Powerpoint Class 8 Flashcards
Real Estate Investment Trusts (REITs)
Indirect Investments, publicly traded real estate securities
REITs can be described as mutual funds for investing in RE
benefits of REITs
Diversification benefit
Liquidity benefit
Types of REITs
Equity REITs (Equity)
Mortgage REITs (Debt)
Equity REITs (Equity)
Own commercial real estate and derive revenues primarily from rents
Mortgage REITs (Debt)
Invest in mortgage or MBS and derive revenues primarily from interest payments
REITs not taxed at corporate level if they satisfy which set of restrictive conditions on an ongoing basis?
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
U.S. REITs vs Canadian REITs
U.S. REITs
are corporations
Minimum distribution percentage is 90% for U.S. REITs
Usually pay quarterly dividends
U.S. REITs vs Canadian REITs
Canadian REITs
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%
REITs vs Real Estate Operating Companies (REOCs)
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
REIT-specific advantages
Exemption from taxation
Predictable earnings
High yield due to high income payout ratio
REIT-specific disadvantages
Lack of flexibility
–> REITs are prevented from making certain kinds of investments and from retaining most of their income
Types of REITs
Equity REITs
Mortgage REITs
Hybrid REITs
Equity REITs
Actively managed
Own income-producing (i.e., rent payments) real estate
Improve existing properties and purchase additional properties
Mortgage REITs
Own mortgages
Own mortgage-securities or loans that are secured by real estate
Hybrid REITs
combination of Equity REITs and Mortgage RETs
Subtypes of Equity REITs
Industrial/Office
Retail
Residential (Multi-Family)
Hotel
Health Care
Diversified
Subtypes of Equity REITs
Industrial/Office
long lease term
stable year-to-year income
Subtypes of Equity REITs
Retail
stable revenue stream over the short term (3-5 yrs)
Subtypes of Equity REITs
Residential (Multi-Family)
one-year lease
stable demand
Subtypes of Equity REITs
Hotel
non-stable income
cyclical
Health Care
REITs lease facilities to health care providers
stable income
UPREITs
Partners in an existing partnerships & a newly-formed REIT become partners in a new LP termed the “operating partnership” (OP)
in an UPREIT, what do owners transferring LP interests into OP receive?
receive units in OP w/o triggering a taxable sale
–> If they received REIT stock or cash, it would trigger a taxable gain
in an UPREIT, what do recipients of OP units receive?
distributions from OP
–> These “dividends” are equal to dividends paid to REIT shareholders
in an UPREIT, who is the general partner & majority owner of OP Units?
REIT
IN an UPREIT, who are the Limited Partners?
The property contributers
Measuring of REITs Income: Funds from Operations (FFO)
REIT-level cash flow
Cash flow available to the REIT for distributions (dividends) to shareholders
REIT-level cash flow
measures REITs operating performance
FFO formula
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
Valuing REITs as Investment: formulas
Gordon Dividend Discount Model (DDM)
Income Multiple (Price-to-FFO)
Net Asset Value (NAV) per share
Gordon Dividend Discount Model (DDM)
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
Valuing REITs as Investments – Example Income Multiple Approach
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
Valuing REITs as Investments – Example Net Asset Value Approach
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
what can we tell from NAV approach
Net asset value is an indicate of a REIT’s assets to a buyer in the private market
why do REITs often trade at premiums or discounts to their NAV?
because of how the market views the management and its ability to identify good investment and development opportunities in the future
