EQUITY INVESTMENT IN REAL ESTATE THROUGH LISTED REITS
Your Fund’s
Real Estate Investments:
October 28, 2014
National Association of Real Estate Investment Trusts®
REITs: Building Dividends & Diversification®
1875 I St, NW Suite 600, Washington, DC 20006 • 202-739-9400
Approaches for Today’s
Market and a Better
Tomorrow
The Developed Global Equity Real Estate Opportunity Set
Note: Underlying Property Market Data as of March 30, 2014; Listed Property and Stock Market Data as of June 2014 Source: EPRA Monthly Statistical Bulletin, June 2014
Region
Underlying Property Market ($bn)
Listed Property Market ($bn)
Listed as a Percent of Underlying
Stock Market Listed Property as a Percent of Stock Market
Europe 7,493.8 439.6 5.8 14,478 3.0
North America 8,061.3 933.0 11.5 25,884 3.6
Asia-Pacific 4,468.6 888.2 19.8 11,525 7.7
Africa / Middle East 211.7 18.9 8.9 41 28.7
Global $20,240.4 $2,279.6 11.2% $51,928.0 4.4%
• Commercial real estate investment is a large part of the worldwide market portfolio
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Real Estate in the Institutional Investment Portfolio
Commercial real estate investment has been viewed as a core asset class by many institutional market segments, including endowment, pension, and retirement funds
“Basically, there are only four types of investment categories that you need to consider: Cash, Bonds, Common Stocks and Real Estate.”– Burton G. Malkiel (Princeton), The Random Walk Guide to Investing
Commercial real estate investment provides a unique combination of investment attributes
Strong return (like stocks) with strong, steady current income (like bonds)
Investment grade property provides a measure of inflation protection
Supply inelasticity leads to a distinct real estate cycle
Moderate correlation over time contributes to portfolio diversification
Commercial real estate investment can be accessed through different platforms, including direct property investment, unlisted property funds, and listed real estate securities
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Real Estate Allocations of Institutional Investors Current and target allocation Ranges: August 2014
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13%
52%
29%
5%
0.5%
32%
49%
16%
2% 0.8% 0%
10%
20%
30%
40%
50%
60%
Less than 5.0% 5% - 9.9% 10% - 14.9% 15% - 19.9% More than 20%
Target Allocation
Current Allocation
Source: Preqin Real Estate Online
• Across all plans investing in real estate, the average actual allocation is 6.8%; while the average targeted allocation is 7.6%; suggesting more capital is available for investment
Institutional Investors in the Real Estate Asset Class Exposure to Listed REITs
5
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Public Sector Pensions Private Sector Pensions Foundations Endowments
57.7%
53.2%
27.5% 28.4%
36.5% 38.1%
30.7% 29.1%
Asset Weighted # Plans
Source: Preqin Real Estate On-line. June 2014.
U.S. Institutional Investors in Listed REITs Distribution by Total Plan Assets
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Endowments 3%
Foundations 3%
Private Sector Pensions
35% Public Sector
Pensions 59%
Source: Preqin Real Estate On-line. June 2014.
$ 3,722,790 Total Plan Assets
The Use Of Real Estate, Including REITs and Global Listed Real Estate Securities by Pension and Retirement Plans
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Real Estate Investment through REITs
• REITs are Real Estate equities
• REITs deliver competitive long-term performance
• REITs provide stable dividend income
• REITs provide portfolio diversification
• REITs are a source of market liquidity
• REITs are a complement to private investment in the real estate portfolio
• REITs are an efficient way to gain exposure to global property markets
0
150
300
450
600
750
900
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Billions ($)
1960: REITs created by Congress
1960s-1970s: Mortgage and Hybrid REITs
Dominant
1986: Tax Reform Act Permits Internal
Management
1989: Collapse of Real Estate Market
1991: Kimco IPO Modern REIT Era Begins
1992: Taubman Centers IPO (First UPREIT)
1993: Relaxation of the “Five or Fewer” Rule for
Pension Funds
2007: Equity Office Properties LBO
2007-2009: Great
Financial Crisis
Note: Data as of August 31, 2014
Publicly Traded REIT Industry Growth Equity Market Capitalization
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Listed REITs and Property Companies Contribute Solid Portfolio Performance
Note: Monthly data as of August 2014 Sources: NAREIT® analysis of data from IDC accessed through FactSet.
