Investments In Real Estate Through Publicly Traded Securities Flashcards
What’s the difference between mortgage REIT and equity REIT?
- mortgage REIT: make or invest in loans secured by real estate
- equity REIT: own, finance, and/or develop income producing real estate
What are the 2 types of mortgage backed securities, describe them.
- residential mortgage backed securities: mortgage securities backed by residential properties
- commercial mortgage backed securities: mortgage securities backed by commercial properties
What are 3 common requirements of REITS?
- distribute 90% - 100% of taxable earnings
- invest at least 75% assets in real estate
- derive at least 75% of income from real estate rental income or interest on mortgages
What are 4 advantages of REITS & 4 disadvantages of REITS? Advantages: LTTD Disadvantages: LRRL
- advantages: liquidity, transparency, tax efficiency, diversification
- disadvantages: lack of retained earnings, regulatory costs, reduced diversification vs owning, limited in what they can own
What are 3 common approaches to valuing equity that analyst use?
- asset value estimates
- price multiple comparisons
- discounted cash flows
What are 2 measures of value analysts use, describe them.
- book value per share (BVPS): based on reported accounting values
- net asset value per share (NAVPS): based on market values for assets
Under IFRS what are 2 ways companies are allowed to value investment property?
- cost model: cost of property less accumulated depreciation and any accumulated impairment losses.
- fair value model: price at which the property could be exchanged between parties
What is the formula for NAVPS?
- net asset value per share = (market value of assets - market value of liabilities)/ number of shares
What is the formula for net operating income (NOI) for REITS?
- net operating income (NOI) = (gross rental revenue - operating costs)
- operating costs = vacancy/collection losses, insurance, taxes, utilities, and maintenance costs
What is a REITS NOI comparable too for non-real estate companies?
- comparable to earnings before interest & taxes (EBIT)
If a trailing NOI is used as a starting point what adjustments may be necessary to produce an estimate of expected NOI in the upcoming year?
- non-cash rent is subtracted
+ adjustments for full year impact of acquisitions + expected growth in cash NOI = real estate NOI (next 12 months, estimate)
What is the formula for property value and cap rate?
- property value = NOI/ cap rate
- cap rate = NOI/ property value
What are 3 commonly used ways of calculating NAV’s for REITS?
- using appraised values disclosed on REITS financial statements
- capitalizing NOI
- applying a price per square foot to a portfolio of properties
What are 3 multiple that are often used to value REITS & REOCS?
- price/funds from operation (P/FFO)
- price/adjusted funds from operations (P/AFFO)
- enterprise value/earnings before interest depreciation & amortization (EV/EBITDA)
What are the 3 important drivers of multiples FFO, AFFO, & EV/EBITDA?
- expectation for growth: higher expected growth leads to high multiple. growth can come from factors such as superior management
- risk associated with underlying properties: certain properties like hotels have more volatile cash flows than others
- risk associated with with company’s capital structures & access to capital: as leverage increases multiples decrease because greater return is demand with more risk