Message from the President
Major pension plans and endowments, primary targets of NAREIT's Investor Outreach program, traditionally have put the bulk of their real estate investment into direct real estate investments and private equity real estate funds. An IREI/Kingsley Associates study shows these institutions plan to invest 74 percent of their new real estate dollars in private equity funds this year.
Institutions frequently cite lower volatility and correlation as their reasons for favoring private real estate investment, but a recent NAREIT analysis delivers perhaps the strongest argument of all in favor of REITs: outstanding net returns over the last full real estate cycle, as well as over the last bull-market segment of the cycle.
This issue of Roadshow Report reviews our new analysis of the comparative performance of REITs and private equity real estate funds, as well as our initiatives to convey this story through the media and in our outreach meetings with plan sponsors.
In over 150 of these meetings so far this year, we have found that REITs' liquidity and transparency have a greater appeal to investors who were burdened with illiquid real estate investments during the 2008-2009 downturn. Our new comparative performance data completes the case for more balanced allocations to REITs and private real estate funds in institutional portfolios.
Steven A. Wechsler
President and CEO
The Real Estate Return Premium From REITs
In May, the story of REIT investment was enhanced by a NAREIT analysis comparing REIT returns with those of private equity real estate funds over the last full real estate cycle. Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) and The Townsend Group, which measure the performance of private equity real estate funds, advance the case for REITs playing a larger role in the total real estate allocations of pension plans and other institutional investors that historically have relied primarily on private equity funds and other direct investment platforms for their real estate allocations.
NAREIT's research team analyzed the performance of publicly traded REITs and private equity real estate funds over the last full real estate market cycle (peak-to-peak) of approximately 17.5 years, as well as the individual bull-market periods (trough-to-peak), allowing for the fact that market tops and bottoms reported by the different investment alternatives occurred at different points in time. While REITs and private equity real estate funds potentially offer investors complementary access to investment in real property, the data show publicly traded REITs outperformed private equity core, value-added and opportunity funds, on average, over the last full real estate cycle as well as bull market periods.
REITs over the full market cycle delivered total returns, net of fees and expenses, of 801 percent – significantly better than the 272 percent of core funds; the 318 percent of value-added funds; and the 621 percent of opportunity funds. Over their respective bull market periods, REITs delivered total returns, net of fees and expenses, of 1,038 percent, compared with 341 percent for core funds, 430 percent for value-added funds, and 963 percent for opportunity funds.
Of course, REITs also provide the complete liquidity of equities traded on public markets – a major advantage for institutions in managing liabilities, and one that investors in private equity funds find themselves lacking, as has been underlined throughout the financial crisis. Given the performance advantages publicly traded REITs have demonstrated over private equity real estate funds, it is clear that institutions should re-evaluate their real estate allocations to achieve better balance between investment in public and private markets. NAREIT actively is communicating this analysis to the pension fund community, as well as to other institutional investors and consultants.
To view NAREIT Vice President of Research & Industry Information Brad Case discuss this research further, CLICK HERE.
(Contact: Brad Case at firstname.lastname@example.org)
Notwithstanding the outstanding investment performance of REITs when compared with that of private equity real estate funds, private equity real estate funds are the primary choice of real estate investment for pension plans and other institutions, and a recent survey revealed that large pension funds plan to commit 74 percent of their new real estate investments in 2010 to private equity funds, compared with only 3.5 percent to REITs. Convincing these institutions to better align their allocations between private equity real estate funds and REITs is an important goal of NAREIT's Investor Outreach program.
NAREIT's communications team is supporting that goal with briefings on the NAREIT analysis for editors and reporters of major business media and trade publications. The effort so far has produced coverage in The Wall Street Journal and on CNBC's Power Lunch, which featured an interview with NAREIT Chair Debra Cafaro. The story also was covered by Institutional Investor's Real Estate Finance & Investment, Private Equity Real Estate, SNL Financial, BNA's Real Estate Law & Industry Report, Commercial Property Executive and Multifamily Executive. Briefings also were conducted with reporters from Forbes, Reuters, Bloomberg News, Morningstar, Pensions & Investments and The Institutional Real Estate Letter.
