Transcript Document

The Recapitalization of the
Publicly Traded REIT
Industry
Special Analysis
prepared by the
National Association of
Real Estate Investment Trusts®
0
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.
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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
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The Signpost: Security Issuance
• Publicly traded REITs raised $11.5 billion in new security
offerings during April and May 2009
• Security issuance during the first two-thirds of 2009q2 totaled
about 6.5% of aggregate REIT market cap
– Up from just 1.8% in 2009q1 and 0.5% in 2008q4
• During 1991q2, security issuance totaled 4.6% of aggregate
REIT market cap
– Up from just 1.0% in 1991q1
• 1991q2 marked the beginning of a period of tremendous growth
in the REIT industry
– Failures among highly leveraged, non-transparent, illiquid private
equity real estate funds
– Successful funds and private companies went public to access
equity capital markets
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Implied Increase in Market Cap of the
Publicly Traded REIT Industry
• During 1991q2-1994q4, industry market cap
increased at an average annual rate of 48%
– 67% per year for equity REITs
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11
2010q3
2010q4
2009q4
9
2010q2
7
9
2010q1
6
9
2009q3
10
366
421
15
17
933
962
26
31
36
38
39
23
2012q4
277
889
2012q3
244
771
2012q2
228
647
2012q1
170
226
2011q2
160
218
2011q1
100
560
2011q4
1,000
2009q2
1
2011q3
Aggregate Market Cap ($billions)
Implied Growth in Market Cap of Publicly Traded REIT Industry
Quarter: 1 = 1991q2 or 1 = 2009q2
1991q2-1994q4
2009q2-2012q4
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Security Issuance, 1991q2-1994q4
• Security issuance in 1991q2-1994q4
averaged 10.8% of REIT market cap
25%
24.6%
20%
19.8%
15%
13.3%
14.6%
13.3%
11.5% 11.8%
10.9% 11.3%
10%
8.4%
6.4%
5%
4.6%
4.4%
4.0%
2.3%
1994q4
1994q3
1994q2
1994q1
1993q4
1993q3
1993q2
1993q1
1992q4
1992q3
1992q2
1992q1
1991q4
1991q3
0%
1991q2
Security Issuance as Percent of Market Cap
Total Security Issuance by REITs, 1991q2-1994q4
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Implied Security Issuance, 2009q2-2012q4
• Applying the security issuance rates of 1991q21994q4 to the implied market cap growth for 2009q22012q4 implies $654 billion in new security
issuances, or $43.6 billion per quarter on average
Implied New Security Issuance, 2009q2-2012q4
125.3
120
100
89.6
80
77.7
67.4
60
57.7
40
31.1
28.4
40.2
35.0
30.4
20
31.0
16.2
7.4
2012q4
2012q3
2012q2
2012q1
2011q4
2011q3
2011q2
2011q1
2010q4
2010q3
2010q2
4.8
2009q4
2009q3
0
2010q1
11.5
2009q2
Implied New Debt Issuance ($billions)
140
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Debt is Costly, But Not Dead
• Assume that new debt issuance will continue
to be 16.8% of total new security issuance—
equal to the minimum observed over the
period 1991q2-2007q4
Implied New Debt Issuance, 2009q2-2012q4
21.0
20
15.0
15
13.0
11.3
10
9.7
5
5.2
4.8
6.7
5.9
5.1
5.2
2.7
1.2
2012q4
2012q3
2012q2
2012q1
2011q4
2011q3
2011q2
2011q1
2010q4
2010q3
2010q2
0.8
2009q4
2009q3
0
2010q1
1.8
2009q2
Implied New Debt Issuance ($billions)
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Implied Equity Issuance: Total Minus Debt
• Implied new equity issuance totals $544
billion over 2009q2-2012q4, an average
of $36.3 billion per quarter
Implied New Equity Issuance, 2009q2-2012q4
104.2
100
80
74.6
64.6
60
56.1
48.0
40
25.9
23.7
20
33.4
29.1
25.3
25.8
13.5
6.1
2012q4
2012q3
2012q2
2012q1
2011q4
2011q3
2011q2
2011q1
2010q4
2010q3
2010q2
4.0
2009q4
2009q3
0
2010q1
9.7
2009q2
Implied New Debt Issuance ($billions)
120
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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 1999q42008q3
• Assume that new equity issuance will be used to
reduce leverage until the new target is met
Implied Decline in REIT Industry Leverage
Gap Represents Capital Available for Asset Acquisition
71.5
50
53.1
47.2
35.3
25
25.6
2012q4
2012q3
2012q2
2012q1
2011q4
2011q3
2011q2
2011q1
2010q4
2010q3
2010q2
2010q1
2009q4
2009q3
2009q2
0
2009q1
Leverage (Debt/Market Cap)
75
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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 $728 billion in property value
Capital Available to Finance Acquisitions
555
600
500
424
348
400
243
300
149
200
0
0
0
2010q1
108
2009q4
100
582
505
2009q3
20
44
63
2012q4
2012q3
2012q2
2012q1
2011q4
2011q3
2011q2
2011q1
2010q4
2010q3
0
2010q2
Surplus Equity Issuance ($billions)
700
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REITs’ Role in the U.S. Real Estate Asset Class will Change
Total-current
$5.9
$0.3
REITs = 5% of total
Debt-current
$3.2
Equity-current
$2.7
Total-future
$2.6
$0.1
$0.2
Private
Public
$1.3
REITs = 31% of total
Debt-future
$1.3 $0.2
Equity-future
$1.3
0
$ in Trillions
$1.0
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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
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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
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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
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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
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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
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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
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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
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