Incorporating a REIT Module to an Undergraduate Capstone Course: An Experiential Education Approach

Abstract

This paper describes the pedagogical approach of incorporating a Real Estate Investment Trust (REIT) module in an undergraduate finance major capstone course at Florida Gulf Coast University, a regional comprehensive 4-year university. The module consists of two class periods and requires research of publicly-traded REITs using industry accepted sources of data, empirical and qualitative data analysis, and preparation of written and oral presentations that receive academic and practitioner feedback. The assignment aligns with experiential learning theory and the constructivism learning theory found in research in that it incorporates experiencing, reflecting, thinking, and active learning combined with the participation of guest speakers and judges who serve as external validators enhancing the student classroom experience.

Introduction

In today’s higher education environment, educators understand that complementing the orthodox classroom lecture with experiential and applied learning techniques provides students with knowledge that is readily applicable in their careers. This practical knowledge is crucial to the production of competent professionals who are prepared to move seamlessly from the classroom to the workforce. Lizzio et al. (2002) suggest that perceptions of the teaching environment influence learning outcomes both directly and indirectly; the authors explain that these perceptions affect both grades and reported qualitative learning outcomes which are likely to impact students’ future professional performance. Existing economic pedagogy literature finds that participatory learning and practitioner involvement (e.g. guest speakers and lecturers) in instruction results in improved perception of learning and enhances students’ classroom experience which should translate to professional competence and confidence (Hawtrey, 2007; Robert & Hanton, 2021). The pedagogical activity presented in this paper involves a research project and presentations that require the utilization of multiple sources of information/data that are commonly used by practitioners along with involvement of industry experts to provide students with relevant real-world experience and feedback. The classroom exercise aligns with the experiential and constructivism learning theories proposed in pedagogy literature (Kolb, 1984; Hawtrey, 2007).

The educational activity introduces the real estate investment trust (REIT) asset class to an undergraduate Bachelor of Science (B.S.) Finance capstone course at Florida Gulf Coast University (FGCU). The activity is completed in one week employing two class periods. In the first class period, students are presented with an overview of the REIT industry, commonly used REIT measures of profitability and performance, and the scope and goal of the project they must prepare and present. In the second session, students present their projects and are provided with feedback by the instructor(s) and guests.¹ In addition to improving student research and presentation skills, this activity results in several valuable student learning outcomes including understanding of REIT-specific financial drivers, diversification benefits associated with including REITs in portfolios, and differences in REIT sectors. We find that including instruction on real estate investment vehicles is of value to finance students given that real estate is among the largest asset classes in the United States; according to the National Association of Real Estate Investment Trusts (NAREIT), the estimated value of commercial real estate (CRE) in the U.S. is $20.7 trillion (as of the second quarter of 2021) with REITs making up approximately 9.4% of the total CRE market.² This learning experience has resulted in significant positive feedback from current students, alumni, employers, and other university partners for its relevance to the real world and for the quality of learning that it provides. The activity described in this paper additionally serves as a relevant and organized gateway for finance students to understand corporate real estate and the growing Real Estate Investment Trust industry.

The remainder of the paper is organized as follows. The next section provides background on relevant pedagogical theories along with related literature. The following section describes the academic setting of this educational activity and the motivation for its adoption. This is followed by a detailed description of the activity and the observed outcomes. The final section concludes the paper.

Background: Experiential and Constructivism Learning Theories

Extant real estate and economic pedagogical literature highlights the importance of experiential education techniques to complement the orthodox lecture/textbook model. Hawtrey (2007) explains experiential learning is active, participatory learning that changes the role of the student from a passive listener to a proactive implementer of ideas, methods, and theories. Experiential learning, also called involved or evidential learning, provides advantages to the conventional approach of class lectures since it compels students to engage with the subject matter, provides a diverse form of learning, stimulates student intellectual curiosity, and forces students to be actively involved. The case in favor of experiential is that individuals are found to retain only a fraction of what they hear but a majority of what they actively do (Borg & Stranahan, 2002; McClean and Tatnall, 2000). Hopkins (2021) provides evidence of increased learning through experiential education employing a case study and a related field trip in an undergraduate real estate development course at Virginia Tech University. The author reports students perceive significant increases in practical and theoretical real estate knowledge as a result of these activities and that there are significant benefits to incorporating active learning components to the course. Hopkins (2021) suggests that when applying Kolb’s experiential learning theory to investigate the effectiveness of a learning activity, the activity should foster abstract conceptualization and reflective observation through the reinforcement of previously learned concepts combined with experiences and active experimentation.

