Real Estate Investment Trusts
• • •
Investing for Dividends
and Diversification
All Information Included in this Presentation
is Based on Publicly-Traded Securities Only
• • •
National Association of
Real Estate Investment Trusts®
Summary
• What is a REIT?
• Why Invest in REITs?
• Common Questions about REIT Investing
• The Globalization of Real Estate Securities
• How to Invest in REITs
What is a REIT?
• REITs are publicly traded companies that own and manage
investment-grade commercial real estate
• Like Verizon in the telecommunications business or Merck
in the pharmaceutical business, REITs are companies in the
real estate business
• REITs are not mutual funds, closed-end funds or
partnerships
• REITs provide a simple and inexpensive way to invest in
commercial real estate without buying property directly
Requirements of the REIT Election
• Company must be in the real estate business
– At least 75 percent of assets must be real property
– At least 75 percent of revenue must come from real
estate
• Stock must be widely held
• At least 90 percent of taxable income must be distributed
annually to shareholders
• Company receives a dividends paid deduction
• Taxes are paid at the shareholder level
What is a REIT?
• Full-time professional management teams
• Business plans designed to maximize shareholder value
• SEC financial reporting and transparency
• Stock values backed by real assets
• Tax transparency
• Traditional corporate governance and accountability
The REIT Industry in 2010
• Approximately $500 billion of commercial real estate
properties owned
– 10-15 percent of investment-grade commercial real
estate
– More than 29,000 properties nationwide
– All major property sectors
– All major geographic regions
•
•
•
{
$298 billion equity market capitalization
}
142 publicly traded REITs in the FTSE NAREIT All REIT
Index
127 companies trade on the NYSE
Equity Market Capitalization of Listed U.S. REITs
500
Billions of dollars
400
300
Trend
(18.5% Compound Annual Rate)
200
KIMCO Realty IPO
November 1991
100
Taubman Centers IPO
December 1992
(First UpREIT)
0
1991
1993
1995
1997
1999
2001
Data as of March 31, 2010. Source: NAREIT®
Note: Equity Market Capitalization does not include operating partnership units
2003
2005
2007
2009
Types of REITs Today
92.1%
EQUITY REITs
Provide equity capital for
commercial real estate by
owning real estate assets.
Derive revenues primarily
from rents.
7.5% MORTGAGE REITs
Provide debt capital for
housing and commercial real
estate by investing in
mortgages and mortgagebacked securities. Derive
revenues primarily from
interest payments.
0.4% HYBRID REITs
Combine the investment
strategies of both equity and
mortgage REITs
Data as of March 31, 2010. Source: NAREIT®
U.S. REITs Invest in All Property Types
Property Sector
Percent
Residential
14
Office
13
Health Care
13
Regional Malls
12
Shopping Centers
10
Diversified
7
Self Storage
7
Lodging/Resorts
7
Specialty
7
Industrial
5
Mixed
3
Free Standing
2
Total
Data as of March 31, 2010. Source: NAREIT®
100
Transparency
The REIT Industry in 2010
• Data provided by Institutional Shareholder Services (ISS)
show that real estate had one of the best average
corporate governance rankings of any U.S. Industry as of
April 1, 2009, as measured by ISS’ Corporate Governance
Quotient (CGQ) database
Industry Group
Average Index CGQ
Utilities
69.9
Pharmaceuticals & Biotechnology
56.2
Semiconductors & Semiconductor
55.4
Real Estate
54.5
Automobiles & Components
52.4
Average
57.7
Summary
• What is a REIT?
• Why Invest in REITs?
• Common Questions about REIT Investing
• The Globalization of Real Estate Securities
• How to Invest in REITs
Why Invest in REITs?
1. Long-term performance
2. Reliable and significant current
income which grows over time
3. Capital preservation and
protection from inflation
4. Diversification
Performance
REITs Outperform Leading U.S. Benchmarks
Compound annual total returns in percent: March 1980 – March 2010
9.15
Dow Jones Industrials1
10.18
NASDAQ Composite1
11.59
S&P 500
12.29
FTSE NAREIT Equity REITs
0
1Price
only returns
2
4
6
8
10
12
14
Liquidity
Average Daily Trading Volume of Listed U.S. REITs
7,000
Millions of Dollars
6,000
Acquisition of Equity
Office Properties Trust
Completed, 2/9/07
5,000
4,000
Proposed Acquisition of
Equity Office Properties
Trust, 11/20/06
3,000
2,000
1,000
0
1990
1992
1994
1996
1998
Data as of March 31, 2010. Source: NAREIT®
2000
2002
2004
2006
2008
2010
Dividends
U.S. REITs Deliver Reliable Current Income
Average annual total return: 12.1 percent
Average annual income return: 7.3 percentage points or 60 percent of total return
50
Percent
Income
40
Price
Average annual
income return
7.3
30
20
10
0
-10
-20
-30
-40
-50
1990
1992
1994
1996
1998
2000
Data for 20-year period ranging 1990-2009. Source: NAREIT®
2002
2004
2006
2008
Capital Preservation
REITs Provide Inflation Protection
Indexed at December 1980 = 100
600
Consumer Price Index
500
NAREIT Equity Price Index
400
300
200
100
0
1981
1984
1987
1990
1993
1996
1999
Data as of February 28, 2010. Source: NAREIT®, Bureau of Labor Statistics.
