Real Estate Investment Trusts (REITs)

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Real Estate Investment Trusts (REITs)

A REIT is an investment vehicle “Usually registered as a company” that can be traded on a stock exchange, and is primarily engaged in investing and owning real-estate assets. REITs provide investors with the option to invest in a diversified asset base, and offer a steady income stream. They invest in completed, income-generating properties, and distribute a significant portion of the earnings as dividends to investors. Historically, REITs have attracted interests from retail investors as well as from long-term investors such as pension funds and insurance companies who prefer a regular flow of income.

REITs can be publicly or privately held, and are typically classified as equity, mortgage, or hybrid REITs. REITs generally make investments by buying, managing, selling, and leasing real estate, by purchasing shares in publicly listed real property companies, or by investing in debt securities in real estate property companies. REITs receive special tax considerations and typically offer investors high yields as well as a highly liquid method of investing in real estate. Furthermore, investments in real estate through REITs have lower risks involved compared with a direct investment with a developer.

Analyst

Sultan Al Kadi

s.alkadi@aljaziracapital.com.sa +966 11 2256374 AGM - Head of Research

Abdullah Alawi

a.alawi@aljaziracapital.com.sa +966 11 2256250

Figure 1: Typical Structure of REITs

Source: OECD, AlJazira Capital

Typically, a REIT’s management team collects funds from investors through an offer of units. The management invests the pooled funds in income-generating real estate assets, which usually provide stable rents from long-term leases. REITs distribute cash flows periodically in the form of dividends or rental income to investors. REITs also appoint a property manager to manage properties under the fund in return for management fees, while the trustee controls the fund’s property besides monitoring operations to ensure that unit holders’ interests are upheld.

Unit Holders

long term investors Institutional Investors Retail Investors

REIT Managers REIT (Fund) Trustees

Property Management

Company Authorized Investments (e.g. Properties)

Investment in REITs Dividends and other distributions

Management free Trustee`s “Fee”

Sub - Contract

Management Services

Ownership of assets

Property Management Services

Property Management free

Rental (and/or other) income Acts on behalf of Unit Holders

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Some of the major characteristics of REITS are:

• Convenient entry and exit: Since REITS are listed on an exchange, investors can make short-term bets on commercial property markets and, to an extent, transform investments in commercial properties as liquid.

• Lower ticket size of investment: REITs allow even small investors to purchase commercial assets; this is particularly beneficial for individual investors who prefer to have exposure to the real estate sector in their investment portfolios.

• Transparency: Many countries have a regulating body which has strict framework and guidelines for REITS under which they operate, and is also being adopted by more and more countries, with evident interest in REITs.

• Regular income and capital gains: A REIT is required to distribute a significant portion of its net income to avoid taxes. In addition to regular income, REIT investors also benefit from appreciation in the value of the underlying property.

Sector

REITs specialize on the basis of property invested in, with about two-thirds of the trusts investing in offices, apartments,

shopping centers, regional malls, and industrial facilities, and the rest divided among hotels, self-storage facilities, and healthcare properties. MSCI Global REIT Indexes classify the REITs industry into seven sub-industries, according to the Global Industry Classification Standard. These seven REITs sub-industries include the following property types:

• Diversified REITs: Companies or trusts with investment across two or more property types

• Industrial REITs: Companies or trusts undertaking acquisition, development, ownership, leasing, management, and operation activities of industrial properties (includes companies operating industrial warehouses and distribution properties)

• Mortgage REITs: Companies or trusts that service, originate, purchase and/or securitize residential, and/or commercial mortgage loans (includes trusts that invest in mortgage-backed securities and other mortgage related assets)

• Office REITs: Companies or trusts engaged in the acquisition, development, ownership, leasing, management, and operation of office properties

• Residential REITs: Companies or trusts engaged in the acquisition, development, ownership, leasing, management, and operation of residential properties including multifamily homes, apartments, manufactured homes, and student housing properties

• Retail REITs: Companies or trusts engaged in the acquisition, development, ownership, leasing, management, and operation of shopping malls, outlet malls, and neighborhood and community shopping centers “strip malls”.

