managing indian reits · • ifrs vs. us -gaap: – bv vs. mv narrower with ifrs? – improved...

Managing Indian REITs The Conventional Wisdom

International Research Conference II

Securities & Exchange Board of India (SEBI)Mumbai | March 20th 2015

Presenter:

Prashant Das, Ph.D.Assistant Professor of Real Estate Finance

With inputs from

Charles Thomas Jr., Ph.D., CPA, CMA

Ecole hôteliere de Lausanne, SwitzerlandRoute de Cojonnex 18, 1000 Lausanne 25, Switzerland

prashant_iitr@yahoo.com

1 | © Prashant Das, Ph.D.

Opinions expressed and errors, if any, are personally of the presenter.

Agenda

• The Story of REITs

• I-REITs

• Conventional Wisdom

• Opportunities & Challenges for I-REIT Management

‹#› | © Prashant Das, Ph.D.

Buying a Piece of Empire EstateESRT: Market Cap (Jan 2015): $1.87B

© Prashant Das, Ph.D. | EHL Lausanne, Switzerland

Image Source: libertyunyielding.com

Stock Data: Yahoo! Finance

ESRT

S&P 500’

Oct 2013 – Jan 2015

ESRT

Institution Name Empire State Realty Trust, Inc.

Total Assets (Mi US$) 2,476,061

Total Liabilities (Mi US$) 1,472,876

Total Equity (Mi US$) 1,003,185

Common Equity (Mi US$) 385,158Common Equity (Mi US$) 385,158

Total Preferred Equity (Mi US$) 0

© Prashant Das, Ph.D. | EHL Lausanne, Switzerland

REITs: USA versus India

© Prashant Das, Ph.D.

Source: maxizoo.ieSource: pixshark.com

Investor-centric versus investment-centric

Intro. Total (Count) Insider (avg %) Float (Avg %) Inst. Own. (avg %)

USA 1960 186 9 91 76

Netherlands 1969 5 19 81 48

Australia 1971 26 17 83 42

Canada 1993 47 14 86 23

Belgium 1995 11 40 60 11

Turkey 1995 7 67 33 7

Greece 1999 1 64 36 25

Japan 2001 44 10 90 44

Singapore 2002 33 32 68 22

France 2003 18 50 50 29

Evolution of REITs and Their Ownership Structure

© Prashant Das, Ph.D.

France 2003 18 50 50 29

Malaysia 2004 5 46 54 40

Hong Kong 2005 8 43 57 16

Germany 2007 3 20 80 29

Italy 2007 2 54 46 23

UK 2007 32 16 84 60

Spain 2009 4 6 94 65

Finland 2010 1 34 66 8

Mexico 2011 7 12 88 18

UAE 2011 1 0 100 14

Ireland 2013 3 10 90 64

South Africa 2013 14 18 82 43

TOTAL (%) 461 17 83 51

Source: SNL & authors

Ownership Structure of Indian Real Estate Companies

40

50

60

70

80

90

100

40%

50%

60%

70%

80%

90%

100%

© Prashant Das, Ph.D.

0

10

20

30

0%

10%

20%

30%

Float Insider Institutional Source: SNL & authors

Potential I-REIT Candidates

• Commercial Real Estate in India:

– Large number of properties held by foreign REITs and non-

REITs (Offices, healthcare, and retail)

– Several hundreds are operated by listed companies

(Hotels, apartments, offices, and retail)(Hotels, apartments, offices, and retail)

• Natural targets for conversion to IREITs, alongwith

established RE developers and international funds

© Prashant Das, Ph.D.

Structure of I-REITs (REITs in India)

Sponsor

Trust ManagerAppoint & scrutinize

SEBI

liais

on

© Prashant Das, Ph.D.

Auditor

Appraiser

Inv. Banker

Shareholder

Pro

tect

the b

en

efi

ts

Distribute + liaison

I-REIT Features

Ownership, Activities & Assets

• Must be publicly traded and listed

• Insider ownership

– sponsor must hold between 25% and 75%

– Responsible management versus entrenchment

• SPV assets must mimic the REITS’• SPV assets must mimic the REITS’

– Taxable REIT subsidiaries?

© Prashant Das, Ph.D.

