = cost of equity The cost of equity can be found using the Capital Asset Pricing Model. The CAPM equation is as follows: )( fmfe rrrK −+= β rf = the risk free rate (typically a US treasury yield that matches your investment horizon) β = Beta (a measurement of a stocks return relative to the market) rm = 5.5% = the return on the market (the historically accepted risk premium is 5.5%) rf = the risk free rate

1. Open Reuters Kobra 2. Select the quote box and type: “0#USBMK=X”

3. Select the treasury bill/note/bond whose maturity most appropriately represents your holding period, and use its yield as the risk free rate. For example, 0.8545% if your holding period is 1 month, or 3.0981% if your holding period is 5 years.

β = Beta

Beta is a measure of risk. We will begin by entering the ticker of a company in which we are interested into Bloomberg. For example, let’s say we’re interested in Microsoft. So we enter the following command: MSFT <equity> BETA And it brings us to the following page:

1. In the range box we type the dates that give us an appropriate timeline by which to measure beta. The greater the number of years in your forecast, the greater the number of years you should use in your beta calculation. Five is generally a safe minimum.

2. The market index set as the default in the S&P500. You should change this if you feel another index better represents the risk associated with your market, or if you believe the S&P500 is not large enough a market.

3. For all intensive purposes we will use the raw beta as it presents us with a larger and more conservative cost of equity.

If you were to repeat this process with Home Depot, the Beta you would pull is 0.53. Pn = price (terminal value) at the end of year n

)(1

ne

nn gk

DPSP−

= +

1. Pn is a value that must be calculated for the final year of your valuation (the price

of the stock at the time you intend to sell it.) Ke represents the cost of equity in the final year, gn represents the company’s terminal growth rate, and DPSn+1 represents the dividend you expect to pay in the year following the terminal year of your valuation.

g = extraordinary growth rates for the first n years = retention rate * ROE

1. Extraordinary growth can be defined as growth that cannot be sustained indefinitely. In a two-stage model, it can be used to grow variables like EPS, DPS, and assorted balance sheet items in the first stage. It can be found by multiplying the company’s Return On Equity by its Retention Rate (the % of earnings the company does not pay out in dividends). Retention rate = 1 – Dividend Payout Ratio.

Finding ROE:

1. Open First Call 4.2

2. Click , enter the company’s ticker symbol (i.e. HD for Home Depot), and click ok

3. Click on , scroll down to selected financial ratios, and you will find Return On Equity %.

Finding the Retention Rate: 1. The Payout Ratio is also listed in the Selected Financial Ratios section in First Call. Your retention rate will equal one minus the payout ratio.

gn = steady state growth rate forever after year n

1. A company experiencing rapid growth is expected to have those growth rates approach levels that are more sustainable. Terminal growth rates are what mature companies reach, and these rates are best approximated by the growth rate of the industry.

2. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

3. Under company reports select Company Comparison.

4. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 5. Under the Growth Rates section you will find EPS quarterly, annual, and 5-year

growth rates for the Company, Industry, Sector, and the S&P 500. Select the one you believe is most feasible.

Terminal Growth Rate

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under company reports select Company Comparison. 3. Enter your company’s ticker into the ticker search (i.e. enter HD for Home Depot)

and click . 4. Under the Growth Rates section you will find EPS quarterly, annual, and 5-year

growth rates for the Company, Industry, Sector, and the S&P 500. The terminal growth rate is the growth rate that you expect your company’s to eventually reach. This can be represented as the EPS 5-year growth rate of the industry, sector, or market. To be conservative we will take the lower of the three.

