Real Estate Investment Trust
(REIT)
Vivian Kee
Fiona Ko
Carol Liu
Xaviera Tam
Agenda
1.
2.
3.
4.
5.
6.
Industry Overview
Canadian REITs & Tax Fairness Plan
Benefits of REITs
RIO CAN
HR REITs
Vanguard (ETF)
What’s REIT?
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An income trust company that accumulates a
pool of money to buy, develop, manage, and
sell assets in Real Estate
Must distribute at least 90% of taxable
income as dividend
Established in Canada in 1993
It can be privately held, publicly traded, or
non-exchange traded
“REITs are best performing
asset class in the past month,
led by REITs in UK and
Japan.”
Global Equity Research
Nov 9, 2006
Types of REIT
Equity REITs
1.
•
•
Invest and own properties
Most revenues come from rents
Mortgage REITs
2.
•
•
Loan money for mortgages to owners of real estate, or
purchase existing mortgages or mortgage-backed
securities
Revenues come from interest earned on mortgage loans
Hybrid REITs
3.
•
Combination of Equity and Mortgage REITs
Types of Property
1.
2.
3.
4.
5.
Multi-residential
Industrial
Office
Self storage
Diversified
REITs around the World
US REITs
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Established in 1960
160 Equity REITs in US with market capitalization of US
$423 billion
Qualifications:
 Corporation or business trust
 75% of assets must be real estate assets, cash, or
government securities
 95% of gross income must from rents, mortgage interests,
plus passive income (dividend or interest income)
 Permitted to invest in foreign assets
 Minimum distributions of 90% of taxable income
Australian REITs
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LPT (Listed Property Trusts)
Established in 1985
37 LPTs with market capitalization of US $60 billion
Qualifications:
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Fixed Trusts
Must invest in assets that generate rental income
Permitted to invest in foreign assets
Must distribute 100% of income and 100% of capital gains
as dividends
Canadian REITs


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Established in 1993
27 REITs listed on TSX with market
capitalization of $27 billion
Added into the S&P/TSX Composite Index on
Jan 26, 2005
Qualifications are updated with respect to Tax
Fairness Plan
Tax Fairness Plan
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Announced on Nov 1st, 2006
Is applicable to all Canadian trusts companies,
except REITs given certain conditions
Before the plan, trust companies do not need to pay
corporate tax
Federal and Provincial government lose $1 billion
annually in tax revenue to trusts
Main purpose is to reduce the growing number of
companies converting to trust
Effective for trusts that begin trading after Oct 31,
2006
Four year transition period for existing trusts (2011)
Income Trusts
New Definition of Canadian
REIT
1.
2.
3.
4.
At no time in the year, shall a REIT hold non-portfolio
property other than real properties situated in Canada.
Have no less than 95% of its income for the year
income from properties, whether in Canada or abroad
(including dividends and interest come)
Have no less than 75% of its income for the year
directly or indirectly attributable from rents, mortgages,
or gains on the disposition of real properties situated in
Canada.
Hold throughout the year real properties situated in
Canada, cash, and debt or other obligations of
Government of Canada with a total fair market value
that is no less than 75% of its equity value.
“At Risk” REITs

Cross-border REITs

Fail to comply with Rule 3
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Significant US or foreign holdings
Hotel REITs & Senior Housing REITs

Fail to comply with Rule 2

Passive Income vs. Active Income
Examples of “At Risk” REITs

Chartwells Senior Housing (CSH.un)

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Internally manages its own and third party
properties  Violates Rule 2
25% of properties located in US  Violates
Rule 3
Sunrise REIT (SZR.un)