Highest return over
period
FTSE NAREIT U.S. Equity
REITs TR
FTSE EPRA/NAREIT Developed TR
S&P 500 TR MSCI EAFE TR Barclays Capital U.S. Aggregate
Bond Index
Barclays Capital Global Aggregate
Bond Index
1-Year 24.01 20.39 25.25 16.43 5.66 6.24
3-Year 14.91 13.04 20.61 11.36 2.91 1.32
5-Year 18.98 13.94 16.88 8.21 4.48 3.71
10-Year 9.16 8.64 8.38 7.01 4.72 4.80
15-Year 11.84 10.17 4.78 4.21 5.70 5.44
20-Year 11.06 8.90 9.53 5.20 6.09 5.88
25-Year 10.79 NA 9.54 5.00 6.62 NA
30-Year 11.46 NA 11.29 9.46 7.75 NA
35-Year 12.06 NA 11.73 9.32 7.99 NA
40-Year 13.86 NA 12.00 10.22 NA NA
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Effect of Dividends on Total Investment Performance $10,000 invested from 1990 through 2013
Source: NAREIT analysis of data from IDC accessed through FactSet.
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0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Sh
arp
e r
ati
o
Correlation with Dow Jones U.S. Total Market
Risk-Adjusted Performance and Diversification Potential U.S. Investment Benchmarks, January 1990 – August 2014
Diversification and Risk-Adjusted Performance of Domestic Equity Investments
Note: Based on monthly returns.
Source: NAREIT® analysis of data from Interactive Data Pricing and Reference Data accessed through FactSet.
REITs
Value Stocks
Growth Stocks
Broad Market Indexes
• Publicly traded commercial real estate contributes both strong risk- adjusted returns and diversification to a domestic equity portfolio
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Listed Equity REITs are More Correlated with Private Real Estate, and Less with Stocks, over Longer Horizons
Graph shows correlation of total returns computed over rolling one-quarter periods, rolling two-quarter periods, etc. Data begin in 1989Q4, the earliest data available for the S&P Financial Sector index. Source: NAREIT analysis of data from NCREIF (NPI and ODCE) and FactSet.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1 2 3 4 8 12 16 20
Co
rrel
atio
n
Investment Horizon (Number of Quarters)
Correlation of Listed U.S. Equity REIT Returns with U.S. Stock Returns and U.S. Private Equity Real Estate Returns over Increasing Investment Horizons
with NCREIF Property Index (4-quarter lag)
with NCREIF ODCE Index (4-quarter lag)
with NCREIF Property Index(Core Properties)
with NCREIF ODCE Index (CoreFunds)
with S&P Financial SectorIndex
with Dow Jones U.S. TotalStock Market
with S&P 500 U.S. Stock Index
7.6
1%
4.7
7%
51 BPS
238 BPS
103 BPS 113 BPS 125 BPS
From 1998 to 2011, Allocations to Real and Alternative Assets Increased by as Much As 20 Percent
REITs Private Equity Other Real
Assets
Private Real Estate
Hedge Funds
11
.31
%
11
.10
%
9.8
5%
Net Return Annualized total
return % net of fees
Fees Investment costs in
basis points
Source: CEM Benchmarking, Inc. “Asset Allocation And Fund Performance Of Defined Benefit Pension Funds In The United States Between 1998-2011”
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Actual Returns &
Costs
A comparison: Listed Equity REITs and Private Equity Real Estate
Fund Average: Listed Equity REITs Private Real Estate
Gross Return: 11.82% 8.73%
Investment Cost: 0.52% 1.13%
Net Return: 11.31% 7.61%
Volatility: 20.17% 16.48%
Compounded Net Return: 9.17% 6.01%
Correlation: 0.9
Equity REITs vs. Private Real Estate (private real estate standardized for smoothing and lag)
† CEM is currently collecting 2013 data. Lag in all illiquid assets (private real estate included) implies that for
these asset classes, 2013 data corresponds to 2012 returns. Thus, 2011 is currently the earliest date for
which real comparisons between asset classes (and funds themselves) may be made.