• Specialized REITs: Companies or trusts engaged in the acquisition, development, ownership, leasing, management, and operation of properties not classified elsewhere (includes trusts that operate and invest in healthcare, leisure, hotel/resort, and storage properties; also includes REITs that do not generate a majority of their revenues and income from real estate rental and leasing operations)

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REITs can be classified based on closed-end and open-end characteristics, with most countries (such as the US, France, Australia, Singapore) focusing on closed-end REITs. The major distinctions between the two types of REITs are based on the following factors:

Parameter Open-end REITs Closed-end REITs

No. of shares

• Do not have fixed number of shares

• Can issue new shares and redeem shares at any time

• New shares are created once the investor invests and the money is added to the investment pool

• When investors sell their shares, corresponding shares are dissolved and the money in the investment pool decreases by the value of the shares sold

• Have fixed number of shares

• Raise funds similar to companies, through an Initial Public Offering (IPO)

• Shares are issued to the public only once, and the issue of additional shares can take place only if current shareholders approve it, which would dilute the stock holding

Pricing

• Share prices are based on REITs’ net asset value (NAV)

• Share values and NAV are calculated once per day after the stock market is closed. NAV is calculated by totaling all assets held by the REIT, reducing liabilities, and then dividing this total by the number of shares owned by investors

• For buying an open-end REIT, cost per share is determined by the NAV calculated the previous day, while selling price is determined at the close of the day

• Share prices are based on the amount investors are willing to pay for them at any given time, similar to a stock

• Share prices can change throughout the trading day

Redemption

• Can be redeemed anytime on the investor’s request; this could lead to situations where redemption might exceed sale of shares of the REIT in a declining real estate market. Consequently, the trust might have to sell its assets to pay off the redemption

• Do not provide investors any option for redemption over the fund duration

• Can be traded in the open market

Acceptance

• Redemption structure does not fit in with the illiquid nature of the underlying real estate assets, hence, not very popular

• Overcomes the redemption problem with open-end REITs, and is more widely accepted by investors globally

Management Structures

There are two generally distinct REIT management structures, internal and external. Internally managed REITS are more prevalent for large REITs. In this structure the REIT is managed with its own employees and office. In this scenario the interest of the shareholders and management are aligned.

In the external structure, a management firm is appointed for a certain set of incentives. Management in this scenario receives a flat rate fee along with a performance fee for managing the REIT’s portfolio. A conflict of interest often takes place in externally managed REITs where the flat fee is based on the size of assets under management leading to an incentive for management to take on further acquisitions. This ultimately leads to a conflict of interest with existing shareholders.

Islamic REITs (iREIT)

Operating an Islamic REIT requires management to strictly undertake sharia compliant activities in its operations. The first set of guidelines was issued by the SC in Malaysia, it includes the utilization of real estate assets and the financial facet of operation. The Malaysian Islamic guidelines for REITs require income to be derived from permissible activities under sharia and that income from non-permissible activities do not exceed 20%. The Malaysian guidelines show a level of tolerance towards non-sharia complaint activities undertaken by commercial and other tenants. The guidelines also require that all forms of investment, financing, and insurance comply with sharia principles.

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Strong growth potential in the Islamic REIT sector

Islamic REITs are mandated to follow the Shariah principles for income earned and fund management of assets. In 2010, Singapore launched “Sabana REIT,” the world’s first Islamic trust, on the Singapore Exchange Securities Trading Limited (current market cap: about USD 586mn); Sabana REIT is now the world’s largest listed Islamic REIT by total assets. Recently, other countries, including Malaysia, Kuwait, Bahrain, and the UAE, introduced Islamic REITs in their respective financial markets.