Dividend Discount Model Home Depot (HD.N) Growth Rate 15.39% Terminal Growth Rate (Market Growth Rate) 8.78% payout ratio 14% Cost of Equity Capital 10.3% Beta 1.28 Risk Free Rate 3.2825% Market Risk Premium 5.50%

Year 0 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009Dividends $ 0.22 $ 0.25 $ 0.29 $ 0.34 $ 0.39 $ 0.45 $ 0.52 Terminal Value $ 33.48 PV of Dividend Cashflows $ 0.23 $ 0.24 $ 0.25 $ 0.26 $ 20.76 Stock Value per share $ 21.74 Closing stock price 10/21/03 $ 35.60 conclusion: Stock is overvalued Notes The payout ratio is too small to use the Dividend Discount Model The terminal growth rate is larger than the Cost of Equity, resulting in a large negative terminal value.

Given the notes listed above, the DDM is not the appropriate model to use. Free Cash Flow to Equity Model: The Free Cash Flow to Equity model is to be used to value firms that possess debt as well as firms that do not payout out more than 90% of their earnings as dividends. Many firms will reinvest their earnings back into the company and these reinvested earnings will not show up as dividends. Using the Gordon Growth model would thus value the equity incorrectly. It is important to note that this model bases its valuation on cash flows to equity, and these cash flows are created after debt payments are taken out. The essential difference between the Gordon Growth Model and the Dividend Discount Model is the definition of cash flows. When firms have FCFE different from the dividends they pay out, valuations of the stocks given by these models will be different. Damodaran says: “In valuing firms for takeovers or in valuing firms in which there is a reasonable chance of changing corporate control, the value from the FCFE provides a better estimate of value.” FCFE for an unlevered1 firm FCFE for a levered firm Cash Flows from Operations -Capital Expenditures -∆Working Capital =Free Cash Flow to Equity

Cash Flows from Operations -Preferred Dividends -Capital Expenditures -∆ Working Capital -Principal repayments +Proceeds from new debt issues =Free Cash Flow to Equity

After the FCFE are calculated they must be discounted to the present by dividing each year’s FCFE by (1+WACC)^t. 1 Leverage is another word for debt. To say a firm is leveraged is to say that they are borrowing money and must pay it back.

t = the number of years from today WACC = Weighted Average Cost of Capital

1. On a Bloomberg terminal enter the ticker of your company followed by <equity> followed by “WACC.”

i. Example: HD <equity> WACC 2. The Weighted Average Cost of Capital is next to the title “Wgt. Avg. Cost Cap.”

Free Cash Flow to Equity Variables: Cash Flows From Operations

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Next to financial reports select Cash Flow Statement. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Scroll down and you will find in bold letters “Cash from Operating Activities.”

Capital expenditures

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Cash Flow Statement. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. In the “Cash from Operating Activities” you will find “Capital Expenditures.”

Working Capital = Current Assets minus Current Liabilities

1. Click on MultexNet , enter the username and password located under the keyboard, and click on the fundamentals tab. 2. Under financial reports select Balance Sheet.

3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Scroll down and you will see Current Assets and Current Liabilities in bold

letters. Preferred Dividends

1. This information may present itself in Multex under the Cash Flows from Investing Activities. It can also be retrieved from Bloomberg using the following steps:

a. HD <equity> CH3 b. Click on “2) Liabilities and Equity.”

2. If it does not pull up on either of these sources, it must be gotten from the company’s 10-K. It would most likely be stated in the company’s statement of retained earnings, with additional related information listed in the footnotes.

3. To access this information via EDGARscan go to the following website: http://edgarscan.pwcglobal.com/servlets/edgarscan

4. Type in the company’s name, select the hyperlink to its most recent 10-K filing, and begin your perusal.

Principal Repayments

1. This information is presented in the 10-K, and it is most likely to appear in the

footnotes. This can prove to be a time consuming hunt, so be patient. EDGARscan (see above explanation) may be used to find this data.

Proceeds from new debt issues

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Cash Flow Statement. 3. Enter your company’s ticker into the ticker search (i.e. enter HD for Home Depot)

and click . 4. In the “Cash from Financing Activities” you will find “Proc. of LT Debt.”

(Proceeds from Long Term Debt) 2003 2002 2001 2000 1999

FPRD LT Debt Proceeds 1.00 532.00 32.00 522.00 0.00 Because we see large fluctuations between the years we are led to take an average of the past five years and grow that amount by the growth rate as opposed to only growing the one million we find in 2003.

