Real Estate

Question 1

What are the main sources of revenue for a REIT?

Answer 1

Rental Income: primary source of REIT income

Ancillary Income (i.e.: phone, cable, water, electricity, gas, etc.)

Question 2

Ballpark a cap rate for New York City office

Answer 2

Go to CBRE or JLL market report.

Question 3

How much do REITs have to pay out in dividends in each year?

Answer 3

90% of Income

Question 4

What is NOI? How do you calculate NOI?

Answer 4

Rental Income + Ancillary Income - Real Estate Expenses

Question 5

Why do you look at NOI vs. NI?

Answer 5

To determine how profitable property is on its own because depreciation, interest expense, taxes, etc. can affect profitability

Question 6

What is AFFO?

Answer 6

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

Question 7

What is Funds From Operations (FFO)? Why do you use it? What is a relevant multiple?

Answer 7

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

Question 8

What are some methods you would use to value a REIT?

Answer 8

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.)

Question 9

Which properties would have a higher or lower cap rate?

Question 10

What is a REIT?

Answer 10

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

Question 11

Given a cap rate and NOI, calculate property value.

Answer 11

NOI / Cap Rate = Property Value

Question 12

Talk about REIT structures. What is an UPREIT? DownREIT?

Answer 12

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

Question 13

What are tenant receivables?

Answer 13

TBD

Question 14

What are tenant improvements?

Answer 14

TBD

Question 15

What is a leasing commission?

Answer 15

TBD

Question 16

What is straight-line rent?

Answer 16

TBD

Question 17

What are acquired lease intangibles?

Answer 17

TBD

Question 18

What are the benefits/advantages of REITs?

Answer 18

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))

Question 19

Name some of the (largest) publicly traded REITs.

Answer 19

American Tower (Communications)

Prologis

Simon Property Group

Equinix

Public Storage

Welltower

AvalonBay

Question 20

What are some of the requirements for REITs?

Answer 20

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)

Question 21

What are the two types of REITs?

Answer 21

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

Question 22

What are some important REIT metrics?

Answer 22

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

Question 23

What are Same Store properties? What are other possible segments?

Answer 23

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

Question 24

Walk through an NAV analysis

Answer 24

1. Determine the FMV of assets by rolling forward the NOI generated from assets on a 1 year basis and divide by the cap rate
2. Adjust NOI for ongoing maintenance CapEx
3. Determine the FMV of income not included in NOI (i.e.: ancillary income) (using a higher cap rate)
4. Adjust value down by the corporate overhead
5. Adjust for any other REIT assets (i.e.: cash, construction in progress)
6. Subtract REIT liabilities and non-common equity claims (i.e.: preferred stock)