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

Transcription

1 Public Equity REITs: The Superior Way to Invest in Commercial Real Estate Chilton Capital Management LLC 1177 West Loop South Suite 1310 Houston, Texas (713) (800) Bruce G. Garrison, CFA Managing Director / Portfolio Manager bgarrison@chiltoncapital.com (713) Matthew R. Werner, CFA Portfolio Manager / Analyst mwerner@chiltoncapital.com (713)

2 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

3 History and Current State of REIT Industry What is a REIT History of REITs Great Real Estate in Great Places 3

4 What is a REIT? 4

5 REIT = Real Estate Investment Trust C-Corps that pay out at least 90% of taxable net income as dividends Exempt from taxes What is a REIT? REITs are classified in the following categories: Equity REITs Mortgage REITs 5

6 Healthcare 13.8% Equity REIT Sectors Datacenters 3.9% Residential 17.9% Storage 7.0% 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 Office 14.4% Malls 17.5% 6

7 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, 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 Source: REIT Watch, November

8 Total Returns as of October 31, 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% 2/3 rds 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 Source: REIT Watch, November

9 History of REITs 9

10 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 : Kimco (KIM) IPO marks the start of the Modern REIT Era 10

11 Modern REIT Era Growth of Equity REITs (UPREIT Structure) Emergence of sectors REITs included in S&P 500 Movement to the Gateway Cities 11

12 Great Real Estate in Great Places 12

13 GM Building (New York, NY) Boston Properties (BXP) 13

14 Prudential Center (Boston, MA) Boston Properties (BXP) 14

15 Bank of America Tower (San Francisco, CA) Vornado Realty (VNO) 15

16 Crystal City (Arlington, VA) Vornado Realty (VNO) 16

17 Allen Center (Houston, TX) Brookfield Properties (BPO) 17

18 World Houston (Houston, TX) EastGroup Properties (EGP) 18

19 River Oaks Shopping Center (Houston, TX) Weingarten Realty (WRI) 19

20 Galleria Houston (Houston, TX) Simon Property Group (SPG) 20

21 Santa Monica Place (Santa Monica, CA) Macerich (MAC) 21

22 Savoye at Vitruvian Park (Addison, TX) UDR (UDR) 22

23 Avalon at Mission Bay North (San Francisco, CA) AvalonBay Communities (AVB) 23

24 The Shores (Santa Monica, CA) Douglas Emmett (DEI) 24

25 Camden Plaza (Houston, TX) Camden Property Trust (CPT) 25

26 Sir Francis Drake Hotel (San Francisco, CA) Pebblebrook Lodging Trust (PEB) 26

27 Self Storage Facilities (Various Locations) Public Storage (PSA) 27

28 Traditional Data Center (Various Locations) Digital Realty Trust (DLR) 28

29 Why REITs are Attractive Investment Vehicles Why Invest in REITs REIT Preferred Equity 29

30 Why Invest in REITs? 30

31 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

32 700 Performance History NAREIT All Equity REIT Index Values Source: Bloomberg as of 11/30/11 32

33 Real Estate Cycle Source: Mueller, Real Estate Finance (1995) 33

34 Occupancy REIT Occupancy 34

35 Low Supply is Driving REIT Occupancy Aggregate Construction (MSF) As of 9/30/

36 Equity Capital Raised As of 12/1/

37 Low Borrowing Costs As of 11/30/

38 Historical Payout Ratios As of 11/30/

39 Management teams are cycle-tested Why Invest in REITs? 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

40 REIT Preferred Equity 40

41 Benefits of Preferred REITs Average yield near 7.5% as of 12/1/2011 Total market capitalization near $20 billion 41

42 REIT Valuation Metrics How to Analyze a REIT Risks 42

43 REIT Valuation Metrics 43

44 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

45 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

46 Historical Price to NAV Premiums As of 12/1/

47 Funds from Operations (FFO) As of 12/1/

48 Dividend Yield vs 10 Year Treasury Yield As of 12/1/

49 Risks 49

50 Risks of Investing in REITs Price to FFO Multiples are above long term averages Volatility A spike in interest rates Declining economic growth 50

51 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