Kuwait was the first to launch an Islamic REIT (Al Mahrab Tower REIT) in the GCC region in 2007; the trust has an estimated market cap of USD 100mn. In 2009, Bahrain followed suit and launched “Inovest REIT,” which has an estimated market cap of USD 80mn. Furthermore, in 2010, the UAE saw the launch of “Emirates REIT,” its first Shariah-compliant REIT, which had its IPO listing in April 2014. The growing awareness of Shariah-compliant products provides significant opportunities, and is expected to drive the demand for Islamic REITs.

Current Trend

REITs were first launched in the US in September 1960. Currently, there are more than 34 countries with established REIT regimes. REITs have proven their resilience as an inflation-protected asset, and provided sound returns compared with the overall stock market, especially in developed markets. According to the National Association of Real Estate Investment Trusts (NAREIT), REITs provided a return of 8.6% YTD until the beginning of May 2014 as against the S&P 500’s 2% return in the same period. Furthermore, during the real estate crash of 2008–09, REITs delivered a return of 28%, which compared favorably with the 21% return from S&P 500 during the same period.

Since its launch, REITs have been gaining prominence as an alternative investment to bonds, which are sensitive to interest-rate risks. Globally, the market capitalization of REITs has increased to more than USD 1tn from USD 300bn in 2003, as of September 2013. The US dominates the global REIT market, accounting for about a 57.7% share in 2013.

REITs have been gaining popularity in GCC countries, as well, as is evident from the successful IPO listing of the first REIT in the region – Emirates REIT – in April 2014 on NASDAQ Dubai. Emirates REIT’s IPO was 3.5 times oversubscribed, driven by high interest from institutional investors, both in the Gulf and in the UK. The REIT has raised approximately USD 201mn, which it intends to use for future acquisition opportunities and for purchasing a significant number of properties in 2014. The successful listing indicates the region’s ability to provide an efficient platform to raise funds for investors seeking high yields and access to a new type of asset class.

Regulatory Framework

REITs have not been successfully initiated into the GCC capital markets yet due to the lack of regulations in many GCC countries, along with lack of investor awareness of the asset class. With low or no taxes, the basic incentive of allowing a REIT to not pay taxes (as they pay out 80–90% of their income as dividends) is not applicable in the region. Furthermore, many GCC nations have limitations on foreign ownership of real estate, inhibiting the development and growth opportunities of these trusts.

Saudi Arabia, the largest capital market in the GCC region, does not have any listed REITs yet. Moreover, the Kingdom has no regulations in place for such structures. There is a legal structure for the Real Estate Investment Fund, launched in July 2006 by the Saudi Capital Market Authority (CMA), but they do not prescribe to REITs. However, the CMA is looking for ways to increase the diversity of its capital market offerings, though the inclusion of tradable rights, REITs, new classes of ETFs, warrants, and cross listing, and is looking to develop regulations in the near future.

Within the GCC region, only Bahrain and Dubai (UAE) have legislations governing REITs, with the introduction of the DIFC Investment Trust Law in 2006 and Bahrain Financial Trusts Law in 2009. The DIFC took the lead in the UAE in terms of promoting the development of REITs by the passage of the Investment Trust Law. As the financial regulator for the DIFC, the Dubai Financial Services Authority (DFSA) is responsible for the development and administration of the laws, regulations, and rules relating to the regulatory framework in the DIFC.

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GCC Regulatory Example:

The DFSA (Dubai Financial services Authority) issued the regulatory framework for fund management which includes the framework used for REITs registered and listed in Dubai. In this framework, REITs are required to be “closed-ended” as well as being publicly traded. The regulation restricts the fund vehicle to either be an investment company or an investment trust. The REIT is required to distribute 80% of audited net income to unit holders. REIT’s leverage is restricted at 70% of total assets value and are not allowed to invest more than 30% of total assets in ‘property under development’.

The only operating REIT under DFSA regulation is Emirates REIT, which is joint venture between Eiffel management and Dubai Islamic Bank (DIB), Managed by Emirates REIT Management. 49% of the shares are free floating on Nasdaq Dubai while the rest are owned by DIB, Vintage Bullion, Dubai Properties, and founding investors. Emirates REITs is the only publicly traded REIT in the GCC.