Kolb’s experiential learning theory is intended to be a holistic adaptive process that combines experience, perception, cognition, and behavior. According to the theory, learning is the process whereby knowledge is created through the transformation of experience (Kolb, 1984). Kolb’s theory suggests a cycle in which a learner can enter at any point consisting of active experiencing, conscious reflection, conceptualization of theory, and planning. McCarthy (2010) explains the four stages of learning in Kolb’s theory are conceptualized by two polar opposite dimensions of grasping experience – concrete experience and abstract conceptualization, and two polar opposite dimensions of transformative experience – reflective observation and active experimentation. The theory dictates that learners must go through each stage – experiencing, reflecting, thinking, and active learning – to fully reap the benefits of an experiential educational activity. That is, the experiential learning process is complete when students navigate all four dimensions of grasping and transformative experiences.

The participation of guest speakers and judges as part of a pedagogic activity augments and enhances the experiential learning experience. As explained by Robert and Hanton (2021), the implementation of guest speaking activities aligns with the constructivism educational learning theory. This theory states that student cognition and learning results from the joining of new and previously learned information – the principles are that individuals learn through an active process by engaging in external stimuli and that new knowledge formation is conditioned by prior knowledge (Asal & Kratoville, 2013). Guest industry speakers serve as an external stimulus and an important avenue to reinforce knowledge gained in prior phases of the student academic journey. Thus, guest speakers may result in more student cognitive connections and a deeper understanding of the topics at hand.

The Importance of Real Estate in a Finance Curriculum

McGrath et al. (2020) suggests there is a lack of applied and experiential learning, explicitly within the area of real estate education. While this lack of applied or experiential learning in real estate may be directly related to characteristics of the assets and the markets in which they trade, the real estate investment trust industry provides a tremendous experiential learning opportunity. By exploring REITs in depth, students are exposed to a class of stock issued by firms that specialize in owning or financing income-producing real estate across a range of property types; it can be argued that analyzing REITs provides for a hybrid analysis of real estate and equity. Also, since REITs share certain characteristics with mutual funds, fixed-income securities, and other investment vehicles, learning about them provides students with an opportunity to compare and contrast REITs with other investments. In addition, the study of REITs offers learning opportunities with respect to pass-through entities, tax law, and corporate diversification. More generally, real estate investment and development has been an integral part of the southwest Florida economy. Many of the early stakeholders and benefactors of the university earned their stakes from real estate development or ancillary businesses. Students cannot help but see the influence of real estate development in the names of buildings and facilities on the FGCU campus.

While many finance majors may lack the desire or capital to invest directly in real estate, introducing them to the opportunity to invest in securitized real property via real estate investment trusts gives them insight into an asset class capable of enhancing portfolio diversification and returns. In addition, by building specific and relevant knowledge on the growing REIT industry, students are offered the potential to competently compete for positions in these firms. This is relevant since according to NAREIT, as of 2022, the REIT industry aggregate portfolio sits at $2.6 trillion dollars with more than 535,000 properties. More importantly, in 2020, REITs offered more than 3.2 million full-time positions generating $229 billion of labor income, a number that is expected to increase as the industry continues to grow.³

