Understanding Real Estate s Value Proposition

Transcription

1 Investment Focus Understanding Real Estate s Value Proposition The Case for a Listed Real Estate Allocation While investment returns from publicly traded real estate securities have been more volatile than expected during the financial crisis and through the current recovery, over the long term, real estate securities have typically delivered investors attractive risk-adjusted returns when compared to other asset classes. In addition, publicly traded real estate securities generally offer investors income stability, diversification, inflation-protection potential, and liquidity. Lazard s Global Real Estate Securities team believes the long-term performance and differentiated investment attributes of publicly traded real estate (especially in the context of lower return expectations and heightened global unpredictability) warrant consideration of a strategic allocation to the asset class.

2 2 Listed real estate securities have historically provided favorable returns, enhanced portfolio income, diversification benefits, and inflation-protection properties. These traits have been especially visible in US real estate markets, with many global markets catching up. Due to their nature, listed real estate securities have greater liquidity and transparency, as well as stronger corporate governance relative to private real estate. That said, the trade-off of these attributes is greater short- and medium-term volatility for listed real estate companies. However, for long-term horizons, listed real estate s fundamentals present a compelling thesis. Comprising in value the equivalent to anywhere from 1% 9% of a country s GDP, commercial real estate is a sufficiently large asset class both globally ($27 trillion) and in the United States ($7.1 trillion) to warrant consideration within a diversified investment portfolio. 1 Even when considering the substantial price correction witnessed from the latter half of 27 through the end of 29 during the global financial crisis, the long-term performance of commercial real estate has demonstrated strong total return performance, stability of income returns, and low correlations to other investments. Relative to other asset classes, however, the assessment of real estate performance has been historically more complicated as the preponderance of commercial real estate has been held in various private ownership and investment structures, thereby creating opacity around performance metrics. Thankfully, over the past 15 years, for the United States in particular, some of that opacity has been removed due to growth in the securitized real estate market (driven by the increasing adoption of the real estate investment trust [REIT] model and the development of the commercial mortgage-backed securities [CMBS] market) and the resultant wealth of public information. In addition to helping prove commercial real estate s value proposition, the growth in listed real estate securities (namely REITs) has added additional dimensions to the real estate proposition liquidity, transparency, and governance. While earlier in its maturation than the US market is, many global markets are witnessing substantial growth in listed real estate securities as well, with this growth also leading to improved clarity to real estate fundamentals across the globe. Currently, the total global listed real estate market comprises over 3, companies with a total equity market capitalization of $3. trillion and ownership of $5.1 trillion in commercial real estate. Of this, we consider the investable marketplace (companies in excess of $15 million in market capitalization) to be approximately 1,2 companies with a market capitalization of $2.5 trillion. While there is some difference across the three primary regions (North America, Europe, and Asia-Pacific) in terms of total commercial real estate market value, due to market and regulatory differences, there is a greater dispersion of listed market ownership across the regions, with a higher concentration of listed real estate value in Asia and a lower concentration in Europe as compared to the total value of real estate globally (Exhibit 1). As one would expect given its economic size and listed market maturity, the United States has the largest and most liquid listed real estate market comprising approximately 29% of the total global listed market. The United States also has one of the longest track records of listed real estate performance, having originated the REIT model in 196. Exhibit 1 Sizing Up the Global Real Estate Market Region Commercial Real Estate ($B) Total Listed ($B) Total Listed Ownership (%) Asia-Pacific 7,212 2, Europe 9,427 1, Africa/Middle East Latin America 1, North America 8,347 1, Global 27,565 5, As of 3 October 213 This information is for illustrative purposes only. Source: European Public Real Estate Association (EPRA), IMF, Lazard Despite regional differences, we believe there