Additionally, podcast interviews with NAREIT's Vice President of Research and Industry Information Brad Case were featured on the REIT Café and Factset web sites. Case also has written bylined articles on the subject for Registered Rep and Research Magazine, and is preparing a bylined article for International Real Estate Finance and Investment Review. The report itself is prominently featured on the REIT.com website and the outstanding performance of REITs relative to private equity real estate funds also was a key theme in sessions at REITWeek 2010: NAREIT's Investor Forum in June. NAREIT currently is planning additional activities to gain visibility for this message.
(Contact: Ron Kuykendall at email@example.com)
"Road Buzz" – Pension Plans, Endowments, & Foundations
With $5.3 trillion in total assets, the defined benefit pension, endowment and foundation markets are an important focus of NAREIT's Investor Outreach and education activities. On average, approximately 10 percent of pension assets and 15 percent of endowment fund assets are invested in commercial real estate – in total well over one-half trillion dollars. Although these investors were largely on the sidelines during the second half of 2008 and through 2009, 2010 stands in contrast.
Pension and endowment fund investors, buoyed by portfolio gains over the past twelve months and by what appears to be a relatively more promising economic outlook despite recent market turbulence related to sovereign debt concerns, are actively allocating new investment capital, and commercial real estate is among the asset classes on which these investors are focused. While investor sentiment may not be "exuberant," many recognize that commercial property values have declined appreciably and that dislocations in the market also create opportunities.
In their "Tax-Exempt Real Estate Investment 2010" survey of large institutional investors, Institutional Real Estate Inc. and Kingsley Associates noted that new capital commitments to real estate in 2010 are expected to be on the order of $34 billion, an 89 percent increase over 2009 levels. Importantly, the amount targeted for publicly traded REIT investment within total real estate allocations has increased to nearly 11 percent on average compared with current REIT investment of approximately 8 percent.
In our outreach conversations we've noted a heightened level of interest with respect to opportunities in commercial real estate and how publicly traded REITs are positioned to take advantage of those opportunities and how they contribute to investment portfolios. These conversations provide an important opportunity for NAREIT to focus attention on the benefits of publicly traded REIT investment and to advocate for their inclusion as a significant component of a plan's real estate allocation.
To hear more about what NAREIT has learned on this issue,CLICK HERE.
(Contact: Meredith Despins at firstname.lastname@example.org)
Active Meeting Schedule
Last year, NAREIT conducted 160 meetings with organizations managing or consulting on more than $24 trillion in assets with most of the meetings conducted in person, but some also through conference calls. Through the end of July, have conducted another 149 meetings with many of the largest institutions and firms representing $20.2 trillion in assets.
(Contact: Kurt Walten at email@example.com)
A Successful REITWeek Conference in Chicago
NAREIT's annual REITWeek conference is the centerpiece of NAREIT's Investor Outreach effort, as it brings together nearly 1,000 institutional investors with more than 150 REIT management teams. REITWeek 2010: NAREIT's Investor Forum took place at the Hilton Chicago from June 9-11. The conference attracted almost 2,000 attendees who participated in a series of general session panel discussions, one-on-one meetings and company presentations throughout the three day event.
(Contact: Abby McCarthy at firstname.lastname@example.org)
Michael Grupe, NAREIT's executive vice president for Research & Investor Outreach, joined other members of the Real Estate Equity Securitization Alliance (REESA) on a discussion panel at the Asian Public Real Estate Association (APREA) annual conference in April 2010 in Singapore. The panel focused on the strong investment returns of REITs and listed real estate companies worldwide over the past decade. Mr. Grupe noted both the robust access to public equity and debt markets demonstrated by U.S. REITs throughout 2009 and into 2010, as well as how access to capital indicates strong prospects for growth and performance well into the current decade.
In conjunction with the APREA conference, one-on-one meetings were held with the Government of Singapore Investment Corporation (GIC) and the Monetary Authority of Singapore (MAS). Within its $250 billion investment portfolio, the GIC's real estate allocation mostly is invested through a number of private equity products focused on Asian markets, but it is actively evaluating alternative investment opportunities using listed REITs and property companies in the U.S. and worldwide. The MAS functions as the central bank of Singapore and also as the regulator for the banking, insurance and securities industries. The MAS maintains a strong interest in global REITs and listed real estate companies and has communicated with NAREIT from time to time in recent years.
