“am i reit or am i wrong?”. topics to cover reits 101 who are reits? who owns reits?...
TRANSCRIPT
“AM I REIT or AM I Wrong?”
Topics to Cover
• REITs 101
• Who are REITs?
• Who Owns REITs?
• Advantages/Disadvantages
• What’s In It For You?
When Were REITs Created?
• Congress created REITs in the early 1960’s• Make investments in large-scale real estate accessible to investors
– Diversification– Dividends– Liquidity– Transparency
• Originally more retail investors• Now more institutional investors
Fact: Who were first REITs? Winthrop Realty Trust, Pennsylvania Real Estate Investment Trust and Washington Real Estate Investment Trust were the first REITs still in existence today.
REIT Properties - Office
What is a REIT?
• A REIT is really just a TAX designation– Most of the company’s assets and income must be real estate-
related– Effectively a non-taxable entity
• MUST distribute at least 90% of taxable income to shareholders• Deduction for dividends paid
– Taxes are paid by shareholders– Losses are not passed through
• A REIT owns and usually operates income-producing properties
(Note: There are also Mortgage REITs.)
REIT Properties - Industrial
REITs Being Public
• The REITs we will focus on are public companies• What does it mean to be public?
– Public Shareholders• Retail• Institutional (buy side)
– Traded on an exchange (Majority on NYSE, but some on NASDAQ)
– Board of Trustees/Directors– Followed by analysts (sell side)– Public Reporting– Earnings conference calls– Earnings guidance
REIT Properties - Multifamily
REITs Reintroduced in the Early 1990s?
• Over the past 20 years, commercial real estate has seen a dramatic shift from the private sector to public markets, contributing to the substantial growth of the global real estate securities market. This shift has been due in large part to the increasing adoption of the modern REIT structure amid growing investor demand for listed real estate and global real estate allocations.
• The modern REIT era emerged in the early 1990s on the heels of a major downturn in commercial real estate values. For U.S. real estate operators, many of which were over-leveraged, the REIT structure provided a way to access capital from public markets, since bank financing was unavailable at the time due to the savings-and-loan crisis. As a result, more than 100 U.S. companies formed as REITs and became public between 1991 and 1997.
• 1990s: The Modern REIT Era Emerges: During the early 1990s, credit and capital for commercial real estate became largely unavailable and property values dropped dramatically. As a means of accessing capital, private real estate companies began to embrace the REIT structure. Kimco Realty Corporation was the first to go public in 1991. About a year later, Taubman Centers issued an IPO using an innovative structure called the UPREIT, which allowed owners to go public without triggering adverse tax consequences.
REIT Properties - Retail
Who are REITs?
• How many REITs are there - 160 as of YE 2011• Approximately 130 Equity REIT’s, 30 Mortgage REITs
• How big are they – Combined Market Cap of over $850 billion
• About 75% of the companies in the global real estate securities market
are REITs
• BUT…REITs own less than 15% of US institutional grade real estate.
FACT: Largest REIT is Simon Property Group. Simon’s CEO, David Simon is the highest- compensated
chief executive in America (all companies/every industry)
REIT Properties - Malls
REIT Financial Statement Analysis
• The key items from REIT financial statements that investors use to value REITs and make investment decisions:
• Funds from Operations (FFO) (Defined as: Net Income + Depreciation + Amortization
• Less: GAAP Adjustments, including straight line rental income
• Less: Tenant Improvement and Leasing Commission Costs• Less: Capital Expenditures
• Equals: Adjusted Funds from Operations (AFFO)• Typically is a good representation of a company’s ability to
pay their dividend
REIT Properties - Lodging
Who Owns REITs?
• Retail investors
• Institutional investors– Mutual funds– Pension funds– Pension fund advisors– Insurance Companies– Endowments– Foundations– Hedge funds– Index funds– Exchange Traded Funds (ETFs)
REIT Properties - Storage
Why Invest in REITs, Generally?
• Dividends (Income)– Average annual return for American REITs for 40-year history: 9.8% – Dividends paid by REITs in 2011: $22 billion– Due to their minimum distribution requirement and cash-flow-oriented business
models, REITs typically offer higher dividend yields than other equities with similar risk profiles.
– Average REIT dividend yield (as of August 31): 4.2%
• Growth• Relative Stability• Diversification
Compound Annual Returns
1yr 3 yr 5 yr 10 yr 15 yr 20 yr-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
NAREIT EquityS&P 500DJIA
Why Invest in Specific REITs?
• Track record of success• Management team• Strong markets• Strong property types• Strong operating metrics
Public Company Capital Raising
• Equity – Three Different Types– Common Equity– Preferred Equity– Private Equity
• Debt - Two Different Types– Unsecured (Line of Credit)– Secured (Mortgage)
• Cash Flow (to a point)• Dispositions
Perceived Advantages of REITs
• Shareholders– Transparency to public– Accountability – reporting– Corporate governance– Chance to own real estate with less risk/more liquidity
• Local Operations– Institutional parent – In-house decisions– Expertise
– Access to capital– Handled by CFO– Well capitalized– No worries about capital
– Conservative balance sheet– No loans on properties – flexibility to do shorter term deals, move/grow tenants– Local operating platforms– Entrepreneurial– Leasing, property management, asset management – local level– Quicker decisions
Perceived Disadvantages of REITs
• Rigid reporting responsibilities• Short term focus on results• Lack of local relationships
– Accounting– Lenders
Local REITs
• Aimco• Apple REIT Cos.• Ashford Hospitality Trust• Avalon Bay • Berkshire Income Realty• Developers Diversified Realty Corp• Duke Realty• Entertainment Properties Trust• First Potomac Realty Trust• Liberty Property Trust• MHI Hospitality Corp.• Prologis• Senior Housing Properties Trust
What’s In It For You Locally?
1. Brokers – listings, quickness and certainty of commissions being paid
2. Local vendors – attorneys, general contractors, designers, engineers, building services
3. Customers• Quick decisions• Flexibility• Ability to grow• Customer service• Asset management• Relationships
Who Are We?
Liberty Property Trust (NYSE: LRY) www.libertyproperty.com
Southern Virginia Portfolio• 5.3 million square feet in Hampton Roads and Richmond•23 employees•Pay $1.5 million in annual RE taxes in Hampton Roads
First Potomac Realty Trust (NYSE: FPO) www.first-potomac.com
Southern Virginia Portfolio• 5.5 million square feet in Hampton Roads and Richmond•26 employees
•Pay $2.8 million in annual RE taxes in Hampton Roads