are key common attributes for consideration when investing in listed equity real estate and we will discuss each area in greater detail: Total return performance Diversification Income and Inflation protection Liquidity Transparency and governance Volatility Total Return Performance Within the United States, the commercial real estate asset class has generally provided competitive returns when compared to broad market indices. Through 31 December 213, US listed real estate, as measured by the FTSE NAREIT All Equity REITs TR Index, has delivered compounded annual returns that have been comparable to most stocks over the last 15- and 2-year periods (Exhibit 2). Exhibit 2 US Listed Real Estate versus Broad Market Indices Annualized Returns (%) Year 1-Year 15-Year REITs S&P 5 Index Russell 2 Index NASDAQ 2-Year As of 31 December 213 The indices listed above are unmanaged and have no fees. It is not possible to invest in an index. Performance quoted represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg

3 3 Performance against some of the equity benchmarks has been more moderate over the last few years as real estate has been impacted by the economic recession and financial crisis as well as a pronounced underperformance of the asset class in 213 as the sector sold off with expectations of higher future interest rates. However, due to the good quality of the industry s underlying real estate assets and a recovery in the financing markets, many listed real estate companies have stable balance sheets (equity REITs: 34% leverage, 3.7 fixed charge coverage 2 ) and we believe they are well-positioned to benefit from an economic recovery (even if tepid). Of note, one of the benefits demonstrated by the public real estate market over the past five years is the flexibility in financing alternatives that are available to public companies as compared to private companies. While the re-equification of public company balance sheets through stock issuance has taken a toll on short-term performance because of equity dilution, the benefit is that public real estate (both in the United States and globally) currently has a much healthier balance sheet than that in the private markets and is able to translate this advantage into market share gains. With continued balance sheet stresses among banks and in the private market, we feel public real estate companies should be well-positioned to accelerate earnings growth through strategic and accretive acquisitions in the coming years. Global real estate within developed countries also has demonstrated good long-term returns as compared to global equities and comparable returns to United States real estate, but it has performed slightly short of the United States over a longer time period of 15 years (Exhibit 3). While these data reflect only the developed country markets (given the short history and limited size of listed real estate within emerging market countries), we expect the combination of population growth, GDP-per-capita growth, and increasing growth in the REIT format to propel emerging-market real estate opportunities over the coming decade. Exhibit 3 Global Listed Real Estate versus Broad Market Indices Annualized Returns (%) Year 1-Year Developed-Market Global Real Estate Developed-Market Global Equities US Real Estate US Equities 15-Year As of 31 December 213 Developed-Market Global Real Estate = S&P Developed Property TR Index; Developed- Market Global Equities = S&P Developed BMI TR; US Real Estate = FTSE NAREIT All Equity REITs Index TR; US Equities = S&P 5 Index TR. Performance quoted represents past performance. Past performance is not a reliable indicator of future results. The indices listed above are unmanaged and have no fees. It is not possible to invest in an index. Source: Bloomberg Exhibit 4 Sector Characteristics of the US REIT Market Real Estate Sector Market Capitalization a % of US Listed Market Economic Drivers Key Tenants Office 78, Corporate profits, business segment growth, GDP Corporations, professional service industries Lease Duration (Years, unless indicated) 5 1 Industrial 26, Consumer spending, retail sales Logistics, manufacturing, retailers 3 5 Regional Malls 84, Disposable income, consumer Soft good retailers, jewelry, department 7 1 (in-line) sentiment stores Shopping Centers 49, Consumer spending, CPI, population Grocery and drug, local necessity retail 3 5 (in-line) Single Tenant Retail 24, Consumer spending, CPI, population Restaurants, banks, gas/convienence 1 15 Multifamily 73, Age cohort growth, interest rates and 65+ age cohorts 9 12 Months Manufactured Housing 4,71.7 Interest rates, population, age cohort growth 55+ age cohort, lower middle class families Diversified 53,4 8. Various Various Various Lodging 41, Business spending, disposable income, consumer sentiment Business and leisure travel Daily (consumer); 1 15 (mgmt contract) Health Care 68, Aging population, government 65+ age cohort 1 3 (resident); 1 15 (mgmt contract) Self Storage 35,5 5.3 Population Adults Monthly Timber 33, Construction, new home sales Construction industry Various Infrastructure 31, Population growth, data/voice usage Corporations Various Mortgage REITs 6, Interest rates, financial system health Real estate owners 3 1 b As of 31 December 213 a Implied, $M b Maturity Duration Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. Source: NAREIT, Lazard N/A