80% of assets located in US
Canadian REITs book value of $260 M vs. REITs
equity value of $630 M  Violates Rule 4
Summary of Effects
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Both Income Trusts and REITs index value
fell
Investors are panic and uncertain
Volumes traded were particularly high
In the near future, most likely, there will be
stronger funds into REITs as investors
reallocate capital out of income trusts into
REITs
Value Drivers
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
Rise in Interest Rates – Renting increases
Fall in Interest Rates – Interest expense reduces
Benefits to REIT Unitholders
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No corporate tax – no double taxation
Taking a real stake in the ownership of property via
increases and decreases in value
Participating in the income generated by the
property
Does not need large capital investments
Diversification – relatively low correlation between
REIT and publicly traded real estate stock returns
and the returns of other market sectors
Liquid
Relatively higher returns than other major indexes
REITs vs. Index
REIT vs. S&P 500
NAREIT Equity Index
S&P 500
Dividend Growth vs. CPI
Diversification
Diversification
Diversification
Factors of Choosing REIT
Internalized Management
1.
•
Ability to choose the right investments
Diversification
2.
•
Types of properties invested
Strong Growth Prospects
Low Leverage
Earnings
3.
4.
5.
•
FFO, instead of Net Income
Cash Flows
6.
•
Available cash for dividend distribution
Exchange: TSX
Symbol: REI.UN-T
RioCan Today
Total outstanding units: 198,735
Market value: C$5,216,793.75
Current Overview
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Canada’s largest REIT and the 2nd largest public real estate
entity in Canada (Equity REIT)
Went public in 1993
Currently ranked the 16th largest owner of shopping centres in
North America (GLA)1and largest in Canada
Enterprise value in excess of $7 billion
Focused on ownership and management of “Retail” real
estate, a defensive asset class
–Dominant owner of community and new format retail in
Canada
–RioCan has largely become the “Urban Market” REIT
Current Overview

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Ownership interest in 200 retail properties, including 14 under
development, diversified throughout Canada
–72% of all Canadians live within 30 kilometers of a RioCan
property
Proven track record of delivering stable growth while
maintaining a conservative balance sheet
Strong, creditworthy tenant base
–Long lease term profile with Canada’s best known tenants
–Almost 5000 tenancies
A full-service real estate entity
Management Group
Management Group
Board of Trustees
Canadian vs. US
Only six metropolitan markets within
Canada have in excess of one million
people
Canada’s Six Urban Markets
Primary Marketing Strategy
Geographic Distribution
Based on Gross Revenue
Gross Revenue from Six Urban
Makets
Stability of Revenue Stream
A diverse, high quality investment grade tenant base and long
lease0-term profile provides substantial income stability.
RioCan Development Program
RioCan Development Program
Redevelopment and Expansion
of Existing Properties
Recent Investment Activities


