The Recapitalization of the Publicly Traded REIT Industry

1
The Recapitalization of the Publicly Traded REIT
Industry
Special Analysis prepared by the National
Association of Real Estate Investment Trusts
2
Background

• The commercial real estate market situation in
  2009Q2 suggests strong parallels with 1991Q2.
• In 1991, institutional and individual investors
  sustained heavy losses in real estate investments
  that were illiquid, opaque and heavily leveraged.
• In the aftermath of this crisis, investors
  gravitated away from these investment products to
  another type of real estate investment that
  provided more equity and less debt more
  liquidity and less illiquidity more transparency
  and less opacity and more simplicity and less
  complexity.
• In 2009, the same process is taking place.

3
Background

• The REIT market situation in 2009Q2 suggests
  strong parallels with 1991Q2
• The years following 1991Q2 can be used to model
  the course of the REIT industry over the coming
  few years
• Aggregate market cap of the REIT industry is
  likely to increase sharply
• Secondary equity offerings of existing REITs
• Initial public offerings of new REITs
• Stock price rebounds
• REITs are likely to use secondary equity
  offerings
• First to stabilize their capital structure by
  paying down debt
• Second to finance acquisitions from distressed
  sellers
• Individual properties
• Portfolios
• Private equity real estate funds

4
The Signpost Security Issuance

• Publicly traded REITs raised 11.5 billion in new
  security offerings during April and May 2009
• Security issuance during the first two-thirds of
  2009q2 totaled about 6.5 of aggregate REIT
  market cap
• Up from just 1.8 in 2009q1 and 0.5 in 2008q4
• During 1991q2, security issuance totaled 4.6 of
  aggregate REIT market cap
• Up from just 1.0 in 1991q1
• 1991q2 marked the beginning of a period of
  tremendous growth in the REIT industry
• Failures among highly leveraged, non-transparent,
  illiquid private equity real estate funds
• Successful funds and private companies went
  public to access equity capital markets

5
Implied Increase in Market Cap of the Publicly
Traded REIT Industry

• During 1991q2-1994q4, industry market cap
  increased at an average annual rate of 48
• 67 per year for equity REITs

6
Security Issuance, 1991q2-1994q4

• Security issuance in 1991q2-1994q4 averaged 10.8
  of REIT market cap

7
Implied Security Issuance, 2009q2-2012q4

• Applying the security issuance rates of
  1991q2-1994q4 to the implied market cap growth
  for 2009q2-2012q4 implies 654 billion in new
  security issuances, or 43.6 billion per quarter
  on average

8
Debt is Costly, But Not Dead

• Assume that new debt issuance will continue to be
  16.8 of total new security issuanceequal to the
  minimum observed over the period 1991q2-2007q4

9
Implied Equity Issuance Total Minus Debt

• Implied new equity issuance totals 544 billion
  over 2009q2-2012q4, an average of 36.3 billion
  per quarter

10
Leverage Will Decline to a New Industry Standard

• Assume that leverage will decline to an industry
  average of 25, representing a one-third haircut
  from the minimum observed over the period
  1999q4-2008q3
• Assume that new equity issuance will be used to
  reduce leverage until the new target is met

11
REITs Will Use Continued Equity Issuances to
Finance Acquisitions

• Implied equity issuance rates suggest that REITs
  will have brought leverage down to 25 by 2010q2
• Continued equity issuances will be available to
  finance asset acquisitions
• Implied surplus equity issuances by 2012q4
  total 582 billion, suggesting 728 billion in
  property value

12
REITs Role in the U.S. Real Estate Asset Class
will Change
REITs 5 of total
REITs 31 of total
in Trillions
Current estimates as of December 31, 2008 future
estimates as of December 31, 2012. Sources
NAREIT based on analysis of data from U.S.
Federal Reserve, Emerging Trends, NCREIF, Miles
and Tolleson, Prudential and JPMorgan
13
Sources of Properties

• Opportunistic Funds 150 billion
• Value-Added Funds 80 billion
• Core Funds 200 billion
• Institutional Investors (Separate Accounts)
  550 billion
• Other Private Investors 1,700 billion
• Corporate Owners (Sale/Leaseback) 2,400
  billion

14
Opportunistic Funds

• Average leverage 67.1 (NCREIF)
• Lost 37.9 during calendar year 2008
• Unlevered property values lost 6.5
• Unlevered property values are expected to fall an
  additional 40 by 2012q4
• At 67.1 leverage, implied loss is 135 before
  fees
• Estimated holdings 150 billion

15
Value-Added Funds

• Average leverage 51.6 (NCREIF)
• Lost 19.6 during calendar year 2008
• Unlevered property values lost 6.5
• Unlevered property values are expected to fall an
  additional 40 by 2012q4
• At 51.6 leverage, implied loss is 90 before
  fees
• Estimated holdings 80 billion

16
Core Funds

• Average leverage 27.7 (NCREIF)
• Lost 10.7 during calendar year 2008
• Unlevered property values lost 6.5
• Unlevered property values are expected to fall an
  additional 40 by 2012q4
• At 27.7 leverage, implied loss is 58 before
  fees
• Estimated holdings 200 billion

17
Summary

• Ability to reduce leverage determines competitive
  strength
• REITs can and will tap public equity markets
• Applying historical patterns, U.S. REIT industry
  could have 25 leverage by mid 2010
• Surplus REIT equity could initiate acquisition
  trend by mid 2010
• REITs could accumulate 582 billion surplus
  equity for acquisitions by end of 2012 (782
  billion property value)
• REITs could grow from 5 to 31 of U.S. CRE
  market by end of 2012

18
Disclaimer

• NAREIT does not intend this presentation to be a
  solicitation related to any particular company,
  nor does it intend to provide investment, legal
  or tax advice. Investors should consult with
  their own investment, legal or tax advisers
  regarding the appropriateness of investing in any
  of the securities or investment strategies
  discussed in this presentation. Nothing herein
  should be construed to be an endorsement by
  NAREIT of any specific company or products or as
  an offer to sell or a solicitation to buy any
  security or other financial instrument or to
  participate in any trading strategy. NAREIT
  expressly disclaims any liability for the
  accuracy, timeliness or completeness of data in
  this presentation. Unless otherwise indicated,
  all data are derived from, and apply only to,
  publicly traded securities. Any investment
  returns or performance data (past, hypothetical,
  or otherwise) are not necessarily indicative of
  future returns or performance.

For more information please visit www.reit.com