A handout highlighting basics of REITs, it's evolution and current state, with notes on its relevance to Indian context

1. A Brief Report on REITs and the Indian Connect 2016
1 Sources: NAREIT website and reports, and other publically available sources
Real Estate Investment Trusts (REITs)
Real estate investment trusts (‘REITs’) have been
around for more than fifty years. REITs were first
created when President Eisenhower signed into law
the REIT Act in 1960, to allow individual investors to
invest in large-scale, income-producing real estate.
What is a REIT?
A REIT is a company that owns – and typically
operates – income-producing real estate or real
estate-related assets. The difference between REITs
and other real estate companies is that a REIT must
acquire and develop its real estate properties primarily
to operate them as part of its own investment portfolio,
as opposed to reselling those properties after they
have been developed.
The Three Categories of REITs: Equity,
Mortgage, and Hybrid
 Equity REITs typically own and operate
income-producing real estate
 Mortgage REITs provide money to real estate
owners and operators either directly in the
form of mortgages or other types of real estate
loans, or indirectly through the acquisition of
mortgage-backed securities
 Hybrid REITs generally are companies that
use the investment strategies of both equity
REITs and mortgage REITs
Publicly Traded REITs and Non-Traded
REITs
Many REITs (whether equity or mortgage) are
registered with the SEC and are publicly traded on a
stock exchange. These are known as publicly traded
REITs. In addition, there are REITs that are registered
with the SEC, but are not publicly traded. These are
known as non-traded REITs (also known as Public
Non-Listed REITs (PNLRs)). Such REITs do file
reports with the SEC but there is no independent
information about the share value available. The
company may provide and estimated share value 18
months after the offering has closed.
Advantages of REITs
Evolution of REITs
1960
Introduction
of REITs
1965-1975
Dominance
of Mortgage
REITs
1976
Tax Reform Act
authorized REITs to be
established as
corporations in addition
to business trusts
1986
Tax Reform Act
made equity
REITs popular
1997-2007
Numerous
REITs offerings
2014
Paramount
launched IPO to
raised $2.3bn
Factors Driving REIT Earnings
The key demand drivers for revenue generation for
REITs are:
 An uptick in economic fundamentals
positively affects REITs by increasing
business growth
 The strength of job market fuels the demand
for the housing, office, and hotel industry
 Rising population results in greater demand
for apartments, hotels, and warehouses units
 Higher occupancy rates leads to higher
income
 With higher mortgage rates, renting an
apartment becomes more appealing, further
leading to a rise in occupancy rates
 Rising interest rates can hurt REITs in many
ways

2. A Brief Report on REITs and the Indian Connect 2016
2 Sources: NAREIT website and reports, and other publically available sources
REITs Valuation Techniques
Traditional valuation methods don’t apply to REITs
because their operations are different from traditional
companies. REITs are valued based on three main
techniques namely:
 Net Asset Value (NAV) is one of the most
important valuation metrics for REITs. NAV is
the market value of all the assets, including
cash and indirect property assets, net of
liabilities and deliberated dividends or
distributions. A high NAV indicates that REITS
have strong earning potential and good
management
 Fund from Operations (FFOs) is a measure
to evaluate the cash generated from their
operations. It is calculated as net income +
depreciation and amortization + impairment
charges + losses from sale of property – gains
from sale of property
 Adjusted Fund From Operations (AFFOs)
further deducts the capital expenditures
required to maintain the existing portfolio of
properties
How is the Global Listed Property Market
Configured?
As earlier stated, REITs were introduced in the US in
1960. For the next 30 years, REITs were largely
confined to the US and Australia. The major growth of
REITs happened only after 2000 when some of the
key Asian countries introduced REITs. Japan adopted
REITs in 2000. It was followed by Singapore in 2002
and Hong Kong in 2003. While France was the first
major European country to launch REITs in 2003, the
United Kingdom & Germany introduced REITs in 2007.