At the Canadian Benefits and Pension Summit 2010 held in Toronto, Ontario on April 28 and April 29, Meredith Despins, NAREIT's vice president for Investment Affairs & Investor Education, delivered a presentation on commercial real estate investment through publicly traded equity REITs during a session on "New Trends in Defined Benefit Investment." The session focused on the trend among larger Canadian plan sponsors toward increased allocations to commercial real estate and the fact that plan sponsors are looking for increased transparency and more "tangible" assets within their investment portfolios in the aftermath of the financial crisis. The summit, hosted by Benefits Canada in partnership with U.S.-based International Foundation for Employee Benefit Plans, was well attended by prominent Canadian pension funds, representatives from several global investment and benefits consulting firms, and by leading investment solutions providers to the pension and retirement market.
(Contact: Michael Grupe at email@example.com)
REITs Part of a Well-Balanced Portfolio
An article in the August issue of Money magazine titled "Navigating a High-Wire Market," features a model investment portfolio which would have increased investment returns over the long term while minimizing short-term disturbances. REITs make up 10 percent of the portfolio allocation. Only U.S. large cap stocks, foreign developed stocks and long-term government bonds have a higher allocation in this model portfolio.
The full breakdown of the model listed in the article includes:
The Money magazine mutual portfolio follows a piece in the July 19 issue of Index Universe illustrating a low-cost model portfolio using exchange traded funds (ETFs) with a 5 percent REIT allocation. Additionally, the May 2010 issue of the American Association of Individual Investors Journal, published by the American Association of Individual Investors, featured a review of AAII's Model ETF Portfolio by it's founder, James Cloonan.
The model portfolio focused exclusively on the equity allocation of a diversified investment portfolio and included nine separate ETFs representing domestic and international equity markets. The Model ETF Portfolio included a 21 percent allocation to REITs – including a 16 percent allocation to U.S. REITs using the iShares Cohen & Steers Realty Majors ETF (ICF) and another 5 percent allocation to international REITs using the SPDR Dow Jones International Real Estate ETF (RWX).
As Cloonan noted, the large real estate allocation "hurt relative performance when real estate was hit even harder than the overall market in 2008, but is helping now that real estate has begun to recover."
CLICK HERE to watch a video with NAREIT's Michael Grupe discussing the importance of such REIT allocations.
(Contact: Abby McCarthy at firstname.lastname@example.org)
Investor Education: Georgetown REIT Summit
On April 28, NAREIT partnered with the Georgetown University McDonough School of Business in support of the Georgetown REIT Summit, a summit of real estate professionals focused on real estate capital markets. NAREIT co-sponsored the event with the Georgetown MBA Real Estate Organization.
The summit included panel discussions focused on real estate debt and equity capital markets. The equity markets panel was moderated by Bob Steers, co-CEO and co-chairman of Cohen & Steers, who also serves as chairman of the McDonough School of Business Board of Advisors and was recognized at the summit by the school's faculty for his leadership in both real estate and the real estate initiative at Georgetown University. Joining Steers on the panel were NAREIT First Vice Chair Bryce Blair, chairman and CEO of AvalonBay Communities Inc., NAREIT Second Vice Chair Don Wood, president and CEO of Federal Realty Investment Trust, and NAREIT Treasurer Ed Walter, president and CEO of Host Hotels & Resorts Inc. Appearing on the debt markets panel was Michael Farrell, president, CEO and chairman of Annaly Capital Management, Inc.
(Contact: Michael Grupe at email@example.com)
Investor Education: Texas A&M Conference
NAREIT participated in The Aggie Real Estate Network's Annual Conference, which convened in late July at The Woodlands Conference Center near Houston. The network's annual conference brought industry leaders together with students and faculty from the various real estate programs and research centers at Texas A&M University to review and discuss all areas of commercial real estate.
The conference agenda included a panel discussion on REITs organized by Cydney Donnell, formerly of European Investors and currently executive professor at the Mays Business School of Texas A&M University. Participating on the panel was Michael Grupe, NAREIT's executive vice president for Research & Investor Outreach, who presented the compelling investment performance of publicly traded REITs compared with other public and private investments.
NAREIT regularly supports academic programs that seek to educate and inform students and the public about the real estate investment proposition through REITs.
(Contact: Michael Grupe at firstname.lastname@example.org)