4 4 Exhibit 5 Composition of US Real Estate Total Returns by Sector Annualized Return (%) Total Income Price Office Industrial Mixed Shopping Centers Regional Malls Apartments Free Standing Manufactured Homes Diversified Lodging/ Resorts Health Care Self Storage Mortgage For the period 1994 to 213 The information in the above chart is for illustrative purposes only and does not represent the performance of any product managed by Lazard. Performance quoted represents past performance. Past performance is not a reliable indicator of future results. Data are based on the FTSE NAREIT All Equity REITs Index. Source: NAREIT, Lazard Diversification of Exposure, Cash Flows, and Geography Creating an investment portfolio of assets that behave differently across market conditions has always been a key element to managing and reducing risk. Traditionally, direct real estate investors have looked to build portfolio diversification by property, tenant, business sector, asset sector, and geography. This cross-set of elements creates diversification due to differences across sectors such as the 1) underlying key economic or demographic drivers of a particular sector s demand, 2) primary tenant concentrations, and 3) lease structure both in terms of duration and rent exposure to inflation. While these elements help drive the ability for diversification within a real estate portfolio, they also are among the components that allow real estate to generally perform with lower correlations to other investments and provide low correlations across countries (Exhibit 4 on the previous page). Understanding the true risk profile of each sector within real estate, and how the economic drivers, lease structures, and tenant credit health (among others) relate to value is critical to the assessment of real estate investments. To do this, we take a look at the United States listed real estate market as an example for sector performance. We rely on US data, as the United States has the largest, most liquid, and most mature of the global listed real estate markets. Exhibit 5 looks at the composition of each sector s returns from 1994 to 213, underscoring the impact of the income component in many sectors. Taking into consideration the income orientation of the real estate asset class and the history of REITs paying out consistent dividends, one might assume mortgage REITs (highest dividend to price return mix) to be a low-volatility pick while self-storage REITs (lowest dividend to price return mix) would be of higher volatility. In fact, the opposite is the case. Mortgage REITs have the highest volatility of total returns and self-storage REITs, while not the lowest in volatility, are behind only free standing retail (the most investment credit-oriented of any sector) and manufactured homes (lowest tenant turnover of any sector), as shown in Exhibit 6. This apparent mismatch is due to the differing compositions in the underlying fundamentals and structure of each sector. For example, self storage Exhibit 6 Underlying Sector Fundamentals Lead to Different Volatilities Mortgage Lodging/Resorts Regional Malls Office Industrial Mixed Health Care Shopping Centers Diversified Apartments Self Storage Free Standing Manufactured Homes Volatility (%) For the period 1994 to 213 Performance quoted represents past performance. Past performance is not a reliable indicator of future results. Data are based on the FTSE NAREIT All Equity REITs Index. Source: NAREIT, Lazard REITs have been the beneficiaries of strong, multi-year increases in demand due to population growth and increasing consumer consumption. Meanwhile, due to the nature of a facility whereby a single location has hundreds of leases (comprising both individuals and businesses), the cash flow is well-diversified and ultimately secured by goods stored within a unit. As a result, the self-storage REIT sector has exhibited both solid earnings growth and dividend income. We believe these differences can be utilized to enhance portfolio diversification. Moving globally, an investor can continue to build diversification. There is a healthy diversification by asset type among global listed real estate securities, providing investors with differing levels of exposure to various components of a country s economy (Exhibit 7). Not only is the investable universe of listed commercial real estate large ($2.5 trillion market capitalization), the investment opportuni-