Source: CEM Benchmarking, Inc. “Asset Allocation And Fund Performance Of Defined Benefit Pension Funds In The United States Between 1998-2011”
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Blended Portfolios of Listed REITs and Unlisted Real Estate Funds Optimal Allocations
Note: Based on quarterly net total returns for NCREIF/Townsend Fund Indices (ODCE, Value Added, and Opportunistic) and FTSE NAREIT Equity REITs Index for 1992q1–2013q3. Fees and expenses are assumed to be 50 bps per year for publicly traded equity REITs; fees and expenses for core, value added, and opportunistic funds are as reported by NCREIF. Source: NAREIT® analysis of data from NCREIF and FTSE NAREIT Equity REITs Index
• Blended portfolios have produced better risk-adjusted returns than either REITs or private equity real estate funds alone
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%7.1
1%
7.4
2%
7.7
3%
8.0
4%
8.3
5%
8.6
6%
8.9
7%
9.2
8%
9.5
9%
9.9
1%
10.2
2%
10.5
4%
10.8
5%
11.1
7%
11.4
8%
11.8
0%
12.1
2%
12.4
4%
12.7
6%
13.0
8%
13.4
0%
Optim
al P
ort
folio
Allo
cation
Portfolio Annual Average Net Return
Listed Equity REITs Core Funds (ODCE) Value Added Funds Opportunistic Funds
Target Net Return 8.5%/yr
16.5% REITs, 65.2% ODCE,
18.3% Opportunistic
Volatility 7.24%/yr
Maximum Sharpe Ratio Portfolio
23.0% REITs, 38.0% ODCE,
39.1% Opportunistic
Average Net Return 9.64%/yr
Volatility 8.52%/yr
Minimum-Volatility Portfolio
4.7% REITs, 95.3% ODCE
Average Net Return 7.11%/yr
Volatility 6.34%/yr
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Source: NAREIT® and NCREIF (70% NPI – 30% FTSE NAREIT Equity REIT Index, 1978 – September 2008)
• Since 1988Q3, there has never been a five-year investment period during which a 50/15/35 blend of core funds, opportunistic funds, and listed equity REITs experienced negative net returns
Case Study: Listed Equity REITs and Unlisted Real Estate Funds Complements in a Total Real Estate Allocation
Note: Based on quarterly net total returns of FTSE NAREIT Equity REIT Index, NCREIF Open-End Diversified Core Equity Fund Index (ODCE), and NCREIF/Townsend Opportunistic Fund Index, 1988Q4-2013Q3. Source: NAREIT analysis of data from NCREIF and Interactive Data Pricing and Reference Data accessed through FactSet.
33.3% 33.3% 33.3%
0.0%
24.7% 25.9%
38.3%
11.1%
0.0%
50.6% 49.4%
0.0%
6.2%
40.7%
44.4%
8.6%
0%
10%
20%
30%
40%
50%
60%
<0 0 - 10% 10% - 20% >20%
Per
cen
t o
f 5
-Yea
r In
vest
men
t P
erio
ds
Avg. Annualized Return
Five-Year Net Returns
100% ODCE 100% Opport
50/15/35 100% REITs
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Global Expansion of the REIT Business Model
Data as of August 10, 2014. 18
• Today, REITs have been introduced and accepted in 35 countries worldwide, validating the REIT business model and expanding the global opportunity set for all investors
Summary & Findings
• Securitized commercial real estate equity is a meaningful part of the worldwide market portfolio and contributes potential diversification benefits to risk averse and risk tolerant investors
• When developing a strategic asset allocation, REITs and listed real estate equities provide investors an effective and efficient method of investing in commercial real estate equity worldwide
• Listed REITs and property companies are high utility portfolio assets for pension funds and retirement plans, endowments and foundations
• The public markets are positioned to capitalize on opportunities in commercial real estate equity investment as the global economy and financial markets stabilize and recover
• The opportunity set for investment in the real estate asset class through securitized vehicles is expanding worldwide
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NAREIT is the worldwide representative voice for REITs and listed real estate companies with an interest in U.S. real estate and capital markets. Members are REITs and other businesses that own, operate and manage income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. NAREIT is the exclusive registered trademark of the National Association of Real Estate Investment Trusts, Inc.®, 1875 I St., NW, Suite 600, Washington, DC 20006-5413. Follow us on REIT.com. Copyright© 2014 by the National Association of Real Estate Investment Trusts, Inc.® All rights reserved. This information is solely educational in nature and is not intended by NAREIT to serve as the primary basis for any investment decision. NAREIT is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to buy or sell any security or real estate investment is being made. Investments and solicitations for investment must be made directly through an agent, employee or representative of a particular investment or fund and cannot be made through NAREIT. NAREIT does not allow any agent, employee or representative to personally solicit any investment or accept any monies to be invested in a particular security or real estate investment. All REIT data are derived from, and apply only to, publicly traded securities. While such data are believed to be reliable when prepared or provided, such data are subject to change or restatement. NAREIT does not warrant or guarantee such data for accuracy or completeness, and shall not be liable under any legal theory for such data or any errors or omissions therein. See http://reit.com/TermsofUse.aspx for important information regarding this data, the underlying assumptions and the limitations of NAREIT’s liability therefore, all of which are incorporated by reference herein. Performance results are provided only as a barometer or measure of past performance, and future values will fluctuate from those used in the underlying data. Any investment returns or performance data (past, hypothetical or otherwise) shown herein or in such data are not necessarily indicative of future returns or performance. Before an investment is made in any security, fund or investment, investors are strongly advised to request a copy of the prospectus or other disclosure or investment documentation and read it carefully. Such prospectus or other information contains important information about a security’s, fund’s or other investment’s objectives and strategies, risks and expenses. Investors should read all such information carefully before making an investment decision or investing any funds. Investors should consult with their investment fiduciary or other market professional before making any investment in any security, fund or other investment.
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