The Investor’s Guide to REITs - Boston Properties

1 The investor s Guide to REITsNAREIT s Guide to the Real Estate Investment Trust IndustryContents:p2. REIT Basicsp2. REITs in the S&P Indexesp3. Fundamentals of REITsp4. Returns Delivered by REITsp4. Characteristics of REIT Investmentp6. REIT Valuationp6. Benefits of Real Estate in Portfoliosp7. REIT Sectorsp8. The REIT Story in Brief Copyright 2012 National Association of Real Estate Investment Trusts REITs : Building Dividends and Diversification 1875 I Street, NW, Suite 600, Washington, 20006-5413 202-739-9400, 800-3 NAREIT 202-739-9401 fax NAREITNAREIT NewsBriefNAREIT s Monthly NewsletterREIT BasicsReal estate investment trusts ( REITs ) arecompanies that own and most often activelymanage income-producing commercial realestate. Some REITs make or invest in loans andother obligations that are secured by real estatecollateral.

2 The shares of most large REITs arepublicly Congress created the legislativeframework for REITs in 1960 to enable theinvesting public to benefit from investments inlarge-scale, commercial real estate real estate equity investment throughREITs has much to offer institutional and retailinvestors. REIT stocks provide superior dividendincome along with the potential for long-termcapital gains through share price appreciation,and can also serve as a powerful tool for by Ibbotson Associates, an investmentresearch unit of Morningstar, Inc., demonstratesthe multi-faceted benefits of investing in REITs : The ownership of REIT shares over time has historically increased investors total return and/or lowered the overall risk in both equity and fixed-income portfolios over time. Dividend growth rates for REIT shares have outpaced inflation over the last can choose to benefit from theopportunities in the REIT market by purchasing thestocks of individual REITs or investing in REIT mutual funds or ETFs.

3 Actively managed mutualfunds are run by portfolio managers with a highdegree of expertise in the real estate in the S&P IndexesThe inclusion of REITs in 2001 in the Standard &Poor s Indexes, the most widely followedinvestment performance benchmarks for the markets, underscored the importance ofREITs in public capital markets andacknowledged the integral role they play in theeconomy and in diversified investment ongoing success of the REIT model is areflection of many things, from its incomegenerating and growth potential, to the provenportfolio diversification benefits of owning REIT shares; and from the benefits of active andprofessional management of real estateproperties, to the transparency and managementaccountability that are essential components ofREIT corporate TwoThe investor s Guide to REITsThe investor s Guide to REITsNAREIT s Guide to the Real Estate Investment Trust IndustryNAREIT NewsBriefNAREIT s Monthly NewsletterFundamentals of REITsPublicly traded REITs are vital companies thatoffer investors the benefits of commercial realestate investment along with the advantages ofinvesting in a publicly traded can purchase or sell shares in REITs aseasily as they purchase or sell shares in any otherpublicly traded company.

4 REIT shares are tradedon all of the major stock exchanges in the ,including the New York Stock Exchange (NYSE),Nasdaq, American Stock Exchange (AMEX), aswell as various after-hours ValueJust like investors in other public companies,REIT shareholders can receive value in the form ofboth dividend income and share Management/Corporate Governance Publicly traded REITs generally are actively andprofessionally managed corporations. Theyadhere to the same corporate governanceprinciples that apply to all major publiccompanies. They have a senior management team that isheaded by a chief executive officer (CEO) whoactively manages the overall strategic vision andequity of the enterprise. The board of directorsappoints the CEO, which in turn is elected by andaccountable to the shareholders of the ObligationPublicly traded REITs , like other public companiesin the , are required to make regular financialdisclosures to the investment community,including quarterly and yearly audited financialresults with concomitant filings with the Securitiesand Exchange Shareholder LiabilityAs is the case with equity investments in otherpublicly traded companies, shareholders have nopersonal liability for the debts of the REITs inwhich they LeverageLike most other publicly traded companies, REIT stend to use moderate levels of debt in their capitalstructures.

5 In fact, the average REIT debt ratio hasbeen below 55 percent for much of the investor s Guide to REITsPage ThreeThe investor s Guide to REITsNAREIT s Guide to the Real Estate Investment Trust IndustryInvestors can purchaseshares in REITs as easilyas they purchase sharesin any other publiclytraded company. REIT shares are traded on allmajor stock NewsBriefNAREIT s Monthly NewsletterReturns Delivered by REITsREITs Deliver Income & Long-term GrowthThe special investment characteristics ofincome-producing real estate provide REIT investors with competitive long-term rates ofreturn that complement the returns from otherstocks and from bonds. High Dividend YieldREITs are required to distribute at least 90 percentof their taxable income to shareholders annually inthe form of dividends.

