Real Estate Flashcards
What are the main sources of revenue for a REIT?
Rental Income: primary source of REIT income
Ancillary Income (i.e.: phone, cable, water, electricity, gas, etc.)
Ballpark a cap rate for New York City office
Go to CBRE or JLL market report.
How much do REITs have to pay out in dividends in each year?
90% of Income
What is NOI? How do you calculate NOI?
Rental Income + Ancillary Income - Real Estate Expenses
Why do you look at NOI vs. NI?
To determine how profitable property is on its own because depreciation, interest expense, taxes, etc. can affect profitability
What is AFFO?
AFFO = FFO + nonrecurring items - CapEx
Similar to FFO, but adjusts for recurring Maintenance CapEx, the amortization of lease intangibles, the straight-lining of rent, and other non-cash items
What is Funds From Operations (FFO)? Why do you use it? What is a relevant multiple?
Trying to arrive at CFO
FFO = Net Income + D&A - Gains + Losses
Use FFO, instead of Net Income, because massive depreciation and constant gains and losses on property sales distorts net income figures
Equity Value / FFO
What are some methods you would use to value a REIT?
NAV
- RE has efficient markets (relatively liquid and transparent private markets) from which to draw valuations/FMV of assets (i.e.: can compare your assets to properties that have recently sold, etc.)
DCF
DDM
Multiples (i.e.: Equity Value / FFO, Equity Value / AFFO, etc.)
Which properties would have a higher or lower cap rate?
What is a REIT?
Real Estate Investment Trust
Acquire, Develop, Operate and Dispose properties and continually raise debt and equity to fund these activities. Similar to PE firms, but for properties (vs. companies).
Can be public or private and invest in all property types
Given a cap rate and NOI, calculate property value.
NOI / Cap Rate = Property Value
Talk about REIT structures. What is an UPREIT? DownREIT?
Both UPREITs and DownREITs allow investors to defer capital gain taxes on sale of appreciated properties
Umbrella Partnerships (UPREITS): allow investors to transfer assets into a REIT while deferring the taxable event. Assets are then owned by an operating partnership (OP) and owners receive OP units. After holding period, OP units are convertible into REIT shares. Once converted, capital gains taxes kick in.
Benefits: Defer taxes, increased liquidity
Cons: COI between OP unit holders and management (i.e.: wanting to dispose of assets, etc.)
DownREIT: Goal is the same as the UPREIT (defer taxes); Multiple OP for each property
What are tenant receivables?
TBD
What are tenant improvements?
TBD
What is a leasing commission?
TBD
What is straight-line rent?
TBD
What are acquired lease intangibles?
TBD
What are the benefits/advantages of REITs?
Investors: REITs enable investors to gain access to a diversified collection of income-producing real estate similar to investing in a mutual fund (vs. having to purchase individual properties
Owners or REITs: Significant tax advantages (not taxed on corporate level; only taxed on an individual/shareholder level (vs C-Corps which are taxed at both levels))
Name some of the (largest) publicly traded REITs.
American Tower (Communications)
Prologis
Simon Property Group
Equinix
Public Storage
Welltower
AvalonBay
What are some of the requirements for REITs?
Distribute 90% of Net Income as Dividends
At least 75% of revenue must come from real estate-related activities (i.e.: rents from real property, interest income from mortgages, gains from the sale of real property, etc.)
At least 75% of assets must be real estate-related Assets
Shares must be owned by at least 100 shareholders
5/50 Rule (no more than 50% of shares outstanding can be owned by 5 or few people)
What are the two types of REITs?
Equity REITs (aka traditional REITs): represent ~90% of all REITs by market cap
Mortgage REITs: purchase debt (real estate loans and mortgage-backed securities) and primary income is from interest income from the mortgages
What are some important REIT metrics?
Occupancy Rates: measure how effectively a REIT is at leasing its properties
- Physical Occupancy: Number of tenants/Total Leasable Units
- Financial Occupancy: Rent Collected / Potential Rent
- Economic Occupancy: Net/Effective Rent Collected / Potential Rent
NOI: Rental and Ancillary Income less Direct Real Estate Expenses; captures profitability before deprecation, interest, taxes, corporate-level SG&A, CapEX, and financing payments
Capitalization (Cap) Rates: inverse of a multiple/equivalent way of talking about multiples
Cap Rate = NOI / Value of Property
Higher cap rates are cheaper
What are Same Store properties? What are other possible segments?
Properties that have been completed, stabilized, and owned by the REIT for a period of time (usually 1 year)
Renovation Properties Lease-Up Properties Recently Acquired Properties Dispositions New Developments
Walk through an NAV analysis
- Determine the FMV of assets by rolling forward the NOI generated from assets on a 1 year basis and divide by the cap rate
- Adjust NOI for ongoing maintenance CapEx
- Determine the FMV of income not included in NOI (i.e.: ancillary income) (using a higher cap rate)
- Adjust value down by the corporate overhead
- Adjust for any other REIT assets (i.e.: cash, construction in progress)
- Subtract REIT liabilities and non-common equity claims (i.e.: preferred stock)