Focused investment strategy on increasing exposure to the
unenclosed new format asset class 6 years ago, led to:
 Average of $500MM of acquisitions in each year (including
partners’ interests)
 A total of 23MM sq. ft.
 Average cap rate of 9.3%
 Average price per sq. ft. of $130
Portfolio repositioning strategy in 2005:
 Acquired a total of 1.9MM sq. ft. (new format retail in primary
markets)
 Disposed of 21 non-core shopping centrestotaling 3.4MM sq.
ft.
 12 enclosed malls, none of which were located in Canada’s 6
primary markets
Forward Looking Information
Price in the Past 1 Year
Price in the Past 5 Years
1 Year Comparison with S&P
5 Years Comparison with S&P
RioCan Financial
06 Q3 Balance Sheet
06
Q3
Income
Statement
06
Q3
Cash
Flow
Statement
1 of 2
06
Q3
Cash
Flow
Statement
2 of 2
05 Balance Sheet
05
Income
Statement
05
Cash
Flow
Statement
2 of 2
05
Cash
Flow
Statement
1 of 2
Financial Summary
Distribution History
Year
Pre-Split Distribution
Distribution
C$1.08 so far, expecting
C$1.32
YTD 2006
2005
C$1.27
2004
C$1.23
2003
C$1.14
2002
C$1.11
2001
C$1.08
2000
C$1.07
1999
C$1.04
1998
C$0.95
1997
C$1.55
C$0.78
1996
C$1.30
C$0.65
1995
C$1.15
C$0.58
Continuous Distribution Increase
Changes in Payout Ratio
Recommendation
H&R REIT
Open-ended Real Estate
Investment Trust
Latest Price As of Nov 16, 2006
Last: C$ 24.950
Net Change: C$ 0.600
% Change: 2.46%
Open
24.360
Bid
24.910
High
25.280
Ask
25.000
Low
24.220
EPS
0.85
Volume
583,740
P/E
29.40
52-Week High
24.440
Indicated Annual
Div.
1.37
52-Week Low
18.250
Yield
5.63
Market Capitalization: $2,756,065,872
Units Outstanding: 124,372,465
Closing Price based on 3 Years (Weekly)
H&R REIT vs. S&P500 (3Years - Weekly)
Closing Price based on 5 Years (Monthly)
H&R REIT vs. S&P500 (5 Years - Monthly)
Corporate Information
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
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IPO in December 1996.
Owns, manages and acquires income producing properties, and
provides mezzanine financing for development projects.
H&R REIT is a TSX-listed, open-ended Real Estate Investment
Trust. The REIT holds interests in 34 office properties, 113 singletenant industrial properties, 133 retail properties and 2
development projects, principally in the Greater Toronto Area.
Portfolio As of November 10, 2006
Office
Industrial
Retail
Developments
34
113
133
2
Net Rentable
Area (sf) *
8,001,647
23,185,863
9,570,546
N/A
Book Value
($ millions) *
$ 1,548
$ 1,371
$ 1,400
$ 29
Bell Canada Inc.,
TransCanada
Pipelines, Bell
Mobility, Royal Bank
of Canada, Public
Works of Canada,
Nestle, Telus
Communications,
Americredit,
Telemedia, Sony
Pictures
Entertainment
Canadian Tire,
Purolator Courier
Limited, Nestle USA,
Finning International
Inc., Circuit City,
Nortel Networks,
Asea Brown Boveri,
Sherwin Williams,
Sysco Food Services
of Canada
Rona Inc., Lowe's,
Shell Oil Products,
Home Depot, WalMart, Chapters, Nike,
Canadian Tire,
Famous Players,
Eckerd, Walgreens,
Sobey's, A&P,
Shoppers Drug
Mart
Number of
Properties
Selected Tenants
Growth over 9 years (End of 2005)
1996
Today (2005)
27
227
Assets
$270M
$3.8B
Market Cap.
$170M
$2.3B
Average term of leases
8yrs
12.3yrs
Average term of
mortgages
8yrs
11.1yrs
$0.75
$1.46
Properties
Distributable Income per
unit
Diversification of Rental Area
Book Value by Geographic Region
Operating Income by Type of
Asset
Flagship Properties


320 Front Street, Toronto, 590,000 sq.ft. – lead
tenant Royal Bank
Nestle building, North York, 360,000 sq.ft. – lead
tenant Nestle Canada
Key Acquisitions in 2001
Location
Est.
Price Levered
[CAD$] Return
Lease
Term
[Years]
Purolator Courier
Distribution Centres
12 across
Canada
$83M
14%
20
Bell Canada
Office/data Centres
Montreal
and
Toronto
$124M
18%
20
TransCanada
Pipelines Office Tower
Calgary
$263M
17%
20
Key Acquisitions in 2003
Location
Price
[CAD$]
Est.
Levered
Return
Lease
Term
[Years]
$79M
17%
20
Finning International
Facilities
Western
Canada
Bell Canada
Complex
Mississauga
$140M
13%
20
Place Bell Canada
Ottawa
$224M
16%
14
Circuit City
Distribution Centre
Marion,
Illinois
$48M
14%
19
Lowe’s Home
Improvement stores
Georgia,
Alabama
$43M
14%
17
Key Acquisitions in 2003 - US
Tenants
Price
[CAD]
Est.
Levered
Return
28 Stand alone retails
properties
Lowes, Home Depots,
Walgreens, Sams Club
$292M
15%
6 Distribution Centres
Georgia Pacific, Sherwin,
Williams, Jones Apparel
$123M
13%
Management Profile
Thomas J. Hofstedter, President & CEO
founded H&R REIT in 1996; more than 25 years in
commercial real estate; CA.
Initial Assets:
• 567,861 square foot office complex located at 310-320330 Front Street West in Toronto, tenants as NCR and
the Royal Bank;
•359,227 square foot office tower located at 25
Sheppard Avenue West in Toronto, head office of Nestlé
Canada;
•153,314 square foot office building located at 145
Wellington Street West in Toronto, corporate head office
of AIG.
Management Profile

