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CFA Level II Alts > Reading 41 - Publicly Traded Real Estate Securities > Flashcards

Reading 41 - Publicly Traded Real Estate Securities Flashcards

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CFA flashcards
1
Q

What are the 3 main types of publicly traded real estate securities?

**Critical Concept**

A
  1. Real Estate Investment Trusts (REIT)
  2. Real Estate Operating Companies (REOC)
  3. Residential or Commercial Mortgage backed securities (MBS)
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2
Q

What are the advantages of investing in publicly traded real estate securities?

**Critical Concept**

A

REIT & REOC

  1. Superior liquidity
  2. lower minimum investment
  3. limited volatility
  4. Access to premium properties
  5. Active professional management
  6. Protections according to publicly traded securities
  7. Greater potential for diversification

REIT only

  1. Exemption from taxation
  2. Predictable earnings
  3. High Yield
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3
Q

What are the disadvantages of investing in publicly traded real estate securities?

**Critical Concept**

A

REIT and REOC

  1. Taxes versus direct ownership.
  2. Lack of control
  3. Costs of a publicly traded corporate structure
  4. Price is determined by the stock market
  5. Structural conflicts of interest
  6. Limited potential for income growth
  7. Forced equity issuance (to maintain financial leverage, sometimes have to issue additional equity)

REIT only

  1. Lack of liquidity
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4
Q

What are the investment characteristics of REITs?

**Critical Concept**

A
  1. Exemption from corporate level taxes
  2. High dividend yield
  3. Low income volatility
  4. Secondary equity offering
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5
Q

What are the due dlligence considerations of REITs?

A
  1. Remaining lease terms
  2. Inflation Protection
  3. In-place rents vs market rents
  4. Costs to re-lease space
  5. Tenant concentration in the portfolio
  6. Tenants’ financial health
  7. New competition
  8. Balance sheet analysis
  9. Quality of management
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6
Q

What are the various subtypes of equity REITs?

A
  1. Retail or Shopping Center REITs
  2. Office REITs
  3. Residential (Multi Family) REITs
  4. Health Care REITs
  5. Industrial REITs
  6. Hotel REITs
  7. Storage REITs
  8. Diversified REITs (more common Intl)
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7
Q

What are Economic Value Determinants, Investment Characteristics and Principal Risks for Retail REITs?

A

Economic Value Determinants:

  1. Retail sales growth
  2. Job creation

Investment Characterics:

  1. Stable revenue stream over the S/T

Principal Risks:

  1. Depends on consumer spending
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8
Q

What are Economic Value Determinants, Investment Characteristics and Principal Risks for Office REITs?

A

Economic Value Determinants:

  1. New space supply vs demand
  2. Job creation

Investment Characterics:

  1. Long (5-25 yr) lease terms
  2. Stable yr to yr income

Principal Risks:

  1. Changes in office vacancy and rental rates
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9
Q

What are Economic Value Determinants, Investment Characteristics and Principal Risks for Residential REITs?

A

Economic Value Determinants:

  1. Population growth
  2. Job creation

Investment Charactersitics:

  1. One year leases
  2. Stable demand

Principal RIsks:

  1. Competition
  2. Inducements
  3. Regional economy
  4. Inflation operating costs
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10
Q

What is the Net Asset Value Per Share (NAVPS)?

**Critical Concept**

A

The amount by which assets exceed liabilities, using current market values rather than accounting book values

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11
Q

How is the capitalization rate (cap rate) calculated for use in NAVPS?

A

= Net Operating Income / Property Value

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12
Q

What does FFO stand for?

A

Funds from Operations

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13
Q

What is Funds from Operations (FFO) and how is it calculated?

**Critical Concept**

A
  • FFO adjusts reported earnings
  • Depreciation is added back under the premise that accounting depreciation often exceeds economic depreciation for real estate
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14
Q

What is Adjusted funds from Operations (AFFO) and how is it calculated?

**Critical Concept**

A
  • Begins with FFO and then subtracts non-cash rent and maintenance-type capital expenditures and leasing costs
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15
Q

What does AFFO stand for?

A

Adjusted funds from Operations

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16
Q

What are the three key factors that impact the price to FFO and price to AFFO of REITs and REOCs?

**Critical Concept**

A
  1. Expectations for growth of FFO and AFFO
  2. The level of risks inherent in the underlying real estate
  3. Risk related to the firm’s leverage and access to capital
17
Q

How do you caculate an assets Net Asset Value (NAV) and Net Asset Value Per Share (NAVPS)?

A
18
Q

How do you calculate the AFFO (Adjusted funds from operations)?

**Critical Concept**

A
19
Q

What is the difference between an UPREIT and a DOWNREIT?

A
  • UPREIT - a traditional reit.
  • DOWNREIT- may also own the land. Can create a conflict of interest when seling properties.
20
Q

Why is AFFO considered superior to FFO?

A

b/c it takes into account the capital expenditures necessary to maintain the economic income of a property portfolio.

21
Q

An analyst gathered the below figures about a REIT. Calculated it NAVPS..

NOI $115 million

Book value of properties $1,005 million

Market value of debt outstanding $505 million

Market cap rate 7%

Shares outstanding 100 million

Book value per share $5.00

A

Calculate the value of the Asset by Capitalized it:

= 115 / 0.07 = 1,642,857,000

Deduct the debt to get the NAV: = 1,642,857,000- 505,000,000 = 1,137,859,000

Divide NAV by # of shares: 1,137,859,000 / 100,000,000 = 11.38

22
Q

An analyst gathers the following information for a REIT, calculate it’s Funds from Operations….

Non-cash (straight-line) rent £207,430

Depreciation £611,900

Recurring maintenance-type capital expenditures and leasing commissions

£550,750

Adjusted funds from operations £3,320,000

AFFO per share £3.32

A

FFO = AFFO + Non-cash (straight-line) rent + Recurring maintenance-type capital expenditures and leasing commissions

= 3,320,000 + 270,430 + 550,750 = £4,078,180.

The number of shares outstanding = 3,320,000/3.32 = 1,000,000. FFO/share = 4,078,180/1,000,000 ≈ £4.08.

CFA Level II Alts (4 decks)

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