5 5 Exhibit 7 Global Listed Real Estate by Sector Exhibit 8 Generally Low Correlation of Real Estate Returns by Country United States United States 1. Japan Japan Hong Kong Hong Kong Australia Australia United Kingdom Residential Self Storage Retail Office Speciality Diversified Lodging Industrial As of 3 October 213 Data are based on the FTSE EPRA/NAREIT Global Index. Source: EPRA United Kingdom Singapore France Singapore France For the 15 years ended 31 December 213 Data are based on S&P country property indices as noted. Source: Bloomberg, Standard & Poor s Health Care Exhibit 9 Correlation of Global Real Estate versus Broad Equity Indices 15-Year Correlation Global Stocks US Stocks US Real Estate International Bonds US Bonds For the 15 years ended 31 December 213 Global Equities = MSCI World Index TR; S&P 5 Index TR; US Real Estate = FTSE NAREIT All Equity REITs TR Index; Global Bonds; Barclays Capital Global Aggregate Bond Index; US Bonds = Barclays Capital US Aggregate Bond Index; Global Real Estate = FTSE EPRA/NAREIT Global Index. Past performance is not a reliable indicator of future results. The indices listed above are unmanaged and have no fees. It is not possible to invest in an index. Source: Bloomberg ties are spread across more than 35 countries and companies owning in excess of 75, distinct properties. 3 The last component then, is to link real estate s underlying diversification potential (again, by property, tenant, etc.) with 1) listed real estate s performance across countries and 2) listed real estate s performance as compared to other asset classes. As expected, the differences in economic patterns, population growth, market maturity, and country stability do create the ability to gain meaningful diversification by expanding an investment set to the global markets (Exhibit 8). However, the correlation against broad equity benchmarks is not as low as it has been historically, due, in our view, to two primary reasons (Exhibit 9). The first is that over the last decade, led by the United States, an increasing number of listed real estate companies have been included in broad benchmark indices creating an index drafting effect. For example, in 1996 there were no US REITs in the S&P 5 Index. Today, 18 REITs comprising 47% of US REIT market capitalization are included in the S&P 5 Index. In total, approximately 74% of the REIT market (by capitalization) is included in the S&P 5, S&P 4 Mid Cap, or S&P 6 Small Cap indices. For an industry with a long-term investment horizon and an income orientation, we believe this index inclusion has cemented REITs stronger short-term linkage with broader equities. The second factor is that listed real estate has not been immune to the enhanced correlation across all asset classes during the great financial crisis and macro/government policy-driven markets that followed in the aftermath of the crisis. While too early to assess if the higher correlation driven by this last point will be maintained, recent declines in correlation (to the.6.7 range) may suggest that even though REITs may exhibit higher correlations at certain periods in a cycle, throughout a full cycle REITs will still deliver lower correlations to broader equities. The rise in correlations of REITs versus broad equities reflects the importance of relying on company fundamentals for a favorable stock-selection approach. Income and Inflation Protection One of the primary investment characteristics of commercial real estate is that a property provides strong and stable income flows. The stability of the income flow is derived from the multi-year term of most leases while the strength is generated from the contractual nature of the lease structure through which tenants gain access to the use of the property. The creation of the US REIT structure in 196 was an attempt (successful as it turns out) to create an income-oriented investment vehicle that would mimic the strong and stable income flows of direct real estate. Due to this structure, returns driven primarily by dividends have become one of the chief drivers in listed real estate performance, both historically, and prospectively, given current high dividend yields and expectation for future dividend increases (Exhibit 1). Average annual total returns illustrate the benefit of REITs steady income returns. While REIT stocks have historically exhibited strong price appreciation, like equity stocks, the dispersion of returns can vary widely. In contrast, since 199 REIT dividend returns have been consistent and stable, averaging 7.3% over that period with a standard

