Powerpoint Class 8

Question 1

Real Estate Investment Trusts (REITs)

Answer 1

Indirect Investments, publicly traded real estate securities

REITs can be described as mutual funds for investing in RE

Question 2

benefits of REITs

Answer 2

Diversification benefit

Liquidity benefit

Question 3

Types of REITs

Answer 3

Equity REITs (Equity)

Mortgage REITs (Debt)

Question 4

Equity REITs (Equity)

Answer 4

Own commercial real estate and derive revenues primarily from rents

Question 5

Mortgage REITs (Debt)

Answer 5

Invest in mortgage or MBS and derive revenues primarily from interest payments

Question 6

REITs not taxed at corporate level if they satisfy which set of restrictive conditions on an ongoing basis?

Answer 6

At least 100 shareholders

75% of assets must be RE, cash, or government securities

75% of gross income must come from RE assets

90% of REIT taxable income must be paid out in dividends each year

Question 7

U.S. REITs vs Canadian REITs

U.S. REITs

Answer 7

are corporations

Minimum distribution percentage is 90% for U.S. REITs

Usually pay quarterly dividends

Question 8

U.S. REITs vs Canadian REITs

Canadian REITs

Answer 8

Canadian REITs are unincorporated investment trusts

Minimum distribution percentage is 100% for Canadian REITs

Usually pay monthly dividends

The Canadian government limits foreign ownership of REITs to 49%

Question 9

REITs vs Real Estate Operating Companies (REOCs)

Answer 9

REOCs are not tax-advantaged, they are ordinary corporations that own real estate

Firms intend to develop and sell real estate rather than generating cash flow from rental payments

Question 10

REIT-specific advantages

Answer 10

Exemption from taxation

Predictable earnings

High yield due to high income payout ratio

Question 11

REIT-specific disadvantages

Answer 11

Lack of flexibility

–> REITs are prevented from making certain kinds of investments and from retaining most of their income

Question 12

Types of REITs

Answer 12

Equity REITs

Mortgage REITs

Hybrid REITs

Question 13

Equity REITs

Answer 13

Actively managed

Own income-producing (i.e., rent payments) real estate

Improve existing properties and purchase additional properties

Question 14

Mortgage REITs

Answer 14

Own mortgages

Own mortgage-securities or loans that are secured by real estate

Question 15

Hybrid REITs

Answer 15

combination of Equity REITs and Mortgage RETs

Question 16

Subtypes of Equity REITs

Answer 16

Industrial/Office

Retail

Residential (Multi-Family)

Hotel

Health Care

Diversified

Question 17

Subtypes of Equity REITs

Industrial/Office

Answer 17

long lease term

stable year-to-year income

Question 18

Subtypes of Equity REITs

Retail

Answer 18

stable revenue stream over the short term (3-5 yrs)

Question 19

Subtypes of Equity REITs

Residential (Multi-Family)

Answer 19

one-year lease

stable demand

Question 20

Subtypes of Equity REITs

Hotel

Answer 20

non-stable income

cyclical

Question 21

Health Care

Answer 21

REITs lease facilities to health care providers

stable income

Question 22

UPREITs

Answer 22

Partners in an existing partnerships & a newly-formed REIT become partners in a new LP termed the “operating partnership” (OP)

Question 23

in an UPREIT, what do owners transferring LP interests into OP receive?

Answer 23

receive units in OP w/o triggering a taxable sale

–> If they received REIT stock or cash, it would trigger a taxable gain

Question 24

in an UPREIT, what do recipients of OP units receive?

Answer 24

distributions from OP

–> These “dividends” are equal to dividends paid to REIT shareholders

Question 25

in an UPREIT, who is the general partner & majority owner of OP Units?

Answer 25

REIT

Question 26

IN an UPREIT, who are the Limited Partners?

Answer 26

The property contributers

Question 27

Measuring of REITs Income: Funds from Operations (FFO)

Answer 27

REIT-level cash flow

Cash flow available to the REIT for distributions (dividends) to shareholders

Question 28

REIT-level cash flow

Answer 28

measures REITs operating performance

Question 29

FFO formula

Answer 29

Net income
- gains/losses from sales of property
\+ Depreciation (real property) 
\+ Amortization of leasing expenses 
\+ Amortization of tenant improvements
-  Gaines/losses from infrequent & unusual events

= FFO

Question 30

Valuing REITs as Investment: formulas

Answer 30

Gordon Dividend Discount Model (DDM)

Income Multiple (Price-to-FFO)

Net Asset Value (NAV) per share

Question 31

Gordon Dividend Discount Model (DDM)

Answer 31

PV last year = D1 / K - g

the calculate all the PVs of dividends we will receive all the way until the last year

That gives us the total PV of Share price

Question 32

Valuing REITs as Investments – Example Income Multiple Approach

Answer 32

Funds from operations (FFO) $70 million
Shares outstanding 10 million
FFO/share = $70 million / 10 million = $7/share
Office subsector average P/FFO multiple 10

Value of REIT per share = $7/share ×10 = $70/share

Question 33

Valuing REITs as Investments – Example Net Asset Value Approach

Answer 33

Estimated cash NOI $80
Assumed cap rate 8%

Estimated value of operating real estate $1,000
Plus: Cash 65
Accounts receivable 35
100
Less: Debt and other liabilities (400)

Net asset value $700
Shares outstanding 10 million
NAV/share $70/share

Value of REIT per share = $70/share

Question 34

what can we tell from NAV approach

Answer 34

Net asset value is an indicate of a REIT’s assets to a buyer in the private market

Question 35

why do REITs often trade at premiums or discounts to their NAV?

Answer 35

because of how the market views the management and its ability to identify good investment and development opportunities in the future