Description of the Capstone Course

The required capstone course for the FGCU Financial Analysis and Management concentration of the Finance Major, Financial Policy Senior Seminar, is a comprehensive class which entails quantitative and qualitative analysis of financial policies, critical thinking exercises, independent readings, empirical research, as well as exploration of emerging threats, current trends, and opportunities in business.⁴ Over a period of several years the capstone course transitioned from a traditional, textbook case-based experience, to a more applied case-based experience utilizing current market data and often involving community members as subject matter experts. The university is located on Florida’s Gulf Coast between the cities of Fort Myers and Naples. These two communities are home to a large number of retired senior executives, seeking the weather and amenities the region has to offer. While the region is widely known for the significant wealth of these retirees, the financial capital in the region is easily matched by the human capital these individuals have accumulated during their careers. Many of these retired executives remain professionally active and seek opportunities to give back to their communities frequently reaching out to FGCU and volunteering their expertise. The engagement of these executives provides an opportunity to leverage their extensive experience in ways that enhance the learning environment. The existence of this pool of experienced professionals allow each content area of emphasis in the course (e.g. corporate governance, mergers and acquisitions, real estate) to be addressed in the context of an applied, real-world case moderated or facilitated by community partners. These roles transcend beyond the traditional guest speaker and the specific approach described here answers the call from Robert and Hanton (2021) for exploring student and industry interactions. The learning approach integrates all areas of business into “real world” case work format.

Before enrolling in the Financial Policy Senior Seminar capstone course, the Financial Analysis and Management concentration of the Finance Major at FGCU requires students to take courses in Money and Capital Markets, Financial Management, Investments, and Real Estate Finance. This ensures students have adequate background in all topics covered in the capstone course and, specifically, in real estate investment analysis. In addition, prior to the REIT module, students have completed a series of modules on relevant topics to ensure proficiency in qualitative and quantitative analysis as well as a strong understanding of how to conduct proper professional research, build an executive report and presentation, and effectively present the information to their peers and guests. At this point of the semester, students have an adequate level of Microsoft Excel spreadsheet and PowerPoint presentation proficiency, have completed (or have made significant progress toward) the Bloomberg Markets Concepts (BMC) certification, and have successfully delivered multiple written and oral presentations. Applicable course topics covered before the REIT module include:

• Financial reporting: Annual reports, Securities and Exchange Commission (SEC) forms 10-K, 10-Q, 8-K, S-1, S-4, and Schedule 13D.

• Firm capital structure and cost of capital: debt, equity, and hybrid securities.

• Corporate governance.

• Capitalization: Initial public offerings, direct listings, credit funds, special purpose acquisition companies.

• Financial statement analysis.

• Mergers and acquisitions.

The REIT Module

The REIT module consists of a student-led, two-class period activity. Classes for the Financial Policy Senior Seminar are commonly held twice per week and each class period is one hour and fifteen minutes. The activity is segmented into a REIT primer and, subsequently, a team case presentation.

The REIT primer serves as an opportunity for students to become familiar with the REIT industry and the nuances REIT investors must evaluate to make informed investment decisions. Table 1 presents the details of the REIT primer task. Note that the material is divided in a way that allows each student group to focus on specific topics while the class as a whole covers a wide spectrum of topics that are of interest to a REIT stakeholder.⁵ The task presented in Table 1 is assigned to students in the previous class period to ensure adequate preparation time. On the day of the activity, each student team presents the assigned material to their peers, instructor(s), and two industry experts. After each team presentation, there is a question and answer (Q&A) period that is followed by professional and academic feedback from the instructors and guest industry professionals.

Table 1. First REIT Module assignment.

REIT Primer You are to prepare a primer on Real Estate Investment Trusts. This primer should target an audience that has a general knowledge of investments and portfolio theory but no specific knowledge or experience with REITs. You are to prepare a 1-page executive summary and a 7- to 8-minute presentation for the next class period. Your presentation should address the following points:

