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What is a REIT
REIT 101 Milos Milosevic 2
Created under the Real Estate Trust Act of 1960. An investment vehicle designed to allow a large numbers of
small investors to pool capital and share the benefits of real estate investment and financing.
Created a tax advantage structure as an incentive, making CRE assets available to smaller investors
Equity investors are drawn to REITs for high dividend yields and the ability to gain exposure to CRE without physically owning property
Types of REITs
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(1) Equity REITs Make up the majority of REITs Primarily invest in and own interests in real property which are typically
leased to end users May concentrate on a market segment (i.e., office, multi-family, retail)(2) Mortgage REITs Provide real estate financing through mortgages on real property Acquire existing loans or mortgage-backed securities (3) Hybrid REITs
Public vs. Non-Traded and Private REITs
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Public File with SEC and traded on the national stock exchange Self-managed and self-advised
Non-Exchange Traded File with SEC but not traded. Secondary market Externally advised and managed
Private Don’t file with SEC and not listed Externally advised and managed
Qualifying to be a REIT
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Must distribute 90% of all taxable income to investors, excluding capital gains mandates fairly low retained earnings policy has important implications for financing growth
Five or fewer entities may not own 50% or more of the outstanding shares (the “5/50 Test”)
75% of gross income must be from rents or gains from sale of real property
95% of gross income must be from dividends, interest, rents, or gains from sale of stock or other non real estate investment
Qualifying to be a REIT
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May not have more than 10% of voting securities of any corporation other than another REIT, Taxable REIT Subsidiary (TRS) or Qualified REIT Subsidiary (QRS)
REITs allowed to own 100% of a Taxable REIT Subsidiary (TRS) but no more than 25% of REIT’s total assets
TRS can provide services to REIT tenants and others
REIT Sectors in FTSE NAREIT Index
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REIT Sectors in the FTSE NAREIT Index Sector Total Number of REITs S&P 600 Market Cap (millions) Portion of Industry Total
Office 18 10 $64,321.7 9.6%Industrial 8 2 $26,414.4 3.9%Office/Industrial 6 3 $14,644.9 2.2%
Sector Total 32 15 $105,381.0 15.7%
Shopping Centers 22 12 $50,292.5 7.5%Regional Malls 8 5 $84,163.7 12.6%Net Lease 7 4 $24,975.1 3.7%
Retail Sector Total 37 21 $159,431.3 23.8%
Apartments 17 12 $74,263.7 11.1%Manufactured Homes 3 0 $4,710.3 0.7%
Residential Sector Total 20 12 $78,974.0 11.8%
Divers ified 28 8 $54,356.7 8.1%Lodging 19 4 $41,176.1 6.1%Self Storage 4 3 $35,050.3 5.2%Health Care 14 10 $68,443.5 10.2%Infras tructure 2 1 $31,673.3 4.7%Timber 5 4 $33,790.2 5.0%
Home Financing 26 1 $42,360.4 6.3%Commercial Financing 15 0 $19,697.1 2.9%
Mortgage Sector Total 41 1 $62,057.5 9.3%
Industry Total 202 79 $670,334.1* As of December 31, 2013
Diversified REITs
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Two or more types of commercial property Vornado Realty Trust - VNO Digital Realty Trust - DLR W.P. Carrey - WPC
Health Care REITs
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NNN or Modified Gross Leases Medial office buildings, Clinics, Labs Exposure to Medicare and Medicaid changes VENTAS – VTR HCP – HCP Health Care REIT – HCN
Hotel REITs
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RevPAR = Occupancy x ADR Location and level of service key pricing drivers Third party management Host Hotels – HST Hospitality Property Trust – HPT LaSalle Hotel Properties – LHO
Industrial REITs
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NNN or Modified Gross Leases Distribution warehouses, light manufacturing, R&D Low volatility Prologis – PLD DCT Industrial Trust – DCT First Industrial Trust – FR
Office REITs
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Full Service Leases More cyclical than average REIT Corporate rightsizing Boston Properties – BXP SL Green Realty – SLG Alexandria Real Estate Equities – ARE Office/Industrial REITs - Stable CF from industrial hedge
more volatile CF from office
Office/Industrial REITs
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Stable CF from industrial hedge more volatile CF from office
Liberty Property Trust – LRY Duke Realty – DRE PS Business Parks – PSB
Multifamily REITs
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High-rise or garden-style 12- month leases Agency financing Equity Residential – EQR AvalonBay Communities – AVB UDR – UDR Essex and BRE merger Manufactured Homes REITs (trailer parks) – land is
rented
Manufactured Homes REITs
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Trailer parks Land is rented Equity Lifestyle Properties – ELS Sun Communities – SUI UMH Properties – UMH
Retail REITs
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Gross or full service leases Anchor tenants 10-20 year leases In-line tenants 5-10 year leases Shopping Center REITs (Kimco, Federal Realty, DDR)
From grocery-anchored to power centers Mall REITs (Simon, GGP, Macerich)
Malls can be regional or super regional Anchors draw traffic
NNN REITs (Realty Income, Cole, National Retail Properties) 15-20 year leases with extensions Most defensive sector
Shopping Center REITs
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From grocery-anchored to power centers Kimco Realty – KIM Federal Realty Investment Trust – FRT DDR – DDR
Mall REITs
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Regional or super regional Anchors sometimes own the space Simon Property Group – SPG General Growth Partners – GGP Macerich – MAC Taubman Centers – TCO
Triple – Net REITs
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15-20 year leases with extensions Most defensive sector Realty Income – O Cole Real Estate Investments – COLE National Retail Properties – NNN
Self Storage REITs
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Highly fragmented One Month Leases Default rates Public Storage – PSA Extra Space – EXR Sovran – SSS
Timber REITs
REIT 101 Milos Milosevic 32
Acres of timberland Trees become more valuable as they grow older Land rises and falls in value along with the going price for
timber Plum Creek Timber – PCL Rayonier - RYN
Infrastructure REITs
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Leasing antenna space on multi-tenant communications sites
Wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and municipalities.
