Investments In Real Estate Through Publicly Traded Securities Flashcards

1
Q

What’s the difference between mortgage REIT and equity REIT?

A
  • mortgage REIT: make or invest in loans secured by real estate
  • equity REIT: own, finance, and/or develop income producing real estate
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2
Q

What are the 2 types of mortgage backed securities, describe them.

A
  • residential mortgage backed securities: mortgage securities backed by residential properties
  • commercial mortgage backed securities: mortgage securities backed by commercial properties
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3
Q

What are 3 common requirements of REITS?

A
  • 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
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4
Q

What are 4 advantages of REITS & 4 disadvantages of REITS? Advantages: LTTD Disadvantages: LRRL

A
  • advantages: liquidity, transparency, tax efficiency, diversification
  • disadvantages: lack of retained earnings, regulatory costs, reduced diversification vs owning, limited in what they can own
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5
Q

What are 3 common approaches to valuing equity that analyst use?

A
  • asset value estimates
  • price multiple comparisons
  • discounted cash flows
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6
Q

What are 2 measures of value analysts use, describe them.

A
  • book value per share (BVPS): based on reported accounting values
  • net asset value per share (NAVPS): based on market values for assets
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7
Q

Under IFRS what are 2 ways companies are allowed to value investment property?

A
  • 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
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8
Q

What is the formula for NAVPS?

A
  • net asset value per share = (market value of assets - market value of liabilities)/ number of shares
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9
Q

What is the formula for net operating income (NOI) for REITS?

A
  • net operating income (NOI) = (gross rental revenue - operating costs)
  • operating costs = vacancy/collection losses, insurance, taxes, utilities, and maintenance costs
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10
Q

What is a REITS NOI comparable too for non-real estate companies?

A
  • comparable to earnings before interest & taxes (EBIT)
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11
Q

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?

A
  • non-cash rent is subtracted
    + adjustments for full year impact of acquisitions + expected growth in cash NOI = real estate NOI (next 12 months, estimate)
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12
Q

What is the formula for property value and cap rate?

A
  • property value = NOI/ cap rate
  • cap rate = NOI/ property value
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13
Q

What are 3 commonly used ways of calculating NAV’s for REITS?

A
  • using appraised values disclosed on REITS financial statements
  • capitalizing NOI
  • applying a price per square foot to a portfolio of properties
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14
Q

What are 3 multiple that are often used to value REITS & REOCS?

A
  • price/funds from operation (P/FFO)
  • price/adjusted funds from operations (P/AFFO)
  • enterprise value/earnings before interest depreciation & amortization (EV/EBITDA)
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15
Q

What are the 3 important drivers of multiples FFO, AFFO, & EV/EBITDA?

A
  • 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
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16
Q

What is the formula for funds from operations (FFO)?

A

(GAAP net income) + depreciation - gains from sale of depreciable RE + losses from sale of depreciable RE + RE impairments + write downs unrelated to depreciation = funds from operations (FFO)

17
Q

What is adjusted funds from operations (AFFO) and formula?

A
  • funds available for distribution, or cash flow that a REIT can pay out as dividends to its shareholders

Funds from operations (FFO) - noncash rent - recurring maintenance type capital expenditures - leasing costs = adjusted funds from operations (AFFO)

18
Q

What are 3 drawbacks to using P/FFO and P/AFFO?

A
  • FFO doesn’t account for necessary capital expenditures, while AFFO does it requires a lot of estimation
  • changes in accounting & one time gains or expenses can make it more difficult to calculate FFO & AFFO
  • FFO & AFFO may not capture non-income generating assets (eg. Land held for development, employ buildings) or potential to increase rents