Free Cash Flow to Equity Home Depot (HD.N) in millions Growth Rate 15.39% Terminal Growth Rate (Market Growth Rate) 8.78% WACC 9.54% Year 0 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009Cash Flows from Operations $4,802.00 $ 5,541.22 $ 6,394.24 $ 7,378.56 $ 8,514.42 $ 9,825.13 $11,337.61 less preferred dividends $ - $ - $ - $ - $ - $ - $ - less Capital Exenditures $2,749.00 $ 3,172.18 $ 3,660.51 $ 4,224.01 $ 4,874.25 $ 5,624.59 $ 6,490.44 less Change in Working Capital $ (22.00) $ (25.39) $ (29.29) $ (33.80) $ (39.01) $ (45.01) $ (51.94) less principal repayments $ - $ - $ - $ - $ - $ - $ - plus proceeds from new debt issues $ 217.40 $ 250.87 $ 289.48 $ 334.05 $ 385.47 $ 444.81 $ 513.29 Free Cash Flows to Equity $2,292.40 $ 2,645.29 $ 3,052.51 $ 3,522.41 $ 4,064.65 $ 4,690.36 $ 5,412.40 Terminal Value $ 714,508.06 PV of FCFE $ 2,414.91 $ 2,543.97 $ 2,679.92 $ 2,823.14 $ 456,021.21 Common Shares Outstanding $2,367.34 Stock Value per share $ 197.05 Closing stock price 10/21/03 $ 35.60 conclusion: Stock is undervalued Notes The terminal growth rate is barely less than the WACC, which results in an astronomically high terminal value Principal Payments were not listed for the company in the footnotes of its 2003 10-K

Free Cash Flow to the Firm Model: This model bases its valuation on all cash flows to the firm. It can be used when a company has significant amounts of debt, and when it does not pay the majority of its earnings out in dividends.

Damodaran says: “It is the sum of the cash flows to all claim holders in the firm, including stockholders, bondholders, and preferred stockholders.” As such, this measure should be used to approximate the value of a firm in its entirety, not just the firm’s equity value. It is calculated as follows: Net Income +Depreciation -Capital Expenditures -∆Working Capital +Interest expense (1-tax rate) =Free Cash Flows to the Firm After the FCFF are calculated they must be discounted to the present by dividing each year’s FCFF by (1+WACC)^t. Free Cash Flow to the Firm Variables: Net Income

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Income Statement. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Use “Net Income After Taxes” for the purpose of your analysis.

Depreciation

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Income Statement. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Use the expense titled “Depreciation” for the purpose of your analysis.

Capital expenditures

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Cash Flow Statement. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Under the “Cash from Operating Activities” you will find “Capital Expenditures.”

Working Capital = Current Assets minus Current Liabilities

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Balance Sheet. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Scroll down and you will see in bold letters Total Current Assets and Total

Current Liabilities. Interest expense

1. Click on MultexNet . Enter the username and password located under the keyboard, and click on the fundamentals tab.

2. Under financial reports select Income Statement. 3. Enter your company’s ticker into the ticker search (i.e. HD for Home Depot) and

click . 4. Use the row titled “Interest Expense” for the purpose of your analysis.

Tax rate

1. On a Bloomberg terminal enter the ticker for your company followed by the yellow <equity> key and the letters “DES.”

i. MSFT <equity> DES

2. Hit the green page forward button twice and the effective tax rate should be under the profitability section (“Eff tax rate”). You will use this rate as the company’s tax rate.