American Tower Company – AMT
Mortgage REITs
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Operate like “virtual banks,” borrowing cheaply short term and using the proceeds to buy long-dated mortgages.
41 in the FTSE NAREIT Index – 1 in S&P 600 Residential and commercial mortgages Annaly Capital –NLY American Capital Agency – AGNC Starwood Property Trust – STWD
Earnings
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NOI = Rental Revenues – Operating Exp. (taxes and insurance included)
Same Store NOI – from properties operated for 12 months or more
Organic Growth Rent growth ( market growth, rent percentage, bumps) Expense control Tenant upgrades Property refurbishments Sale and reinvestment.
Earnings
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External Growth Acquisitions Development and expansion Non-rental revenue
Internal + External Growth = FFO Growth
Funds From Operations
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Depreciation in real estate FFO – supplemental measure of earnings Net Income + Depreciation & amortization -/+ Gains (losses) from operating real estate sold +/- Income (loss) attributable to minority interest + Adjustment for FFO from JVs = FFO P/FFO PEG Ratio = (P/FFO)/FFO growth%
Adjusted Funds From Operations (AFFO)
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More precise measure of earnings – adjusts for accounting conventions and recurring capex
Properties can decline in value due to obsolescence Leasing comissions and tenant improvements Straight-lining of rents Reasonable measure of operating performance Cash Available for Distribution (CAD) = AFFO –
Capitalized interest – principal on secured debt Indicator of dividend safety
AFFO and CAD
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FFO - Recurring Capex
+/- Adjustments for straight-lining of rents -/+ Gains (losses) from undepreciated properties sold +/- One time items + Stock compensation + Amortization of financing costs
= AFFO - Capitalized interest - Principal amortization= Cash Available for Distribution (CAD)
Dividends and Taxation
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REIT dividend sources: Ordinary Dividends (Individual tax rate) Capital Gains (15%) Returns of Capital (non-taxable)
Dividend yield and safety Payout Ratio = Current dividend/FFO (AFFO, CAD) Low leverage key to dividend safety
Net Asset Value (NAV)
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Current value of real estate properties Cash NOI x Annual Growth / Cap Rate= FMV of operating properties + Cash/Current Assets – Current Liabilities + Development Properties - Debt - Preferred stock= NAV/#Shares and OP Units = NAV per share
Unsecured Debt Structure
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REIT
Operating PartnershipProperty
Property
Property
Secured Debt
(Mortgage)
Secured Debt
(Mortgage)
Secured Debt
(Mortgage)PropertyPropertyPropertyProperty
Unencumbered Pool
Unsecured Debt (Bonds
and Bank Debt)
OP Units Holders
Unsecured Debt Covenants Maximum Unencumbered Leverage Minimum Unencumbered Interest Coverage
Unencumbered NOI/ Interest Expense Minimum Unencumbered Debt Service Coverage Maximum Corporate Leverage Minimum Fixed Charge Coverage
Recurring EBITDA/ Interest + Preferred Dividends
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Timber and Infrastructure REITs Timber REITs (Plum Creek Timber, Rayonier)
Acres of timberland Land rises and falls in value along with the going price for
timber
Infrastructure REITs (American Tower Company) Leasing antenna space on multi-tenant communications sites Wireless service providers, radio and television broadcast
companies, wireless data providers, government agencies and municipalities.
REIT 101 Milos Milosevic 52