Team 1: WHAT IS A REIT REITs are the third largest asset class (17%) after US equities (37%) and US bonds (43%). Why invest in them? What are REITs unique characteristics that differentiate them from bonds, mutual funds and equities (include a discussion of their unique taxation feature)? Why were REITs created by Congress? How is evaluating a REIT's growth potential different from evaluating the growth potential of a manufacturing company? Present REIT industry statistics and current conditions. Discuss the different property types managed by REITs. Team 2: FINANCIAL ACCOUNTING What differentiates REITs financially from other asset classes? Why doesn’t GAAP accounting fully explain REIT performance and cash flow? How is depreciation used by REITs to improve cash flow and dividends? Describe the correlation between a lease payments and a REIT’s dividends (include a discussion of the adjustments necessary to calculate FFO)? How do investors use AFFO, which includes “real” depreciation and cash flow coming from operations—cash rent, versus accrued rent when evaluating a REIT’s performance? How is a REIT’s NAV calculated (contrast from a NAV calculation for a non-REIT)? Team 3: ANALYZING RISK BY REIT and LEASE TYPES, and SEGMENT DYNAMICS What are the primary differences and inherent risks between internally/externally managed REITs, as well as publicly traded vs. publicly non-traded REITS? What are the advantages/disadvantages and risks of investing in a specialty, diversified and/or mortgage REITs? What are the differences and inherent risks in triple-net, double-net and gross leases? Provide a rationale for making a REIT investment in one of the following sectors - Office, Retail, Industrial or Multifamily, given the current business environment and inflation outlook? Team 4: REITs FINANCIAL ANALYSIS FRAMEWORK How does a REIT’s assets, lease types and average duration, geographical locations, exposure to various demographics, as well as economic outlook, business climate trends, population migration, population spending habits, and local issues such as property taxes, zoning, etc. affect REIT quality and potential? Past and projected REITs performance in term of: Cash flow/FFO Balance sheet/leverage NAV

Notes: This table shows the first REIT module task assigned to each student group. This task results in a presentation to the class on the first day of the REIT Module.

After all groups present their material on the first REIT Module day, the second task is discussed. Table 2 shows instructions and goals for the second REIT Module task. For this second task, each student team is assigned a REIT property-type specialization from which they have to select two REITs to investigate and serve as the focus of their presentation in the second session. Similar to the dynamic of the fist REIT Module day, students will hold a Q&A session after their presentation and will later receive professional and academic feedback. It is important to note that the REIT primer and subsequent REIT-selection developed over time with specific input from the industry partners. This involvement increases the sense of ownership and commitment from the community partner and results in a more seamless applied learning experience for students across the module.

Table 2. Second REIT Module assignment.

REIT Analysis and Presentation Using Bloomberg, each team will choose two REITs in their segment (by property-type specialization) and compare and contrast past and expected future performance. You should develop a thesis that justifies your selection of the individual REITs based on anticipated performance over a 5-year investment horizon. In addition to the individual REIT selection justification, you should provide information with respect to impacts on dividend income, capital appreciation, diversification, and liquidity to a portfolio. Your goal should be to inform an investor with respect to the impact a portfolio’s risk and return profile. Each Team will make a 10-minute PowerPoint presentation on their assigned segment. Presentations should include: How current business environment trends, inflation, and other factors unique to your sector are impacting real estate (RE) values and REIT performance. The risks and opportunities of each REIT, based on the geographical concentrations of RE holdings and their operations (i.e. CBD vs suburban office, gateway markets vs sunbelt, average lease duration, future capital requirements of the assets). Past and expected future performance of each REIT including funds from operations (FFO/AFFO), cash flow, dividend payout, leverage, and net asset value (NAV). How might your expected future REIT dividends compare with income from bonds, utilities and other investments over the next few years. Highlight any announced changes in management or strategic direction that might impact performance of your REITs. Team Assignments: Team 1: Retail Team 2: Office Team 3: Industrial Team 4: Multi-family

Notes: This table shows the second REIT module task assigned to each student group. This task results in a presentation to the class on the second day of the REIT Module.

