Public Equity REITs: The Superior Way to Invest in Commercial Real

Public Equity REITs: The Superior Way
to Invest in Commercial Real Estate
Chilton Capital Management LLC
1177 West Loop South
Suite 1310
Houston, Texas 77027
(713) 650-1995
(800) 919-1995
Bruce G. Garrison, CFA
Managing Director / Portfolio Manager
[email protected]
(713) 243-3233
Matthew R. Werner, CFA
Portfolio Manager / Analyst
[email protected]
(713) 243-3234
Purpose of the Presentation
Inform you about the history and current
state of the public equity REIT industry
Present the reasons why public equity
REITs are attractive investment vehicles
Educate you on REIT valuation metrics
and the risks of investing in REITs
2
History and Current State of REIT Industry
What is a REIT
History of REITs
Great Real Estate in Great Places
3
What is a REIT?
4
What is a REIT?
REIT = Real Estate Investment Trust
 C-Corps that pay out at least 90% of taxable
net income as dividends
 Exempt from taxes
REITs are classified in the following categories:
 Equity REITs
 Mortgage REITs
5
Equity REIT Sectors
Datacenters
3.9%
Healthcare
13.8%
Storage
7.0%
Residential
17.9%
Shopping
Centers
8.2%
Lodging
6.3%
Diversified
4.4%
Industrial
4.4%
Office /
Industrial
2.4%
Source: Bloomberg REIT Index as of 11/30/11
Malls
17.5%
Office
14.4%
6
Characteristics of Real Estate Investment Trusts
 160 publicly traded REITs in the U.S. with a
combined market cap of over $447 billion as of
October 31, 2011
 142 traded on the NYSE
 REITs own over $500 billion of the highest quality
US commercial real estate, or 10-15% of total
institutionally-owned commercial real estate
7
Source: REIT Watch, November 2011
Total Returns as of October 31,2011
1 yr
3 yr
5 yr 10 yr 20 yr 30 yr
FTSE NAREIT All
Equity REIT Index 10%
16%
-1%
11%
11%
12%
S&P 500 8%
11%
0%
4%
8%
11%
 2/3rds of REIT total returns since 1972 have been
dividends
 Dividend classification for average REIT: 68% ordinary taxable
income, 12% return of capital, and 20% long-term capital gains
8
Source: REIT Watch, November 2011
History of REITs
9
Early Years of REIT Industry
 1960: President Eisenhower signs the REIT Act title giving
investors the opportunity to invest in diversified portfolios of
income-producing real estate
 Mortgage REITs spur growth in the industry up to $21 billion
in market cap
 NAREIT Index created in 1972
 Tax Reform Act of 1986
 1991: Kimco (KIM) IPO marks the start of the Modern REIT
Era
10
Modern REIT Era
Growth of Equity REITs (UPREIT Structure)
Emergence of sectors
REITs included in S&P 500
Movement to the “Gateway Cities”
11
Great Real Estate in
Great Places
12
GM Building (New York, NY)
Boston Properties (BXP)
13
Prudential Center (Boston, MA)
Boston Properties (BXP)
14
Bank of America Tower (San Francisco, CA)
Vornado Realty (VNO)
15
Crystal City (Arlington, VA)
Vornado Realty (VNO)
16
Allen Center (Houston, TX)
Brookfield Properties (BPO)
17
World Houston (Houston, TX)
EastGroup Properties (EGP)
18
River Oaks Shopping Center (Houston, TX)
Weingarten Realty (WRI)
19
Galleria Houston (Houston, TX)
Simon Property Group (SPG)
20
Santa Monica Place (Santa Monica, CA)
Macerich (MAC)
21
Savoye at Vitruvian Park (Addison, TX)
UDR (UDR)
22
Avalon at Mission Bay North (San Francisco, CA)
AvalonBay Communities (AVB)
23
The Shores (Santa Monica, CA)
Douglas Emmett (DEI)
24
Camden Plaza (Houston, TX)
Camden Property Trust (CPT)
25
Sir Francis Drake Hotel (San Francisco, CA)
Pebblebrook Lodging Trust (PEB)
26
Self Storage Facilities (Various Locations)
Public Storage (PSA)
27
Traditional Data Center (Various Locations)
Digital Realty Trust (DLR)
28
Why REITs are Attractive Investment Vehicles
Why Invest in REITs
REIT Preferred Equity
29
Why Invest in REITs?
30
Why Invest in REITs?
 Income and Growth
 Historically, has lowered portfolio risk and increased total
return
 Transparency and liquidity
 Management track record
 Access to capital and Flight to quality
 Low interest rates
31
Performance History
NAREIT All Equity REIT Index Values
700
600
500
400
300
200
100
0
1972 1977 1982 1987 1992 1997 2002 2007
Source: Bloomberg as of 11/30/11
32
Real Estate Cycle
Source: Mueller, Real Estate Finance (1995)
33
Occupancy
REIT Occupancy
34
Aggregate Construction (MSF)
Low Supply is Driving REIT Occupancy
As of 9/30/2011
35
Equity Capital Raised
As of 12/1/2011
36
Low Borrowing Costs
As of 11/30/2011
37
Historical Payout Ratios
As of 11/30/2011
38
Why Invest in REITs?
 Management teams are cycle-tested
 Benign supply of new commercial real estate
 Low debt ratios and cost of capital
 Flight to quality, liquidity, transparency
 High predictability of above average increases in dividends
39
REIT Preferred Equity
40
Benefits of Preferred REITs
 Average yield near 7.5% as of 12/1/2011
 Total market capitalization near $20 billion
41
How to Analyze a REIT
REIT Valuation Metrics
Risks
42
REIT Valuation Metrics
43
How Does a REIT Create Value?
 Growth in NOI via rent increases or lower operating
expenses
 Leading sectors today: Apartments, Luxury Malls and
San Francisco Office and more recently Storage
 Expansion via acquisition and/or development
 Leading REITs adding better properties in "gateway"
cities
 Re-tenanting with higher quality tenants
44
NAV / Value Creation Example
 UDR funds $650 million to develop the Savoye, funded 50%
by debt
 Upon completion the property is producing annual net
operating income (NOI) of $42 million, or 6.5% yield
 At a 5% cap rate, the complex is worth $845 million
 After paying back the $325 million in debt, the equity is now
worth $520 million
 Called the Net Asset Value, or NAV
45
Historical Price to NAV Premiums
As of 12/1/2011
46
Funds from Operations (FFO)
47
As of 12/1/2011
Dividend Yield vs 10 Year Treasury Yield
48
As of 12/1/2011
Risks
49
Risks of Investing in REITs
 Price to FFO Multiples are above long term averages
 Volatility
 A spike in interest rates
 Declining economic growth
50
Key Takeaways
 REITs provide income and growth in a liquid vehicle with
high transparency to the public
 Over time, addition of REITs has lowered risk and raised
return of a traditional portfolio
 Low supply
 Low cost of capital
 Rising dividend yields
51