2013 REIT report

Capital allocations, transactions and financing

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Capital allocations

Considering the capital-intensive nature of real estate and the illiquidity of individual assets, capital allocation discussions are especially significant for REITs. Publicly listed organizations face the extra spotlight of reporting requirements and the instant judgment of highly liquid equity markets.

We see our clients favoring a structured approach when making capital allocation decisions, and they also consider joint ventures — with their challenges and opportunities — as a significant component of the capital allocation decision process. We also outline the likely destination for REIT capital, primarily in the US, in the next 24 months.

Primary destination for capital

EY - Primary destination for capital

Transactions

The global REIT industry has been a major participant in transaction markets in the last three years. Real Capital Analytics (RCA) estimates that REITs accounted for 14% of transactions by volume in 2012, and that percentage rose to 20% in the first half of 20133.

The drivers of deal flow and REITs’ intentions are important not only to the sector but to real estate markets generally. Our survey and the insight provided by our REIT partners provide some clarity about their plans, as well as the scope for transformative acquisitions involving the REIT sector in the next 24 months and the prospects for disposal activity.

Global REIT investment volumes

EY - Global REIT investment volumes

Most large-cap REITs are likely to undertake acquisition activity through the remainder of 2013 and into 2014 at levels similar to or slightly below that of recent years. For some, the drop in activity is a result of being particularly active in recent years, but for many it is more a reflection of the challenges of identifying suitable and appropriately priced targets at this point in the cycle. They are, however, poised to act should a suitable opportunity arise.

Financing

REITs have become increasingly sophisticated in their management of debt. Important lessons from the financial crisis have been learned and implemented.

Themes such as refinancing debt, pushing out maturities, laddering profiles, fixing the cost, diversifying sources, improving credit ratings and capitalizing on accommodative markets remain evident. To date, 2013 has largely been a year of “more of the same” in these areas for the major global REITs. Effective capital management is seen as a matrix that involves managing the many moving parts to create an overall position of strength.

We believe that generally speaking, the largest REITs have been doing and continue to do the right thing in this area. Most are maintaining the strategy that has served them well in recent years.

The interest rate question is becoming increasingly important to the sector, particularly in the US, but few major REITs have taken steps to specifically mitigate the impact. However, all are managing their debt loads in a way that recognizes the potential for rates to rise.

REIT debt — US vs. non-US

EY - REIT debt — US vs. non-US


3 “Global Capital Trends, 2012 Year in Review and Mid Year Review 2013,” Real Capital Analytics.