Parameter Dubai Regulation USA Regulation

Year of Law Formation 2006 1960

Publicly Listed REITs 1 163

Legal Form

Public Property Fund that is either an investment trust or an investment company (same as other public property funds)

Any taxable legal US entity (corporation, partnership, business trust, limited liability, and company)

Shareholder

Requirements/Listing

Detailed information not yet available for share/ unit holders

• Listing mandatory; regulations for private REITs have not been instituted

• At least 100 shareholders

• Five or fewer individuals or foundations may not hold more than 50% of the shares

• No restriction on foreign shareholders

• Listing not mandatory

Asset Restrictions

• REITs can only invest up to 40% of their total assets in assets other than real property

• REITs with 100% foreign share ownership are restricted to certain designated areas in Dubai

• REITs must derive income from at least two types of tenants; each type of tenant or lessee must produce 25% of the total income

• At least 75% of assets must be real estate, government securities, or cash

• Cannot own more than 10% of another corporation’s stock, other than in another REIT or a taxable REIT subsidiary

• Cannot own more than 25% of assets in securities of one or more taxable REIT subsidiaries

Leverage Limited to 70% of total net asset value No statutory or regulatory leverage limits for US

REITs

Profit Distribution

• Annually distribute at least 80% of annual net income

• Capital gains included in net income

• Annually distribute at least 90% of taxable ordinary income

• Capital gains not required to be distributed

Tax Treatment REITs’ rental income is not taxable

Retained income is subject to corporate income tax, but depreciation deductions are made in calculating taxable income

Registration Duties • Transfer fee of 1.5–7%

• Land registration fees

Real estate acquisition is usually subject to transfer taxes in most states

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REITs in the GCC region

Interest in the region has increased, with investors looking to diversify their geographical investment footprint. While the region’s REIT market is still in a nascent stage, the steadily improving real estate sector, along with the improvement in investor sentiment and growing awareness for the REIT investment structure, is likely to spur demand for REITs.

Outlook for REITs in the GCC region

There is potential for REITs in the GCC region, primarily in the UAE, Qatar, and Kuwait, given the high proportion of rich households. Saudi Arabia, in particular, holds great potential for REITs as the Kingdom’s real estate sector is still growing, driven by the shortage of residential units as well as a growing young population and recent approval of the mortgage law. On the other hand, countries such as Qatar, UAE and Bahrain depend on expatriates to feed real estate demand, instead of being driven by local demand. We have explained how REITs could benefit the average investor in terms of diversifying his or her portfolio, protection against inflation; have a stream of income, an affordable and liquid opportunity to invest in real estate, and an investment with lower risk given that the development phase is not as prevalent for REITs as are for regular Real Estate funds. A different angle to look at the outlook for REITs can be seen from the perspective of developers. Developers are limited in terms of financing options and structure when REITs are not an option in the market. Developers are also limited in the type and duration of projects.

From a developer’s perspective, it is difficult to get financing for a project that is based on leasable assets for the reason that investors would prefer having their total return on investment at an earlier time as well as a higher lump sum return on investment. As a result, developers are “limited” with projects that are “built to sale” rather than “built to lease”. For the same reason, they are also limited in terms of time frame. Ultimately, having the option of setting up a REIT relatively lifts the burden and concern of being able to finance large and leasable projects from the developer’s shoulders as opposed to raising funds through other structures. Examining the bigger picture indicates a positive outlook for both investors and developers, financial institutions on the other hand will also have an opportunity with the release of REITs as an investment product. The introduction of REITs is associated with real estate flourishing as an industry with large amounts of liquidity being channeled to real estate through REITs.

Another added advantage that REITs bring into the real estate market is the added transparency it brings through an eventual higher level of investment in a public real estate investment tool like REITs. The higher level of transparency comes from the transparency compliance requirements that REITs have to follow as opposed to holding these investment privately.