I-REIT Features

External Management• Management vs. Advisory

• Internal advisory is sought after; not management

– Over 60% of REITs globally are internally advised

– Nearly 50% of REITs are internally managed

• External advisors

– Reluctance from sponsors (dilutes control)

– Costly; but bring-in expertise

– Impact on performance: ambiguous

– Prevalent if high corruption and poor property rights(Cashman et al., 2014)

‹#› | © Prashant Das, Ph.D.

Are REITs Real Estate?

Stocks are from Mars, Real Estate from Venus

The Nature of REITs

– Stock, commercial RE, or a mixture?– Stock, commercial RE, or a mixture?

– Academic Debate

– Difference of perception before and after the

economic crisis (Das et al., 2015)

‹#› | © Prashant Das, Ph.D.

Financing REITs

• Major shift in financing approach

– Rental assets are LT collateral

• Debt contracts are simpler

– Key challenge is availability of equity, not – Key challenge is availability of equity, not

cost of debt (Chinloy, Das & Wiley, 2014)

• 49% cap on leverage

– Majority of capital must come from equity

– Liquidity issues for early I-REITs

‹#› | © Prashant Das, Ph.D.

Indian RE Development Firms are

Increasingly More Leveraged:

20

40

60

80

100

%

Debt/Enterprise Value

MIN

Average

MAX

‹#› | © Prashant Das, Ph.D.

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

Secured Debt / Property Value

MIN

Average

MAX

Source: SNL & authors

Preferred Equity is not allowed in I-REIT

10,000.0

100,000.0

Sca

le

Th

ou

sa

nd

s

Preferred Equity RE Developers in India

‹#› | © Prashant Das, Ph.D.

1.0

10.0

100.0

1,000.0

2014Y 2013Y 2012Y 2011Y 2010Y 2009Y 2008Y 2007Y 2006Y 2005Y

Lo

ga

rit

hm

ic S

ca

le

Average

MAX

Source: SNL & authors

Creating Shareholder Value

© Prashant Das, Ph.D.

Internal Growth

8

10

12

14

16

Dividend Yield of Publicly-Traded RE Developers in India

MIN

© Prashant Das, Ph.D.

0

2

4

6

8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

Average

MAX

Source: SNL & authors

Free Cash Flow

20

40

60

80

Free Cash Flow Coverage

© Prashant Das, Ph.D.

Source: SNL & authors

-100

-80

-60

-40

-20

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mult

iple MIN

Average

MAX

External Growth

• Capital Gains

– Is this sustainable Business model for REITs?

– Capital constraints in recycling assets

• Leverage is capped• Leverage is capped

• 90% distribution

• Improve NAV ?

– REITs generate value from Income return (Mühlhofer,

2013)

© Prashant Das, Ph.D.

Challenges to REIT Managers in India

100

200

300

400

500

600

700

800

Mult

iple

Price/NAV for Publicly-Traded Real Estate Developers in India, 2006-14

MIN

Average

MAX

© Prashant Das, Ph.D.

0

100

2006 2007 2008 2009 2010 2011 2012 2013 2014

0

20

40

60

80

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mult

iple

Price/EPS for Publicly-Traded Real Estate Developers in India, 2005-14

MIN

Average

MAX

Source: SNL & authors

Opportunities for REIT Managers in India

• Market inefficiency– Real estate in inefficient in general

– Data wizardry may offer an edge: predictability

• IFRS vs. US-GAAP: • IFRS vs. US-GAAP: – BV vs. MV narrower with IFRS?

– Improved performance legibility

• Growth Potentials– Increased appetite for space markets?

– Degrading affordability in asset markets?

‹#› | © Prashant Das, Ph.D.

Questions?

Thank you

© Prashant Das, Ph.D.

References• Alishayev, B., & Geressy-Nilsen, K. (1. August 2014). Externally Managed REITs More Efficient, Weaker

Alignment. Abgerufen am 7. March 2015 von Fitch Wire: www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/Externally-Managed-REITs?pr_id=843695

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© Prashant Das, Ph.D.

References (cont.)• Clayton, J., & MacKinnon, G. (2003). The Relative Importance of Stock, Bond and Real Estate Factors in

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© Prashant Das, Ph.D.

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to trading constraints as the solution to the short-term disparity. Real Estate Economics, 41, 814-857.

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© Prashant Das, Ph.D.

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MODSIM2013, 20th International Congress on Modelling and Simulation (S. 1319-1325). Canberra, Australia: The

Modelling and Simulation Society of Australia and New Zealand Inc.

© Prashant Das, Ph.D.