Eric Cohen, Chief Financial Officer
 joined H&R REIT in 1996; 16 years in commercial real
estate; CA.

Nathan Uhr, Vice President, Acquisitions
 joined H&R REIT in 1996; 30 years in commercial real
estate.
“Two-part” Strategy

Establishing strong,
stable cash flow by
locking in the company
portfolio’s income yield
regardless of real
estate cycles.
“Two-part” Strategy
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Building a portfolio that can withstand the
inevitable economic and real estate cycles in
various markets and generate a dependable
income stream.
Through acquisitions, new developments or
expansions.
Maintain a balanced mix of properties
H&R REIT
Financial Information
End of December 2005
Summary of Financial Information
H&R REIT
First Quarter 2006 Report
H&R REIT
Second Quarter 2006 Report
H&R REIT
Third Quarter 2006 Report
Annual EPS Report
Distribution History
Cash Distribution Per Unit
(approximately 91% of Distribution Income Per Unit)
Payout Period - Monthly
Year
Distribution
1997
$0.6800
1998
$1.0300
1999
$1.1040
2000
$1.1090
2001
$1.1640
2002
$1.1990
2003
$1.2240
2004
$1.2440
2005
$1.3044
2006
Commencing Jan 2006 $0.1112 per
unit ($1.3344 on an annualized basis)
Recommendation
Current Market Information
Quick Facts as of 11/15/06
Last Sale
Net Change
% Change
Previous Close
Open
Today's High
Today's Low
Today's Volume
52 Week High
52 Week Low
Shares Outstanding (000s)
Net Assets
$75.23
(11/15/06)
0.09
0.12
$75.14
$75.25
$75.45
$75.00
89,000
$76.80
$59.13
17,959
$1,351,055,570
Current Market Information
Vanguard REIT ETF

What does the fund do?
an exchange-traded share class of Vanguard® REIT
Index Fund, which employs a “passive
Management” investment approach
designed to track the performance of the MSCI®
US REIT Index, a benchmark of U.S. property trusts
that covers about two-thirds of the value of the entire
U.S. REIT market.
Portfolio Holdings