Mortgage REITs Snapshot:

Mortgage REITs present a unique opportunity in Saudi Arabia, the recent mortgage legislation in the kingdom promises a large mortgage market open for financial institutions to exploit. Mortgage REITs deliver substantial returns in stable and healthy markets. Mortgage REITs have different management and cash flow structures, with less capital expenditure than other REITs and less time for cash flows to “start rolling in”

The most common approach mortgage REITs operate is by making returns through arbitrage. Mortgage REITs using this approach make returns by acquiring securitized mortgages, or mortgage backed securities, and earn the spread. REITs usually acquire these securities through leverage and hold the mortgage backed securities as assets. Hybrid REITs use the same approach as mortgage REITs for acquiring income generating assets.

Another common approach mortgage REITs take is by originating, servicing, and acquiring mortgage loans. However, this approach requires the REIT to start a TRS (Taxable REIT Subsidiary) in order to service the loans in the US. This requirement is due to the regulatory framework that have restrictions on the type and percentage of certain income generating activities and services. It is worth noting that these restrictions are part of the US regulatory framework, regulations regarding restricted REIT activities and services differ from other European and Asian frameworks.

Name Location Manager Year of Inception Size Listing

Arabian REIT Cayman HSBC Mid East 2006 USD 200mn No

Al Mahrab Tower REIT Kuwait Munshaat RE Co. 2007 USD 100mn No

Inovest REIT Bahrain Inovest 2009 USD 80mn No

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As a starting point, looking at NAV (Net Asset Value) for a REIT will give a preliminary picture of how the REIT is valued. Like regular funds and ETFs, assessing the market value of assets and liabilities of REITs is the first step in the valuation process and should be done thoroughly to avoid NAV price distortions and give a fair value of the units, where NAV represents an estimated intrinsic value of each unit. Units can be traded either on a premium or a discount to NAV.

The valuation process goes a step further for REITs compared to regular or other funds. The accounting treatment for depreciation is different, given that depreciation is a non-cash expense and that real estate in general appreciate in value over time, depreciation is added back to net income to generate FFO (Funds from Operations) which is then used as an indicator of operational performance. AFFO (Adjusted FFO) takes it a step further by including capital expenditure in the calculation. However, there is no consensus among analysts and personnel responsible for of disclosure documents on a specific way for finding AFFO. Taking capital expenditure into consideration takes AFFO closer to being a measure of available funds for distribution than FFO.

Accumulated depreciation in REITs tend to be quite large and given that the most important metric to consider is how much a given REIT can distribute, taking depreciation into consideration gives a distorted view of available funds for distribution. Because of the large accumulated depreciation certain valuation metrics are not commonly used in the valuation process. P/E and P/BV, for instance, include depreciation and as a result are not as widely used as a valuation metrics.

Given that interest expense is a cash charge that would have an effect on available funds to distribute as dividends, valuation metrics like EBITDA and EBIT are not suitable for REITs and do not give a complete portrait of how the trust is performing. It is important to note that the bottom line in REIT valuation is how much the targeted REIT can distribute to unit holders, using FFO give an indication on a REIT’s operational performance rather than its ability to distribute funds in a given period of time. Other multiples are used for that purpose.

Alternative valuation multiples include P/FFO and P/AFFO which are used for publicly traded REITs instead of P/E ratio as a valuation multiple. P/FFO can be used as a valuation metric by dividing FFO over shares outstanding before multiplying it by P/FFO multiple. AFFO per diluted share is an alternative multiple used to assess the REITs ability to distribute funds to unit holders.

Another multiple used to analyze REITs is FAD (Funds available for Distribution) which shows the bottom line on how much is available for distribution. FAD, also known as CAD (Cash available for Distribution) is basically a slight adjustment on AFFO where non-recurring expenditures are also subtracted from FFO.

These multiples have different average values depending on which sector or sub sector the REIT operates in. It is useful to compare multiples and yields from similar sectors in order to get a clearer picture of how the trust in performing. REIT valuation metrics including FFO and FAD are usually reported on a per share basis and are used by analysts as an alternative to EPS.