Each student team is required to prepare a 10-minute PowerPoint presentation that addresses each element of the second REIT Module task. All team members are expected to have speaking roles of approximately equal length and importance in the presentations. Students are also instructed to be prepared for the potential absence of a team member in order to be able to deliver a professional presentation without them if needed. At this point in the semester students have given multiple presentations on a variety of topics and should be quite comfortable with the delivery of information in this format as well as responding to questions posed by the guest industry professionals.

The student evaluations are based on the strength of their selection thesis, explanation of the REIT specific characteristics of funds from operations (FFO), depreciation, growth strategy, dividend payout, and risk/diversification benefit. Guest industry professionals are provided with a rubric to use in the evaluation of the student presentations. A copy of the grading rubric is included as Figure 1.

Figure 1. Grading rubric for judges.

Notes: This figure shows the standardized grading rubric used by judges to evaluate and provide feedback on student presentations.

Observed Outcomes

At the end of each semester students are asked for feedback on the various modules covered during the term. The REIT module consistently ranks as one of the most popular with the students. Specific student comments often point to raised awareness of the asset class and the applicability of their skill set to the REIT industry. Another area of focus in the student feedback is the value added by the involvement of the guest industry professionals. Students consistently engage the guests following the sessions discussing career options in the REIT industry as well as opportunities for them to improve their chances of landing jobs in the REIT space. Finally, the combination of required research and presentations to a panel of industry experts greatly enhances this portion of the student skill set.

The module also produces favorable outcomes in terms of the relationship between the institution and the guest industry professionals. The individuals who have engaged in this activity clearly enjoy the interaction with the students and develop a stronger relationship with the institution from participating over multiple terms. Since the students are seniors who are nearing graduation, many are either actively in the job market and/or preparing to be active in it in the near future. In many cases students with an interest in REITs or the real estate industry in general have benefited from coaching from the guests who commonly share their contact information with students and encourage them to reach out for assistance with their job searches. This interaction also provides a great initial point of contact that has resulted in increased levels of activity with the program such as serving on other panels, attending special lectures/events, and participating in advisory boards.

Conclusion

This paper describes a pedagogical activity which offers students the opportunity to conceptually learn about REITs and the REIT industry. This comprehensive activity involves research of publicly-traded REITs using industry accepted sources of data, empirical and qualitative data analysis, and preparation of written and oral presentations that receive both academic and practitioner feedback. The activity is designed to take place over two class periods and has been used for multiple semesters at a comprehensive four-year public institution as part of a capstone class for the finance major. The pedagogical activity is significantly enhanced by the participation of industry experts to provide students with relevant anecdotes of related real-world occurrences and professional judgement of their work and presentations to enhance learning.⁶ The REIT module aligns with Kolb’s experiential learning theory and the constructivism educational learning theory. Through this exercise, students gain practical knowledge that prepares them as competent professionals in an ever evolving and competitive market.

Notes

1 According to Robinson and Kakela (2006), guest speakers in the classroom contribute to dynamic class dialogues and develop creative responses to environmental and social complexities.

2 Source: NAREIT https://www.reit.com/data-research/research/nareit-research/estimating-size-commercial-real-estate-market-us-2021#:∼:text=The%20estimated%20total%20dollar%20value,trillion%20as%20of%202021%3AQ2.&text=This%20research%20note%20summarizes%20a,trillion%20as%20of%202021%3AQ2., last accessed on February 22, 2023.

3 Source: NAREIT. https://www.reitsacrossamerica.com/united-states, last accessed on February 22, 2023.

4 The Department of Economics and Finance at FGCU offers two other Finance Major concentrations – Real Estate Finance and Financial Services. The Real Estate Finance concentration offers specific real estate instruction to students and offers a real estate focused capstone course. For more information, visit: https://www.fgcu.edu/cob/programs/fin-econ/finbs.aspx#CurriculumMap. Last accessed on February 22, 2023.

5 Typically, a Financial Policy Senior Seminar consists of 20 students. Each student group consists of 5 individuals that are randomly selected by the course instructor.

6 According to Robinson and Kakela (2006), Guest speakers in the classroom are found to contribute to dynamic class dialogues and develop creative responses to environmental and social complexities.