2002
2005
2008
Diversification
Three Factors Determine Portfolio Allocations
1.
Rates of return
2.
Volatility of returns
3.
Correlation of returns
When the return to an investment is high enough, the
volatility is low enough and/or the returns are sufficiently
uncorrelated, the investment earns a place in the portfolio.
Diversification
Rates of Return
Compound annual rate in percent
REITs
Large Stocks
Small Stocks
Bonds
1972–2007
13.0
11.2
14.3
8.7
1988–2007
12.3
11.8
13.5
9.3
1998–2007
10.5
5.9
10.6
7.3
2003–2007
18.2
12.8
17.2
5.7
Source: Small Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the
Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Stocks—Standard & Poor’s 500®, which is an unmanaged
group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond;
REITs—National Association of Real Estate Investment Trusts® (NAREIT) Equity REIT Index.
Diversification
Volatility of Returns
Annualized standard deviation of quarterly returns in percent
REITs
Large Stocks
Small Stocks
Bonds
22.5
11.5
19.9
10.1
1972–2007
17.4
1988–2007
17.4
17.
0
16.6
1998–2007
20.4
17.3
22.2
8.8
2003–2007
22.3
9.8
25.1
4.1
Source: REITs—NAREIT Equity Index; Large Stocks—Standard & Poor’s 500®;
Small Stocks—Ibbotson U.S. Small Stock Series; Bonds—20-year U.S. Government Bond.
Diversification
REIT Returns are Uncorrelated with Other Assets
60-month rolling periods
• vs. Small stocks
1.0
• vs. Large stocks
• vs. Bonds
0.8
0.55
0.55
Correlation
0.6
0.4
0.2
0.08
0.0
–0.2
–0.4
Begin 1972 1976
End 1976
1980
1980
1984
1984
1988
1988
1992
1992
1996
1996
2000
2000
2004
2003
2007
Source: Large Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in
general; Small Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund
Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Government Bonds—20-year U.S. Government Bond;
REITs—FTSE NAREIT Equity REIT Index.
Diversification
Efficient Frontier with and without REITs
Stocks, bonds, bills, and REITs 1972-2007
Average Annual Return %
20
• Portfolios with REITs
• Portfolios without REITs
Small stocks
16
REITs
Large stocks
International
stocks
12
Bonds
8
Treasury bills
4
0
5
10
15
20
25
Risk (Annual Standard Deviation) %
Source: Small Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund
Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and
considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; International Stocks—Morgan
Stanley Capital International Europe, Australasia, and Far East (EAFE ®) Index; Treasury Bills—30-day U.S. Treasury Bill; REITs—FTSE NAREIT Equity
REIT Index.
Diversification
Diversify to Reduce Risk and Increase Return
Stock and bond investors 1972–2007
Stocks and Bonds
REITs
10%
T-Bills
10%
Bonds
40%
With 10% REITs
REITs
20%
T-Bills
10%
Stocks
50%
Return
10.6%
Risk
10.7%
Sharpe Ratio 0.42
With 20% REITs
Stocks
45%
Bonds
35%
Return
10.9%
Risk
10.5%
Sharpe Ratio 0.47
Stocks
40%
T-Bills
10%
Bonds
30%
Return
11.3%
Risk
10.4%
Sharpe Ratio 0.50
Source: Stocks—Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative
of the stock market in general; Bonds—20-year U.S. Government Bond; Treasury Bills—30-day U.S. Treasury Bill;
REITs—FTSE NAREIT Equity REIT Index.
Diversification
How Important is Asset Allocation?
A: Variation in returns across
funds attributed to asset
allocation
40%
A
B
B: Variation in a fund’s returns
over time attributed to asset
allocation
90%
C
100%
0
50
Percent (%)
100
C: A fund’s total return attributed
to asset allocation
Summary
• What is a REIT?
• Why Invest in REITs?