It is worth noting that these multiples are considered non GAAP financial measures, REITs are not required to disclose them under GAAP. However, the SEC is moving towards asking REITs to disclose different multiples that are deemed important for REIT valuation including the multiples mentioned above along with FFO.

FFO:

Net income

+ Depreciation and Amortization Expense + Deferred Tax Expense

-Gain (Loss) from sales of property

AFFO:

FFO

- Non-Cash Rent Adjustments - Recurring Capital Expenditure

FAD:

AFFO

- Non-recurring capital expenditure

Source: NAREIT

RIET Returns:

Given the nature and structure of real estate assets, REITs returns are a function of the assets held. Before launching a REIT, it is important to examine the market returns. The returns are mostly based on net operating income, cap rates, and the regulatory framework guiding the market. It is worth noting that different REIT sectors have different average returns, growth opportunities, cap rates, and total asset value, hence trade at different premiums.

NOI (Net Operating Income) and cap rates for REITs are a good measure of earnings and expected earnings for REITs. NOI for REIT is what EBIDTA is for a company in terms of measuring earnings; NOI includes income generated from operating activities and takes out operating expenses. Cap rates on the other hand are a measure of yield and are used to express property value as well. A property’s cap rate is NOI generated by the property divided by the property’s value. At a company level or REIT level, the cap rate, similarly, is the total NOI generated by the property portfolio divided by total value of properties held.

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A common simplified way to determine NAV is to use NOI and Cap rate as an expression of value. In this valuation method, NOI is divided by cap rate to get total market value of held assets (Property Value) we then add the value of other tangible assets and subtract liabilities to find net asset value. We then divide the total by total number of shares to determine NAV per share (NAVPS). Cap rate is generally based on sector cap rate or a more specific area sector cap rates. It is important to note that there is a subjective nature in this calculation.

Historical Performance of REITs

REITs have performed somewhat similar to the market when compared to the Dow Jones Industrial Average and S&P indices in the five year period from 2009 to 2013. FTSE US REIT index data show that over the period from January 2009 to December 2013, REITs witnessed compound total returns1 _{of 16.68% compared to Dow Jones Industrial Average index returns of 16.74% and S&P} 500 index return of 17.94%.

FTSE NAREIT Equity REITs index performed exceptionally well in 2014 with an YTD (as of April 2014) of 13.62% compared to 0.72% total return by the Dow Jones Industrial Average index.

Further breakdown reveals that equity REITs performed better than mortgage REITs over the same five year period. Mortgage REITs returned 11.86% compared to Equity REITs returns of 16.90% in the same period of time. For YTD (as of April 2014) performance, Equity and mortgage REITs had almost similar returns with 13.62% and 13.23% respectively.

NOI (Net Operating Income):

Cap Rate:

Property Value:

1Compounded on a monthly basis

Chart: US Mortgage REITs Performance

Source: NAREIT, FTSE, *2014 Figures are as of May 2014

Mortgage REITs had mixed performances during 2013, where commercial financing REITs significantly outperformed home financing REITs with 2013 returns of 41.77% and -12.69% respectively. YTD returns show a different picture, Home financing REITs returned 15.36% compared to 8.16% for commercial financing.

Observing different sectors shows that self-storage and Healthcare REITs were the top performers on an YTD basis, with returns of 18.83% and 16.84% respectively followed by residential REITs with returns equivalent to 16.24%. Breaking down Residential REITs reveals that Apartment REITs performed better than manufactured homes on an YTD basis. However, it is important to note that timing plays a role in returns for manufactured home and that from a general perspective, manufactured home REITs have higher dividend yields. - 2 0 -10 0 10 20 30 4 0 50 2013 2014

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Sector Number of

constituents

Total Return (%) Dividend

Yield (%)