6 Significantly higher onaverage than other equities, the industry'sdividend yields historically have produced asteady stream of income through a variety ofmarket Price AppreciationApproximately one-third of the total return fromREIT stocks since 1972 came from moderate,long-term growth in share prices. Characteristics of REIT InvestmentIn addition to the investment performance andportfolio diversification benefits available frominvesting in REITs , REITs offer several advantagesnot found in companies across other benefits are part of the reason that REIT shave become increasingly popular with investorsover the past two decades:Predictable Revenue StreamREITs reliable income is derived from rents paid tothe owners of commercial Properties whosetenants often sign leases for long periods of time,or from interest payments from the financing ofthose Properties .

7 Earnings TransparencyMost REITs operate along a straightforward andeasily understandable business model: Byincreasingproperty occupancy rates and rentsover time, higher levels of income may beproduced. When reporting financial results, REITs ,like other public companies, must report earningsper share based on net income as defined bygenerally accepted accounting principles (GAAP).Page FourThe investor s Guide to REITsThe investor s Guide to REITsNAREIT s Guide to the Real Estate Investment Trust IndustrySource: NAREIT and Standard and Poor NAREIT All REIT IndexS&P 500 Source: NAREIT FTSE NAREIT Equity Return Components(Percent change, as of Dec. 31, 2011)50-50403020100-10-20-30-40197219761 9801984198819921996200020042008 Dividend Yields:FTSE NAREIT All REIT Index vs. S&P 500(Year-end dividend yields, 1990-2011)NAREIT NewsBriefNAREIT s Monthly NewsletterAnother way year-to-year financial progress canbe gauged is by comparing levels of Funds FromOperations (FFO).

8 FFO, the industry ssupplemental performance measure, differsmainly from net income by excluding depreciationand amortization of real estate assets and gainsand losses from most property the broad range of real estate propertysectors and business lines, there also are anumber of additional earnings metrics, which areused by REITs in order to provide investors with agreater level of insight into their ReturnThe combination of income returns fromdividends and capital gains from share priceappreciation can result in healthy overall returnsfor REIT investors. Analysis by IbbotsonAssociates demonstrates that the combination ofdividends and share price appreciation has madeREIT returns competitive with other majorinvestments, including a broad range of large-capstocks, small-cap stocks and short, REITs over time have demonstrated ahistorical track record providing a high level ofcurrent income combined with long-term shareprice appreciation, inflation protection, andprudent diversification for investors across theage and investment style investor s Guide to REITsPage FiveThe investor s Guide to REITsNAREIT s Guide to the Real Estate Investment Trust Outperform Leading Benchmarks30-Year Compound Annual Total ReturnsData as of December 31, 2011 Dow Jones Industrial Nasdaq CompositeRussell 2000S&P 500 FTSE NAREIT All Equity.

9 NAREIT Past performance is no guarantee of future NewsBriefNAREIT s Monthly NewsletterREIT ValuationMany factors affect the value of a REIT s share pricebeginning with the earnings tied to generallypredictable and growing streams of rental revenueand a price-earnings multiple assigned by level and growth of rents are largely determinedby economic fundamentals of supply and demand inreal estate markets. These fundamentals includedemographic factors such as population size,population growth, employment growth,construction and the level of overall economicactivity. While differing from region to region, all ofthese factors typically have a direct impact on rentsand occupancy rates, which affect projectedearnings and property factors include:Net Asset Value CalculationMany REIT analysts look at net asset value (NAV) asa reference point for the valuation of a equals the estimated market value of a REIT stotal assets (mostly real property) minus the value ofall liabilities.

10 When divided by the number ofcommon shares outstanding, the net asset value pershare is viewed by some as a useful guideline fordetermining the appropriate level of share price. Property Portfolio EnhancementsThe value of a REIT s property portfolio can bemaintained or enhanced through consistent capitalexpenditures. This is significant because strategicproperty portfolio enhancements help to maintain orincrease NAVs and can provide the basis for priceappreciation of a REIT s of Real Estate in PortfoliosGiven the investment strengths and historicalperformance of REITs , it is no surprise that REIT shares are commonly viewed as a good investmentfor all long-term, diversified , the inclusion of REIT shares in any investmentportfolio is a prudent investment decision:Market Variability BalanceFirst, the variability of market returns over time andacross all economic sectors makes it clear thatdiversification is the key to long-term investmentsuccess.