6 6 Exhibit 1 Composition of US REIT Returns Returns (%) Income Price Total As of 31 December 213 The information in the above chart is for illustrative purposes only and does not represent the performance of any product managed by Lazard. Performance quoted represents past performance. Past performance is not a reliable indicator of future results. Data are based on the FTSE NAREIT All Equity REITs Index. Source: NAREIT Exhibit 11 Real Estate Income Return Outpaces Inflation in the United States (%) REIT Income Return CPI As of 31 December 213 The information in the above chart is for illustrative purposes only and does not represent the performance of any product managed by Lazard. Performance quoted represents past performance. Past performance is not a reliable indicator of future results. Data are based on the FTSE NAREIT All Equity REITs Index. Source: NAREIT deviation of only 2.3%. Therefore, dividends represent approximately 61% of REITs average annual total return of 11.9%. The result of US REIT returns in relation to dividends is also consistent with direct real estate (as measured by the NCREIF Property Index [NPI]). For the NPI, 66% of total returns are attributed to dividend yields. 4 The income return performance is certainly attractive, but the relation of income return and its growth relative to inflation helps substantiate real estate s role as an inflation hedge. Over the past 13 years, with the exception of 28 (i.e., during the impact of the financial crisis), REITs income returns have been in excess of inflation (Exhibit 11). Due to the recovery (following the financial crisis) in the commercial real estate markets, both from a repair in the financing markets and an improvement in property fundamentals, US public REIT balance sheets are currently solid. As a result, REITs are beginning to pass through cash flow growth to investors in the form of dividends. We currently expect that US REITs will exhibit dividend growth well ahead of government estimates (from the Congressional Budget Office) for US inflation at 1.6% 1.9% for With the current strong yields, as compared to other assets (Exhibit 12), we feel REITs should continue to compare favorably against other income alternatives. The income performance of global listed real estate has also kept ahead of inflation (Exhibit 13), but with some differences in the composition of the income returns. The difference here is that the tax transparency/ pass-through nature of the US REIT model is not as prevalent in other countries, so from an overall perspective a smaller percentage of cash flow growth is distributed. Nevertheless, the income component of underlying real estate returns, the further maturation of global commercial real estate markets, and the increasing adoption of US-like REIT rules across more countries are expected to drive income return behavior closer to the US model over time. Liquidity The US-listed real estate market controls approximately $1 trillion in commercial real estate, has an equity capitalization of approximately $67 billion, and trades approximately $4.9 billion of equity daily. In comparison, the total US commercial real estate market is approximately $7.1 trillion, likely has around $ trillion of equity, and is averaging annualized asset sales of approximately $32 billion of assets, or the equivalent of approximately $25 million in equity value per trading day. 5 To put it more succinctly, listed real estate securi-

7 7 Exhibit 12 REIT Yields Are Attractive Relative to Other Income Investments Yield (%) S&P 5 Index 1-Year US Treasury REITs Baa Corporate Bonds BBB REIT Bonds REIT Preferred Shares As of 31 December 213 Past performance is not a reliable indicator of future results. REITs = FTSE NAREIT All Equity REITs Index; Baa Corporate Bonds = Barclays Capital Baa Corporate Bond Index; BBB REIT Bonds = Bloomberg BBB REIT Bonds; REIT Preferred Shares = universe defined by Lazard. The indices listed above are unmanaged and have no fees. It is not possible to invest in an index. Source: Bloomberg, NAREIT, Lazard ties are far more liquid than direct real estate. In addition to the raw trading liquidity, the nature of public securities provide a lower cost of trading, faster execution, and a more certain execution environment. Historically, this liquidity advantage was not as stark because of the listed market s small size, but the growth in listed company market capitalizations (Exhibit 14) has built up the liquidity to a point where investors can enter or exit most investment positions with relative ease and with less concern of moving the market. The global listed real estate markets are following the same development arc as the United States is, and are witnessing increasing overall market capitalizations and trading volumes. For other countries (both developed and emerging), the difference in cost and efficiency of acquiring real estate exposure through listed securities versus going direct is even more pronounced. In our view, the result of this large cost and efficiency advantage of listed over direct should put the growth of listed real estate internationally on a faster track than that of the United States. Exhibit 13 Real Estate Income Outpaces Inflation Globally (%) 8 6 Income Return Inflation As of 31 December 213 Aggregate inflation data is a GDP-weighted calculation adjusted for the underlying country exposure of the FTSE EPRA/NAREIT Global Real Estate Index for developed markets. The