Market Capitalization1

2013 May 2014: YTD Equity Implied

FTSE NAREIT All Equity REITs 146 2.86 2.91 15.02 3.49 722,746,503 752,008,536

FTSE NAREIT Equity REITs 140 2.47 2.41 16.36 3.76 627,674,074 656,936,106

Industrial/Office 33 5.97 2.64 15.71 3.30 123,091,221 128,735,914 Industrial 8 7.40 1.94 12.58 3.26 29,536,373 30,124,247 Office 19 5.57 3.03 17.05 3.06 76,963,526 81,155,615 Mixed 6 5.56 2.14 15.40 4.47 16,591,323 17,456,052 Retail 34 1.86 1.94 14.81 3.75 182,264,868 195,531,935 Shopping Centers 19 4.99 1.49 14.43 3.58 56,908,351 58,108,278 Regional Malls 9 -0.98 2.97 16.46 3.09 97,505,001 109,413,347 Free Standing 6 7.29 -0.45 10.46 6.12 27,851,517 28,010,310 Residential 16 -5.36 3.87 20.73 3.46 93,424,988 96,732,882 Apartments 13 -6.20 3.80 20.83 3.43 87,658,746 90,531,057 Manufactured Homes 3 10.46 5.03 19.12 3.94 5,766,242 6,201,825 Diversified 23 4.33 4.44 13.92 4.29 61,429,776 66,849,889 Lodging/Resorts 16 27.18 2.51 13.24 3.11 46,227,452 46,767,672 Health Care 14 -7.06 1.63 18.74 5.03 80,842,535 81,600,916 Self Storage 4 9.49 -1.30 17.28 3.21 40,393,233 40,716,898 Timber 4 7.86 5.53 2.42 3.33 33,889,085 33,889,085 Infrastructure 2 4.80 6.55 10.66 1.02 61,183,344 61,183,344

FTSE NAREIT Mortgage REITs 35 -1.96 2.38 15.93 9.55 69,283,500 69,483,083

Home Financing 24 -12.69 2.27 17.98 10.58 49,780,894 49,821,413

Commercial Financing 11 41.77 2.65 11.03 6.95 19,502,605 19,661,670

Source: FTSETM, NAREIT®. Notes: 1_{Implied market capitalization is calculated as common shares outstanding plus operating partnership units, multiplied by share price. Data presented in thousands of dollars.}

Table: Performance Breakdown By Sector

From a general perspective, REITs had a few volatile years ahead of 2008, outperforming the market in the years before 2013 and overwhelmingly underperformed compared to the market in 2013 where the FTSE NAREIT ALL REITs index rose 3.2% compared to 32.4% for the S&P 500.

An important factor to consider in this comparison and in REIT investment (diversification and risk) decision making is that REITs have relatively low correlation with the S&P 500 index and stocks in general. REITs have been used as an investment tool to protect against inflation and have consistently outperformed inflation in the last 20 years with the exception of two years.

Chart: US REITS Comparative Performance

Source: NAREIT *Comparison is based on monthly compounded returns ** All REITs under the FTSE NAREIT Index

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00

1-Year 3-Year 5-Year 10-Year

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AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business.

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3. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months.

4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.

The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.

+966 11 2256115

t.nazar@aljaziracapital.com.sa +966 11 2256046s.alquati@aljaziracapital.com.sa +966 11 2256248j.aljabran@aljaziracapital.com.sa

General manager - brokerage services and sales

Ala’a Al-Yousef

+966 11 2256000

a.yousef@aljaziracapital.com.sa

AGM-Head of international and institutional brokerage

Luay Jawad Al-Motawa

+966 11 2256277

lalmutawa@aljaziracapital.com.sa

AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage

Abdullah Q. Al-Misbani

+966 12 6618400

a.almisbahi@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers

Central Region

Sultan Ibrahim AL-Mutawa

+966 11 2256364

s.almutawa@aljaziracapital.com.sa

AGM-Head of Qassim & Eastern Province

Abdullah Al-Rahit

+966 16 3617547

aalrahit@aljaziracapital.com.sa

AGM - Head of Institutional Brokerage

Samer Al- Joauni

+966 1 225 6352