• Common Questions about REIT Investing
• The Globalization of Real Estate Securities
• How to Invest in REITs
Common Questions About REIT Investing
• Interest rates
• Home ownership
Interest Rates and REIT Performance
Rising interest rates to not always result in declining REIT
performance:
• Higher interest rates result from economic growth, higher
inflation or both
• When economy is growing, the value of real estate will also
rise
• Leases include bumps related to inflation – companies
pass on costs of inflation to tenants
• Most companies carry mostly fix rate debt. REITs have
taken advantage of 40-year low rates to improve their
balance sheets
Interest Rates and REIT Performance
Historical data show rising rates have little or no effect on
REIT prices:
• Over the past 30 years, data shows that when interest
rates rose, the probability of REIT stocks rising versus
falling was about 1 to 1
• REITs only slightly more sensitive to interest rates than the
S&P 500
• REITs less sensitive than other financial stocks
Source: Banc of America Securities
Home Ownership is No Substitute
•
A house is a consumer good that may or may not be a good investment
•
A house is highly leveraged, like buying stock on margin
•
A house is undiversified, like owning a single stock
•
Current return (or dividend) is not cash, but imputed “rental value” that cannot
be reinvested and compounded
•
“User costs” recognize both cash and non-cash costs of homeownership
– Mortgage interest expense
– Operating expenses
– Depreciation and opportunity cost of homeowner’s equity
– Property taxes
– Mortgage insurance
– Homeowners insurance
•
Transactions costs are large and liquidity and pricing are uncertain
•
Returns to housing are relatively uncorrelated with returns to commercial real
estate
Summary
• What is a REIT?
• Why Invest in REITs?
• Common Questions about REIT Investing
• The Globalization of Real Estate Securities
• How to Invest in REITs
Why Invest in Global Real Estate Securities?
• Investment opportunity universe doubles
• Increased adoption of REIT type structure
• Compelling dividend yield
• Diversification benefits - low correlation to other asset
classes and among the regions in which the fund invests
• Valuations attractive with wide variances to private market
real estate
Source: INGClarion
The FTSE EPRA/NAREIT Global Real Estate Index Series
FTSE EPRA/NAREIT Global Index
353 Companies
$726 Billion
Americas
138 Companies
$305 Billion
(42%)
Asia Pacific
122 Companies
$298 Billion
(41%)
Data as of March 31, 2010. Source: NAREIT®, FTSE®.
EMEA
93 Companies
$123 Billion
(17%)
FTSE EPRA/NAREIT Global Rules
• Base date of 12/31/99 of 1,000 index points
• Designed to reflect performance of companies in North
American, European and Asian real estate markets
• Free float market capitalization weights
• All annual reports must be in English
• Specific guidelines for each geographic series
• Free float market cap and liquidity standards
• Structured to represent general trends in all eligible real
estate stocks worldwide
• Quarterly reviews and rebalancing by separate index
committees
Globalization of Real Estate Securities
• Many countries have adopted a REIT-type structure:
Belgium REITs – growing universe
German REITs – (G REITs) – Effective 1/1/2007
Canadian REITs – legislated 1993, growing universe
Dutch FBI - Fiscal Beleggings Instelling (Netherlands)
Hong Kong REITs – legislated 2005
J-REIT - Japanese Real Estate Investment Trust
LPT - Listed Property Trusts (Australia and New Zealand)
SIIC – Sociétés d'investissements Immobiliers Cotées (France)
SIIQ – Società di investimento immobiliare quotate (Italy)
S-REIT – Singapore Real Estate Investment Trust
United Kingdom – Effective 1/1/2007, 9 companies already elected
Countries with REIT Legislation
REIT Legislation in Place:
•
Australia
•
Israel
•
New Zealand
•
Belgium
•
Italy
•
Singapore
•
Bulgaria
•
Japan
•
South Korea
•
Canada
•
Korea
•
Taiwan
•
France
•
Malaysia
•
Thailand
•
Germany
•
Mexico
•
Turkey
•
Hong Kong
•
Netherlands
•
United Kingdom
REIT Legislation Under Discussion:
•Finland
•Pakistan
•India
•Spain
Summary
• What is a REIT?
• Why Invest in REITs?
• Common Questions about REIT Investing
• The Globalization of Real Estate Securities
• How to Invest in REITs
How to Invest in REITs
REIT stocks can be bought and sold in a number of ways:
• Most stocks trade on major stock exchanges
• Dividend reinvestment programs (DRIPs)
• REIT and real estate security open-end mutual funds
• Closed-end funds (CEFs)
• Exchange traded funds (ETFs)
Information on REIT Investing
• InvestInREITs.com
–
–
–
–
–
Source for information on REIT investing
Direct links to NAREIT member web sites
Performance information and stock tickers
List of REIT mutual funds
List of REITs with DRIPs
• Wall Street analyst coverage
• Independent research coverage
• Corporate investor relations
Disclaimer
NAREIT® does not intend this presentation to be a solicitation related to any
particular company, nor does it intend to provide investment, legal or tax advice.
Investors should consult with their own investment, legal or tax advisers regarding
the appropriateness of investing in any of the securities or investment strategies
discussed in this presentation. Nothing herein should be construed to be an
endorsement by NAREIT of any specific company or products or as an offer to sell
or a solicitation to buy any security or other financial instrument or to participate in
any trading strategy. NAREIT expressly disclaims any liability for the accuracy,
timeliness or completeness of data in this presentation. Unless otherwise
indicated, all data are derived from, and apply only to, publicly traded securities.
Any investment returns or performance data (past, hypothetical, or otherwise) are
not necessarily indicative of future returns or performance.