information in the above chart is for illustrative purposes only and does not represent the performance of any product managed by Lazard. Performance quoted represents past performance. Past performance is not a reliable indicator of future results. Past performance is not a reliable indicator of future results. Source: NAREIT, EPRA, IMF, Lazard Exhibit 14 US REIT Equity Market Capitalization Growth ($B) As of 31 December 213 This information is for illustrative purposes only. Data are based on the FTSE NAREIT All Equity REITs Index. Source: NAREIT Transparency and Governance While the benefits of transparency and governance extend to most public companies, and therefore is not in and of itself a large comparative benefit for listed real estate relative to other equities, transparency and governance is a substantial differentiator between public and private real estate investment alternatives. Compared to private real estate investments, listed real estate generally provides operating and portfolio-level transparency as well as strong corporate governance. The one area in which the REIT format does provide an advantage over other capital intensive sectors is in tax transparency due to the pass-through nature of a REIT s taxable income to shareholders in the form of dividends. Therefore, because the REIT is required to distribute at least 9% of its taxable income to maintain a tax-free corporate status (US REIT format), shareholders typically receive stable, consistent dividends while the company does not have to give as much

8 8 consideration to the tax impact of corporate finance or investment decisions. Especially important to tax-sensitive investors, on average 68% of REIT annual dividends qualify as ordinary taxable income, 13% as return of capital, and 19% as long-term capital gains. 6 Volatility: The Cost of Performance As mentioned, the income and credit orientation of real estate has helped smooth out annual returns, but even with that smoothing effect, the increasing volatility (as well as higher market correlations) of listed real estate securities over the last decade has been unexpected. We attribute this volatility increase to both a number of broader market factors beyond the scope of our discussion, and to real estate-specific factors such as average lower float volumes for listed real estate companies, a high percentage of the listed market s inclusion in broader market indices, and increased speed of real estate data dissemination. Exhibit 15 Risk/Return Profile of Listed Real Estate Is Comparable to Equities Annualized Return (%) Russell 2 Index S&P 5 Index FTSE NAREIT Equity DJ US Total Market Index NCREIF NPI ML Corp/Govt Index Annualized Volatility (%) For the 2 years ended 31 December 213 Performance quoted represents past performance. Past performance is not a reliable indicator of future results. The indices listed above are unmanaged and have no fees. It is not possible to invest in an index. Source: Bloomberg, NAREIT, Lazard Due to this increase in volatility, it is necessary to risk-adjust the total return performance of real estate. In the context of risk-adjusted returns, the performance of US commercial real estate falls more in line with other equity classes, but still above the risk-adjusted performance of small cap equities (Exhibit 15). For the real estate asset class, volatility should also be measured against real estate values, as defined by net asset value (NAV). Green Street Advisors, a leading research group on REIT securities, found that US REITs traded at an average 6% premium to NAV over the last 1 years, although they exhibited significant volatility around this average (Exhibit 16). This matches data from other research groups that found REITs to trade close to underlying asset values over even longer time frames. This suggests that there is a long-term, durable relationship between public and private real estate. On a short-to-medium-term basis though, there can exist a sizable disconnect between the two valuations. We believe that the short-term price-based volatility should be viewed as the cost for access to the other attributes of listed real estate. But in addition, for the knowledgeable real estate investor this short-term volatility, especially relative to private real estate values, creates trading opportunities for alpha creation. This is possible due to the fact that listed real estate values migrate to net asset value over time, and therefore over a long hold period (for a similar portfolio and capital structure) returns should be consistent between a public or private real estate investment. 7 Conclusion Investing in listed real estate securities, especially within the United States, has proven to provide sustainable and durable returns to investors that enhances an overall investment portfolio though income stability, diversification, and above-inflation income growth. Due to significant structural enhancements over direct real estate, listed real estate also provides enhanced liquidity and governance as compared to private real estate albeit with greater short- and mid-term volatility as the cost for the structural enhancements. Looking out over the next decade, in our view real estate s strong income characteristics and dif- Exhibit 16 REITs Price versus Underlying NAV Premium/Discount (%) 3 15 Average: 6% As of 3 February 214 Data are based on a REIT universe defined by Green Street Advisors. Source: Green Street Advisors