Free Cash Flow to the Firm Home Depot (HD.N) in millions Growth Rate 15.39% Terminal Growth Rate 8.78% Tax Rate 37.3% WACC 9.54% Year 0 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009Net Income $ 3,664.00 $ 4,228.04 $ 4,878.90 $ 5,629.96 $ 6,496.63 $ 7,496.73 $ 8,650.77 Plus Depreciation $ 903.00 $ 1,042.01 $ 1,202.41 $ 1,387.51 $ 1,601.11 $ 1,847.58 $ 2,132.00 Less Capital Expenditures $ 2,749.00 $ 3,172.18 $ 3,660.51 $ 4,224.01 $ 4,874.25 $ 5,624.59 $ 6,490.44 Less Change in Working Capital $ (22.00) $ (25.39) $ (29.29) $ (33.80) $ (39.01) $ (45.01) $ (51.94) Plus Interest Expense (1-tax rate) $ 23.20 $ 26.77 $ 30.89 $ 35.64 $ 41.13 $ 47.46 $ 54.76 Free Cash Flows to the Firm $ 1,863.20 $ 2,150.02 $ 2,480.99 $ 2,862.91 $ 3,303.63 $ 3,812.19 $ 4,399.04 Terminal Value $580,731.13 PV of FCFF $ 1,962.77 $ 2,067.66 $ 2,178.16 $ 2,294.56 $370,640.63 Common Shares Outstanding 2367.336 Stock Value per share $ 160.16 Closing stock price 10/21/03 $ 18.99 conclusion: Stock is undervalued Notes The terminal growth rate is barely less than the WACC, which results in an astronomically high terminal value

Relative Valuation The goal of relative valuation is to find assets that are incorrectly priced relative to how similar assets are being priced at the same time. Now study this equation.

gkgoPayoutRati

EP

DPSP

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n

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0

0

Now read it again. Pause. Think about it. It is essential that you understand this relationship. P0 is the current price, DPS0 is the current Dividend Per Share, P/E is the Current Price divided by the Net Income Per Share, the Payout Ratio is the percentage of earnings the firm chooses to pay to its stockholders, g is the growth rate and ke is the cost of equity. The fundamental principle is that stocks (given similar growth rates, payout ratios, and betas) with high P/E ratios are overvalued and stocks with low P/E ratios are undervalued. Using these variables you can calculate the P/E ratio of a list of companies in a given industry. The analysis consists of valuing stocks relative to other stocks in their industry based on their P/E ratios. The conclusion we should reach is to long (buy) the stocks with low P/E ratios (because they are undervalued), and short (sell) the stocks with high P/E ratios (because they are overvalued).

1. Enter Multex, select screening, select add build, select SIC1Code, click the select button, scroll down and select Real Estate Investment Trusts (6798), click GO.

2. Select “181 Companies” 3. Select Add/Remove/Arrange Columns 4. Add Sales5YCGr% 5. Add PayRatioTTM 6. Add Beta 7. Add ProjPECurFY 8. Click GO

Export the data to Excel by selecting “Download.” Delete all entries that do not have complete information. The equation discussed previously implies that a relationship exists between growth rates, risk (ke in the equation, we will use beta), and the payout ratio. To test this we downloaded these variables for 110 REITS. Now we must run a multiple regression with the aforementioned variables (independent x variables), to predict the P/E ratio (dependent, y variable). The regression gives us an equation that tells us what the P/E should be for these stocks based on growth rates, beta, and payout ratio. To run the regression we select Tools, Data Analysis, and Regression. We enter the existing P/E ratio in the Y-range and the growth, beta, and payout ratios in the X-range. We click ok. The regression bottom of the regression output looks like this:

Coefficients Standard

Error t Stat P-

value Lower 95% Upper 95%

Intercept 11.87074405 0.3636822 32.6404 0 11.14970827 12.59178X Variable 1 -0.000257356 0.0003125 -0.8236 0.41 -0.000876881 0.000362X Variable 2 -0.672687842 1.3553542 -0.4963 0.62 -3.35981084 2.014435X Variable 3 -0.014746442 0.0074019 -1.9923 0.05 -0.029421426 -7.15E-05

Thus, our predictive equation should look like this: Predicted P/E = 11.8707 - 0.00025*Payout Ratio - 0.67268*Sales Growth