REIT Indexes
The most common index for the REIT and global listed
property market is the FTSE EPRA/NAREIT Global
Real Estate Index Series. It constitutes of both REITs
and non-REIT listed property companies. The Global
Index Series contains the Developed Markets indices
and the Emerging Markets indices.
Industry Snapshot
(Monthly data for
February 2016)
FTSE NAREIT All
REITs
FTSE NAREIT All
Equity REITs
Equity Market
Capitalization
$901bn $846bn
Yield Comparison
4.51% 4.05%
Leverage &
Coverage Ratios
Debt Ratio 46.4% 36.0%
Coverage Ratio 4.0x 4.3x
Fixed Charge
Ratio
3.7x 3.9x
Investment Grade 46 (67% by M.Cap.) 46 (67% by M.Cap.)
(Balance sheet data as of Q3 2015)
S&P 500: 2.24%
 221 REITs are in the FTSE NAREIT All REITs
Index
 196 REITs trade on the NYSE
 NYSE listed REITs equity market
capitalization = $853bn
 Stock exchange-listed REITs paid out
approximately $42bn and PNLRs paid out
approximately $4bn in dividends during 2014
Capital Offerings:
(2016: YTD)
Capital
Raised (mm)
Number of
Offerings
IPOs 0 0
Secondary Common $2,764 8
Secondary Preferred $300 1
Secondary Debt $7,700 13
Total $10,764 22

3. A Brief Report on REITs and the Indian Connect 2016
3 Sources: NAREIT website and reports, and other publically available sources
Overview of US REITS
By the end of 2014 REITs in the US owned nearly $3
trillion of gross real estate assets. Public listed REITs
saw their combined equity market capitalization grow
from the end of 1990 at a 21% compound annual rate,
from $9bn to nearly $950bn at the end of 2015.
Public listed equity REITs constitute the bulk of today’s
REIT market. As of year-end 2014, equity REITs
accounted for more than 70% of all US public listed
REIT gross assets and more than 90% of the
approximately $950bn of equity market capitalization.
Economic contribution of REITs in the US
An EY study (commissioned by the NAREIT) to
estimate the economic impact of REITs on the US
economy for 2014 revealed:
 Their total economic contribution in 2014 was
an estimated 1.8mm full-time equivalent (FTE)
jobs and $107.5bn of labor income
 REIT activities also resulted in the payment of
an estimated $44bn of interest income and the
distribution of $81.6bn of dividends in 2014
 REITs invested $55.9bn in new construction
and routine capital expenditures to maintain
existing property in 2014
US REIT Merger and Acquisition Activity
Between 2004 and 2016, US REIT Industry saw M&A
deals to the tune of US$293bn, with Public to public
deals making 64% of the total deals.
$14
$6
$47
$11
$5 $6
$24
$13
$30
$16 $16
$0
$9
$35
$87
$0 $0
$5
$1
$29
2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2016
Public to Public (in bn) Public to Private (in bn)
(YE March 31st)
US Real Estate Indicators
Even though the US economy appears to have
entered into a “goldilocks” environment, in which its
growth trajectory remains solid and inflation remains
low against continued global economic concerns, one
would never know it based on the REIT stock price
roller coaster. Along with the broader stock market, as
represented by the S&P 500 Index, REITs had
declined substantially for 2016 through mid-February,
only to roar back over the intervening six weeks. This
volatility occurred even though property fundamentals
and REIT earnings remain solid and are still growing.
Listed Real Estate Market Performance
 REITs and the S&P 500 Index increased by
10.0% and 6.8%, respectively in March 2016
 In possibly another indication of the industry
being in the later innings of the cycle, with the
exception of the apartments sector (with
expectations of 6% NOI growth), the other
core sectors (industrials, regional mall, office,
community retail, hotel, and health care) are
expecting property performance in a fairly
narrow band between 2.5% and 4.0%.