97.91 % REITS ( High
industry concentration
risk)
2.09 % Short term
reserve holdings to
maintain liquidity for
redemptions
ETF Information
Target REIT Composite is the MSCI US REIT Index adjusted to include a 2% cash position (Lipper
Money Market Average).
Management Profile
Gerard C. O'Reilly,
Principal Manager
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Portfolio manager.
Advised the fund since 2004.
Worked in investment management since
1992.
B.S., Villanova University.
Management Profile
George U. Sauter
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Oversees Vanguard’s Quantitative
Equity and Fixed Income Groups
With Vanguard since 1987
Quantitative Equity Group manages
indexed and structured equity
portfolios covering U.S. and
international markets.
advised Vanguard REIT ETF since
2004
chief investment officer.
A.B. in economics from Dartmouth
College and an M.B.A. in finance from
the University of Chicago.
MCSI REIT Index
Top Ten Holdings
1. Simon Property Group Inc.
•Delaware corporation that operates as a self- administered and self-managed real estate
investment trust.
•ownership, development, and management of retail real estate, primarily regional malls,
Premium Outlet® centers and community/lifestyle centers.
•As of December 31, 2005, the Company owned or held an interest in 286 incomeproducing properties in the United States, which consisted of 171 regional malls, 33
Premium Outlet centers, 71 community/lifestyle centers, and 11 other shopping centers
or outlet centers in 39 states and Puerto Rico, ten parcels of land held for future
development, ownership interests in 51 European shopping centers in France, Italy and
Poland, five Premium Outlet centers in Japan, and one Premium Outlet center in Mexico.
2. Equity Residential
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engaged in the acquisition, development, ownership, management and operation of
multifamily properties.
is structured as an umbrella partnership REIT, under which all property ownership and
business operations are conducted through the Operating Partnership and its various
subsidiaries.
strategy for accomplishing these objectives includes: Leveraging the Company's size and
scale in four critical ways: Investing in apartment communities located in strategically
targeted markets, to maximize its total return on an enterprise level; Meeting the needs of
the Company's residents by offering a wide array of product choices and a commitment to
service; Engaging, retaining, and attracting the people by providing them with the
education, resources and opportunities to succeed; and Sharing resources, customers and
practices in property management and across the enterprise.
3. Equity Office Properties Trust
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was organized in 1996 and began operations in 1997
owns all of its assets and conducts all of its operations through EOP Partnership and
its subsidiary entities.
As of December 31, 2005, the Company owned whole or partial interests in 622 office
properties comprising 111.5 million square feet in 16 states and the District of
Columbia.
owns, manages, leases and develops office properties. At December 31, 2005, the
Company had a national office portfolio comprised of whole or partial interests in 622
office buildings located in 16 states and the District of Columbia.
owns premium quality office buildings.
4. ProLogis
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an international operating company organized as a Real Estate Investment
Trust (REIT).
the largest publicly held, U.S. headquartered, global owner and operator of
distribution properties.
Founded in 1991
a service-oriented company focusing on meeting the needs of customers
through the unique ProLogis Operating System® - made up of over 1,200
real estate professionals working together to provide quality facilities and
services to customers in North America, Europe and Asia.
Geographical Diversification
•100% invested in the US
•Limited Diversification
•High geographical
concentration risk
Performance History
Current Performance
Annual Report
Total Returns
Annual Report
Annual Report
Expense Ratios
Vanguard Index
Participation
Receipts –
VIPERs
a VIPER can be bought
and sold anytime during
the trading day at the
current market price
Cumulative Returns
Statement
of Net
Assets
Statement of Operations
Financial
Highlights
Notes
Management Fees
In Kind Redemptions
Capital Share Transactions
Semi Annual Report
Total Return
Semi Annual Report
Expense Ratios
Statement of
Net Assets
Statement of
Operations
Statement
of Changes
in Net
Assets
Financial
Highlights
Notes
Management Fees
In Kind Redemptions
Capital Share Transactions
Distribution
Valuation
31-Jul-06
NAV
$
31-Jan-06
31-Jan-05
68.73 $
64.07 $
7%
24%
5%
Expenses
0.120
0.120
0.180
Distributions
1.082
3.561
1.270
940.00 $
1,750.00 $
NAV Growth
Investment Income
$
Yield
Price
$
P/E
Unrealized and Realized Gain on Assets
$
Unrealized andf Realized Asset Gain Growth
Net Assets
NA Growth
Shares issued
Rate of Share Issuance
Redeemed shares
Rate of Redemption
Net Share Issuance
Rate of Net Share Issuance
$
4.00%
3.80%
68.88 $
64.07 $
45.000
38.000
4.80 $
14.12 $
-66%
376%
1,363.00 $
871.00 $
56%
340%
10139.000
10668.000
-5%
179%
3900.000
900.000
333%
0%
6239.00
9768.00
-36%
51.77
670.00
51.77
2.97
198.00
3828.000
0.000
Recommendation

Hold until further evaluation at
year end.
Expensive
 Can be costly to trade based on
percentage commissions.
 High P/E