- 0.01474*Beta This is the predicted P/E ratio. We subtract the predicted from the actual P/E ratio for each security. A positive value means the stock is overvalued and we should sell (short) the stock. A negative value means the stock is undervalued, so we should buy (long) the stock. Conclusion: Equity valuation is a process that continues to intrigue and puzzle investors to this day. There are no correct answers, only educated guesses. Try these valuation models on stocks that interest you, chart their performance, and draw your own conclusions. Supplemental Relative Valuation Data:

Ticker Name PE Ratio Current Year

TTM Payout Ratio Beta

5 year Sales Growth Rate

Predicted P/E

Actual minus predicted

PGE Prime Group Realty Trust 3.79 0.00 0.27 28.65 11.27 -7.48HUMP Humphrey Hospitality Tr. 4.17 0.00 0.56 7.15 11.39 -7.22IMH IMPAC Mortgage Holdings, 7.16 91.21 0.07 15.63 11.57 -4.41HRP HRPT Properties Trust 7.51 141.59 0.24 14.83 11.45 -3.94AHR Anthracite Capital Inc. 7.50 500.00 0.07 37.04 11.15 -3.65HT Hersha Hospitality Trust 8.32 358.21 0.30 1.45 11.56 -3.24RAS RAIT Investment Trust 8.10 107.91 0.14 43.92 11.10 -3.00ADC Agree Realty Corporation 8.92 88.21 -0.03 7.21 11.76 -2.84BED Bedford Property Investor 8.71 106.50 0.09 16.55 11.54 -2.83KRC Kilroy Realty Corporation 8.52 154.93 0.22 23.49 11.34 -2.82KE Koger Equity, Inc. 8.96 203.49 0.12 2.62 11.70 -2.74AXM Apex Mortgage Capital 5.92 81.26 -0.12 228.43 8.56 -2.64GL Great Lakes REIT, Inc. 9.07 246.95 0.14 16.30 11.47 -2.40CRE CarrAmerica Realty Corp. 9.36 164.34 0.19 9.10 11.57 -2.21OHI Omega Healthcare Investor 9.11 0.00 0.76 8.59 11.23 -2.12NLY Annaly Mortgage Managemen 8.41 102.52 0.35 74.88 10.50 -2.09NHI National Health Investors 9.75 150.45 -0.15 9.05 11.80 -2.05PKY Parkway Properties, Inc. 9.37 118.67 0.26 26.55 11.27 -1.90ANH Anworth Mortgage Asset 8.99 75.80 -0.03 67.12 10.88 -1.89LTC LTC Properties, Inc. 9.99 160.71 0.07 -1.18 11.80 -1.81FR First Industrial Realty, 9.80 288.89 0.15 9.20 11.56 -1.76