 With annualized three-month volume of
$535bn, property transactions are still at fairly
high levels, but are now pacing even with last
year rather than showing year-over-year
increases
 REITs now trade in line to NAV, which is
slightly below the sector’s long-term 3%
average premium
 REITs are trading at an approximately 17.9
P/FFO multiple, which is 1.6 above the
sector’s long-term average of 16.3
US Real Estate Market Returns
(%cumulative) All REITs Equity REITs REIT Preferred S&P500
1 Month 10.0% 10.2% 3.3% 6.8%
YTD 5.9% 5.8% 2.7% 1.3%
1 Year 4.1% 4.7% 5.6% 1.8%
3 Years 30.2% 32.6% 19.8% 39.8%
5 Years 71.5% 72.8% 45.6% 72.9%
(As of March 31, 2016)

4. A Brief Report on REITs and the Indian Connect 2016
4 Sources: NAREIT website and reports, and other publically available sources
Opening Doors to REITs in India and China
While institutional and retail investors have had a
sampling of Asian real estate through REITs, in a
sense they still have been shut out of the continent’s
most significant economies, China and India.
As of mid-2014, China had a population of 1.4bn, and
India, 1.2bn, according to the CIA World Factbook.
These countries have witnessed growth in GDP much
greater than their developed counterparts.
However, for now, India has a head start on China.
While the guidelines were issued by the Securities and
Exchange Board of India (SEBI) last year on REITs
and so-called infrastructure investment trusts (InvITs),
it is only in February this year, that Budget 2016
cleared Dividend Distribution Tax (DDT) hurdle in
making REITs reality in India.
Importance of REITs in Indian Context
A REIT could:
 Provide an attractive alternative investment
instrument in the Indian financial markets
 Help in bringing the much required
professionalism and transparency in the
real estate sector in India
 Provide developers and large investors of
commercial real estate to tap into the REITs
for investment in the real estate assets
Conducive Investment Environment
 Growing economy could be a key driver for
growth of the REIT regime in the Indian
market
 Increasing working age population will push
the demand and promote the development of
commercial real estate
 Housing and urban infrastructure
requirement will be needed to support the
increasing population
 Disposable income and retirement savings
gives individuals flexibility to invest in long-
term investment options for future savings
 India is one of the countries globally offering
affordable prime spaces, with high growth
potential
The Potential
 The top seven cities of India together have
more than 400mm sqft of operational office
space, according to Mr. Raheja of K Raheja
Corp. This is expected to grow by approx.
25mm to 30mm sqft annually. Of this, more
than 150mm sqft will be ready for REIT listing
 Embassy Office Parks, a joint venture
between Embassy Group and Blackstone,
holds 22 mm sqft of space in three cities,
including Bangalore
 Mr. Anuj Puri, JJL Chairman, adds that
currently, approx. 229mm sqft of office space
in India can be seen as REIT-compliant, and
assuming even 50% of these get listed, we are
looking at a total REITs listing worth $18.5bn
 India needs to develop almost 45mm to 50mm
housing units by 2028
Key Regulations relating to Indian REIT
Initially proposed in December 2008 by the SEBI, the
2014 SEBI REIT Regulations have been notified.
 Offer and listing: Initial offer of units through
public issue to third parties, with mandatory
listing
 Minimum subscription: INR 2lakh (primary
market)
 Trading lot size: INR 1lakh (secondary
market)
 Dividend income: At least 90% of the
distributable cash flow must be distributed and
at least twice a year
 Transparency: REIT, through a valuer, will
undertake full valuation on a yearly basis and
update the same on a half-yearly basis and
declare NAV within 15 days from the date of
such valuation / updation
 Diversification: REITs will have to invest in at
least two projects. Not more than 60% value of
assets will be in one project
 Property concentration: Not less than 80%
of the assets should be invested in completed
and revenue generating properties
 Sponsor commitment: Sponsors must hold
25% of the units for first three years and 15%
thereafter