9 9 ferentiated attributes should provide a good foundation for listed real estate investments. Meanwhile, growth in global listed real estate opportunities should accelerate as emerging markets move closer toward developed-country status. Based on the variation in broad economic and real estate cycles across countries and real estate sectors, as well as the local nature of real estate ownership, we believe the combination of a top-down, cycle-aware approach and an active, bottom-up approach is necessary to evaluate listed real estate opportunities. As such, Lazard s Global Real Estate securities team seeks to identify investment situations where attractive valuations exist based on both current and future expectations of asset value, by combining projections of country and sector cycle positioning with a fundamental assessment of individual company real estate assets. About the Team The Lazard Global Real Estate Securities team believes intrinsic real estate values diverge from market prices, thereby presenting investment opportunities. The team relies on bottom-up, companyspecific research as a central guide for its investment process. However, broader market considerations and real estate trends are combined to shape the views resulting from fundamental analysis. On average, its members have 16 years of experience in real estate investments. The team joined Lazard Asset Management in 211 establishing the firm s real estate platform. Notes 1 Source: EPRA. As of 31 October Source: NAREIT, January 214 REIT Watch. 3 Source: SNL Financial. As of 31 December Source: NCREIF. As of 31 December Source: Bloomberg, Lazard. As of 31 December Source: NAREIT, January 214 REIT Watch. 7 Source: Yuuns Hansz Kennedy, Green Street Advisors, December 21. Important Information Originally published on 2 March 213. Revised and republished on 25 June 214. Opinions and estimates expressed herein are subject to change. The performance of investments in real estate and real estate related securities may be determined to a great extent by the current status of the real estate industry in general, or by other factors (such as interest rates and the availability of loan capital) that may affect the real estate industry, even if other industries would not be so affected. The risks related to investments in realty companies include, but are not limited to: adverse changes in general economic and local market conditions; adverse developments in employment; changes in supply or demand for similar or competing properties; unfavorable changes in applicable taxes, governmental regulations, and interest rates; operating or development expenses; and lack of available financing. An investment in REITs may be affected or lost due in part to the fluctuation with the value of the underlying properties of the investment. An investment in REITs may be affected or lost if the REIT fails to comply with applicable laws and regulations, including tax regulations, specifically, the failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended. This paper is for informational purposes only. It is not intended to, and does not constitute financial advice, fund management services, an offer of financial products or to enter into any contract or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation with respect to any product, security, or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. Australia: FOR WHOLESALE INVESTORS ONLY. Issued by Lazard Asset Management Pacific Co., ABN , AFS License , Level 39 Gateway, 1 Macquarie Place, Sydney NSW 2. Germany: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D-6311 Frankfurt am Main. Japan: Issued by Lazard Japan Asset Management K.K., ATT Annex 7th Floor, Akasaka, Minato-ku, Tokyo Korea: Issued by Lazard Korea Asset Management Co. Ltd., 1F Seoul Finance Center, 136 Sejongdaero, Jung-gu, Seoul, United Kingdom: FOR PROFESSIONAL INVESTORS ONLY. Issued by Lazard Asset Management Ltd., 5 Stratton Street, London W1J 8LL. Registered in England Number Authorised and regulated by the Financial Conduct Authority (FCA). Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-2 One Raffles Place Tower 1, Singapore Company Registration Number W. This document is for institutional investors or accredited investors as defined under the Securities and Futures Act, Chapter 289 of Singapore and may not be distributed to any other person. United States: Issued by Lazard Asset Management LLC, 3 Rockefeller Plaza, New York, NY LR2362