CEI Crescent R.E. Equities Co 9.59 442.48 0.25 17.84 11.33 -1.74WXH Winston Hotels, Inc. 9.43 108.11 0.60 20.66 11.13 -1.70MFA MFA Mortgage Investments 8.69 90.09 -0.17 108.80 10.36 -1.67HPT Hospitality Properties Tr 9.80 142.08 0.20 25.03 11.33 -1.53GLB Glenborough Realty Trust 8.63 5,931.03 -0.05 22.72 10.04 -1.41BDN Brandywine Realty Trust 9.81 156.44 0.10 37.19 11.21 -1.40HIW Highwoods Properties, Inc 9.32 3,824.56 0.04 11.64 10.69 -1.37CLP Colonial Properties Trust 10.30 214.11 -0.02 12.37 11.65 -1.35EOP Equity Office Properties 9.86 150.15 0.21 36.05 11.16 -1.30CLI Mack-Cali Realty Corp. 10.21 114.44 0.13 17.92 11.49 -1.28PP Prentiss Properties Trust 10.26 165.93 0.07 21.90 11.46 -1.20AMC American Mortgage Accepta 10.46 97.58 -0.26 24.81 11.65 -1.19NHP Nationwide Health Propert 10.50 200.87 0.06 6.22 11.69 -1.19SKT Tanger Factory Outlet Cnt 10.56 238.13 0.06 5.82 11.68 -1.12GRT Glimcher Realty Trust 10.28 630.56 0.16 14.03 11.39 -1.11LXP Lexington Corp. Prop. Tr. 10.65 157.02 -0.12 18.22 11.64 -0.99UHT Universal Health Realty 10.87 107.24 -0.07 4.55 11.82 -0.95RSE Rouse Company, The 10.87 189.03 0.00 3.80 11.77 -0.90MAC Macerich Company, The 10.76 127.73 0.03 11.36 11.65 -0.89SPG Simon Property Group, Inc 10.82 156.46 -0.09 15.70 11.66 -0.84CBL CBL & Associates Properti 10.61 89.65 0.00 27.53 11.44 -0.83ARI Arden Realty, Inc. 10.60 221.25 0.09 25.22 11.38 -0.78SNH Senior Housing Properties 10.55 144.02 0.61 7.76 11.31 -0.76PSB PS Business Parks, Inc. 10.54 69.01 -0.11 44.84 11.27 -0.73GGP General Growth Properties 10.80 87.67 0.02 27.49 11.43 -0.63CPV Correctional Properties T 10.55 109.39 0.19 36.78 11.17 -0.62MLS Mills Corporation, The 11.22 105.29 0.21 6.23 11.61 -0.39SLG SL Green Realty Corp. 10.68 91.60 0.08 49.53 11.06 -0.38HCN Health Care REIT, Inc. 11.29 146.80 -0.05 17.35 11.61 -0.32RA Reckson Associates Realty 11.13 282.60 -0.06 26.97 11.44 -0.31PEI Pennsylvania R.E.I.T. 10.97 155.37 -0.06 48.91 11.15 -0.18BXP Boston Properties, Inc. 11.01 48.79 0.25 34.99 11.17 -0.16DDR Developers Divers. Realty 11.31 98.08 0.21 16.12 11.47 -0.16SUI Sun Communities, Inc. 11.42 452.47 0.06 11.04 11.55 -0.13LRY Liberty Property Trust 11.31 125.13 0.27 21.38 11.34 -0.03VTR Ventas, Inc. 11.85 91.82 -0.11 6.99 11.82 0.03AKR Acadia Realty Trust 11.70 149.05 0.09 9.28 11.63 0.07VNO Vornado Realty Trust 11.13 113.25 0.17 46.99 11.03 0.10SIZ Sizeler Property Inv. 11.66 1,435.90 -0.11 2.59 11.54 0.12MNRTA Monmouth R.E. Inv. Corp. 11.59 141.81 0.08 23.36 11.44 0.15ARE Alexandria RE Equities 11.56 106.29 -0.05 32.94 11.39 0.17AIV Apartment Investment and 10.74 2,037.27 0.18 48.73 10.51 0.23USV U.S. Restaurant Props. 11.38 785.71 0.18 27.27 11.15 0.23HR Healthcare Realty Trust 11.64 160.18 0.14 26.61 11.34 0.30UDR United Dominion Realty 11.97 760.14 -0.08 8.98 11.60 0.37SSS Sovran Self Storage, Inc. 12.00 157.90 -0.02 15.66 11.61 0.39CUZ Cousins Properties Inc. 11.89 48.59 0.14 18.36 11.49 0.40EGP EastGroup Properties Inc. 11.91 258.20 0.14 14.56 11.50 0.41

