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This presentation is from Dr. Calvin Schnure's talk about the commercial market outlook for 2014 and the trends of 2013. He speaks about REITs (Real Estate Investment Trusts) and talks about what they are, how they work and perform, and why they're important to the commercial real estate industry.
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National Association of Real Estate Investment Trusts®
REITs: Building Dividends & Diversification®
1875 I St, NW Suite 600, Washington, DC 20006 • 202-739-9400
January 10
Outlook for the Economy and
Commercial Real Estate
2014 Calvin Schnure
Vice President, Research and Industry
Information
1
Macroeconomic Outlook
Positive Signs for the Year Ahead
• GDP growth accelerated in 2013:H2 – 4.1% growth in Q3 had large inventory contribution
– But final demand firmed in Q4
• Auto sales are strongest since 2007 – Aging vehicles on the road translate into pent-up demand
• Job market continues to gain strength – Trend growth now 200K/ month
• Housing market – In full recovery mode, finally!
2
-10
-8
-6
-4
-2
0
2
4
6
8
2000 2003 2006 2009 2012
GDP growth accelerated in 2013
3
Percent change, annual rate
Source: Bureau of Economic Analysis, Haver Analytics
0
5
10
15
20
25
2000 2002 2004 2006 2008 2010 20124
Robust auto sales reflect rising incomes, confidence… and pent-up demand
Million units, seasonally adjusted annual rate
-1000
-800
-600
-400
-200
0
200
400
600
2000 2002 2004 2006 2008 2010 2012
5
Job growth continues to gain momentum
Monthly change in nonfarm payrolls
(Red line is 6-month average)
Source: Bureau of Labor Statistics, Haver Analytics
6
Rising house prices help household net worth and consumer spending, confidence, real estate markets
Source: S&P/Case-Shiller, Haver Analytics
Index 2000 = 100
But how do we know this isn’t another false start?
• GDP growth and the job market have faltered several times in this recovery
– External events: European debt crisis, Japanese earthquake, debt ceiling and govt shutdown
• On the plus side going ahead:
– Consumer deleveraging has reduced debt burden
– Housing markets are showing greater demand
– Drag from government spending is fading
7
14
15
16
17
18
19
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 8
Consumer debt burdens are at decades-low levels
Financial obligations as percent of disposable income
Source: Federal Reserve Board
0
3
6
9
12
15
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20129
Builders are selling homes as fast as they can put them up
Median months for sale of new homes
Source: U.S. Census Bureau, Haver Analytics
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
State and Local
Federal
10
The drag from government cutbacks is fading
Source: Bureau of Economic Analysis, Haver Analytics
Percentage point contribution to real GDP growth, annual rate
11
Real Estate Outlook
12 0
4
8
12
16
20
2008 2009 2010 2011 2012 2013
Percent Vacancy Rates
Apartment
Office
Retail
Commercial vacancy rates remain high, but trending down
13 -12
-9
-6
-3
0
3
6
2008 2009 2010 2011 2012 2013
Perc
ent,
Annu
alize
d
Rent Growth
Apartment
Office
Retail
Rent growth slowly rising; more recent figures show retail, office accelerating, apartment still solid
0
20
40
60
80
100
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
All Properties
Apartment
Retail
Commercial
Office
14
Commercial property prices are recovering.
Commercial property price index, Dec 2007 = 100
Source: Real Capital Analytics, Bloomberg
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
Hotel
Industrial
Retail
Office
Apartment
15
Sales activity is rising steadily
Transactions volumes, millions of dollars
Source: Real Capital Analytics, Bloomberg
16
0
10
20
30
40
50
60
70
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Office
Multifamily
Retail
Recent increases in construction still leave activity well below historical trends… supply concerns are overblown
Construction put-in-place, billions of dollars, annual rate
Source: U.S. Census Bureau, Haver Analytics
17
REITs
• A REIT must be a company in the real estate business
• REITs own and, in most cases, manage and lease income-producing real
estate, including office buildings, apartments, shopping centers and health
care properties. Some REITs engage in the financing of residential or
commercial real estate.
• Operating a real estate company as a REIT is a voluntary election under the
Internal Revenue Code
– A company declares its intention to operate as a REIT under the Internal
Revenue Code by filing income tax Form 1120-REIT.
• Listed REITs operate under the same rules for federal tax, regulatory and
financial reporting purposes as other publicly-traded companies
General Principles
18
• Distribution requirement
– Distribute at least 90% of “taxable income” annually to shareholders in the
form of dividends
– In practice, most REITs distribute 100% of their taxable
– All dividends are taxable at the shareholder level
– All distributions must be characterized in annual 1099-DIV statements
IRC Requirements for Being a REIT
19
Characteristics of REITs Listed REITs, non-listed REITs and private REITs
Source: NAREIT®
Characteristic Public Listed
REITs
Public Non-listed
REITs
Private
REITs
Overview SEC Registered
Shares listed
SEC Registered
Shares not listed
Not SEC registered
Shares not listed
Liquidity Most NYSE traded Limited redemption Limited redemption
Transaction Costs Typical trading costs Fees of 10% or more Varies by firm
Management Internally advised
Internally managed
Externally advised
Externally managed
Externally advised
Externally managed
Minimum Investment One share $1,000 - $2,500 $10,000 - $100,000
Independent Directors NYSE/NASDAQ Rules NASAA Rules Not required
Investor Control Investors re-elect directors
Governance NYSE/NASDAQ Rules State/NASAA Rules Not regulated
Disclosure SEC filings (GAAP) SEC filings (GAAP) Not regulated
Performance Measurement Market benchmarks
Analyst reports
Some independent
reporting No public data available
20
21
Listed Domestic Equity REIT Industry Broad Diversification by Property Type and Geography
Data as of October 31, 2013 Source: NAREIT®
Property locations by U.S. geographic coordinates
Most U.S. REIT owned properties are in the U.S. Some U.S. REITs also own properties outside the U.S.