EQY Equity One, Inc. 11.68 112.85 0.11 38.05 11.21 0.47NXL New Plan Excel Realty Tr. 12.05 976.33 -0.11 9.41 11.55 0.50UBA Urstadt Biddle Properties 12.24 133.60 -0.05 12.30 11.69 0.55NNN Commercial Net Lease Rlty 12.24 129.69 0.04 13.35 11.61 0.63XLG Price Legacy Corporation 11.52 0.00 0.50 46.15 10.85 0.67BFS Saul Centers, Inc. 12.43 137.45 -0.04 6.77 11.76 0.67RPT Ramco-Gershenson Properti 12.45 202.65 0.01 9.02 11.68 0.77AML AMLI Residential Properti 12.31 417.39 0.26 5.62 11.51 0.80DRE Duke Realty Corp. 12.27 182.18 0.30 25.35 11.25 1.02CPT Camden Property Trust 12.60 312.42 0.16 15.52 11.45 1.15KIM Kimco Realty Corp. 12.69 97.41 0.13 17.78 11.50 1.19OLP One Liberty Properties, I 12.75 113.99 0.05 20.10 11.51 1.24IRETS Investors Real Estate Tr. 12.65 185.69 0.00 29.74 11.38 1.27EPR Entertainment Properties 11.57 111.76 0.10 106.94 10.20 1.37PLD ProLogis 12.84 134.02 0.20 17.41 11.44 1.40WRI Weingarten Realty Investo 13.11 131.49 0.00 15.93 11.60 1.51PNP Pan Pacific Retail Proper 13.19 95.32 -0.16 32.81 11.47 1.72CARS Capital Automotive REIT 13.01 100.84 0.05 42.10 11.19 1.82EQR Equity Residential 13.13 307.28 0.28 21.69 11.28 1.85GBP Gables Residential Trust 13.50 227.87 0.08 10.66 11.60 1.90OFC Corporate Office Properti 12.26 1,035.29 0.08 87.14 10.27 1.99HCP Health Care Property Inve 13.53 187.32 0.01 22.85 11.48 2.05SHU Shurgard Storage Centers, 13.68 192.93 0.17 13.47 11.51 2.17ANL American Land Lease, Inc. 13.60 100.10 -0.04 33.16 11.38 2.22CPG Chelsea Property Group 13.82 148.58 -0.06 20.08 11.58 2.24O Realty Income Corp 13.92 126.11 -0.08 15.73 11.66 2.26BRE BRE Properties, Inc. 13.83 132.83 0.10 14.56 11.55 2.28PSA Public Storage, Inc. 14.06 145.87 -0.10 12.40 11.72 2.34HME Home Properties of New Yo 13.52 319.74 0.07 41.51 11.13 2.39CPJ Chateau Communities, Inc. 13.00 3,793.10 0.22 14.31 10.54 2.46SMT Summit Properties Inc. 14.27 390.26 0.08 6.11 11.63 2.64FRT Federal Realty Inv. Trust 14.40 234.87 0.00 9.31 11.67 2.73ESS Essex Property Trust, Inc 14.28 148.61 0.17 18.80 11.44 2.84WRE Washington Real Estate In 14.90 121.19 -0.03 14.00 11.65 3.25AVB AvalonBay Communities 14.52 267.43 0.26 30.15 11.18 3.34SFI iStar Financial Inc. 12.19 106.82 0.47 208.32 8.46 3.73ASN Archstone-Smith Trust 15.28 181.96 0.18 24.93 11.34 3.94MHC Manufactured Home Commun. 15.83 122.71 0.04 12.91 11.62 4.21CNT CenterPoint Properties 15.91 151.24 0.09 12.86 11.58 4.33HMT Host Marriott Corporation 16.49 0.00 0.52 5.06 11.45 5.04PCL Plum Creek Timber Co. Inc 24.07 138.82 0.45 9.40 11.39 12.68 SUMMARY OUTPUT Regression Statistics Multiple R 0.205273749

R Square 0.042137312 Adjusted R Square 0.015027991 Standard Error 2.505729239 Observations 110 ANOVA

df SS MS F Significance F Regression 3 29.28 9.76 1.55 0.20 Residual 106 665.54 6.28 Total 109 694.82

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 11.87074405 0.36 32.64 0.00 11.15 12.59178 X Variable 1 -0.000257356 0.00 -0.82 0.41 0.00 0.0003622 X Variable 2 -0.672687842 1.36 -0.50 0.62 -3.36 2.0144352 X Variable 3 -0.014746442 0.01 -1.99 0.05 -0.03 -7.15E-05