Property Sector Percent
Regional Malls
Residential
Health Care
Office Buildings
Diversified
Shopping Centers
Lodging/Resorts
Self-Storage
Timber
Infrastructure
Industrial Facilities
Mixed Industrial/Office
Free Standing Retail
14
13
12
10
9
8
6
6
5
5
4
4
4
Total 100
Operating Attributes of Listed REITs
• Full-time professional management teams
• Investor-aligned corporate governance
• Transparency
− Registered with the Securities and Exchange Commission
− Standardized financial reporting (GAAP)
• Property Portfolios
– Mostly core properties (residential, retail, office or industrial)
– Non-core property sectors include hotel, self storage, manufactured housing, health care, entertainment properties, timber, infrastructure, etc.
• Moderate leverage for publicly traded equity REITs
– Historical debt-to-asset ratio of about 45 percent
– 32.8 percent as of June 30, 2013
– Public, non-listed REITs generally operate at same or lower levels
22
Investment Attributes of Listed REITs
• Dividend Income
– Distribution requirement provides high level of dividend income
– Dividend typically has provided 1/2 to 2/3 of total return to shareholders
– $19.4 billion of dividends paid in 2011
• Long-term total returns competitive with other investments
• Investment Diversification
– Moderate long-term correlation with other asset classes
– Typical allocations of between 5 percent and 15 percent
• Inflation Hedging Potential
– Real assets
– Rental income
23
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
$110,000
$120,000
12/89 12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11
Initial Investment Cumulative Dividends with Reinvestment Cumulative Capital Gains with Reinvestment
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
$110,000
$120,000
12/89 12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11
Initial Investment Cumulative Dividends with Reinvestment Cumulative Capital Gains with Reinvestment
Standard & Poor’s 500 Index
FTSE NAREIT All Equity REIT Index
Price Return
Note: Based on monthly total returns and price appreciation returns, January 1990 –October 2013
Sources: NAREIT® analysis of data from IDP accessed through FactSet.
Dividends Drive Investment Performance One-half to two-thirds of REIT total returns
24
Competitive Long-Term Investment Performance Total returns in percent
Data as of September 30, 2013
Sources: NAREIT® analysis of data from IDC accessed through FactSet. 25
FTSE NAREIT U.S. Equity
REITs TR
FTSE EPRA/NAREIT Developed TR
S&P 500 TR MSCI EAFE TR Barclays Capital U.S. Aggregate
Bond1
Barclays Capital Global Aggregate
Bond1
1-Year 11.11 13.16 27.18 26.88 -1.08 -1.54
3-Year 12.65 10.02 16.56 8.38 3.02 1.99
5-Year 15.36 15.33 15.17 11.99 6.09 6.07
10-Year 9.94 10.04 7.46 7.71 4.78 5.08
15-Year 10.74 10.04 5.10 5.00 5.36 4.95
20-Year 10.25 8.78 8.93 5.45 5.77 5.71
25-Year 10.71 NA 10.04 5.11 6.82 NA
30-Year 11.39 NA 10.96 9.63 7.82 NA
35-Year 13.04 NA 11.92 9.15 8.07 NA
40-Year 12.45 NA 10.56 8.96 NA NA
Diversification U.S. equity REITs offer low to moderate correlation with stock and bond investments December 1992– December 2012
Source: Large-cap stocks – Standard & Poor’s 500®; Small-cap stocks – Russell 2000; International stocks – Morgan Stanley Capital International Europe, Australasia,
and Far East (EAFE®) Index; U.S. bonds - Barclays U.S. Aggregate Bond Index; Non-U.S. bonds – Citigroup Non-USD World GBI; U.S. REITs – FTSE NAREIT All Equity
REIT Index.
U.S. Equity REITs
Large Cap Stocks
Small Cap Stocks
International Stocks
U.S. Bonds
Non-U.S. Bonds
U.S. Equity REITs
1.00 0.56 0.65 0.55 0.13 0.26
Large Cap Stocks
1.00 0.81 0.80 0.05 0.17
Small Cap Stocks
1.00 0.74 -0.04 0.14
International Stocks
1.00 0.02 0.39
U.S. Bonds 1.00 0.44
Non-U.S. Bonds
1.00
26
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© 2012 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.
Disclaimer
For more information please visit: www.reit.com
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