reit 101: presentation by milos milosevic at george washington university, refa d.c

REIT 101

Milos Milosevic

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


(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


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


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


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 Structure


REIT Structure – UPREIT and OP Units


Leases


Net Lease Net Double Net NNN

Gross Lease

Full-Service Lease

Trading Volatility


Property Cycle


Economic Drivers of Real Estate Demand


REIT Sectors in FTSE NAREIT Index


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


Two or more types of commercial property Vornado Realty Trust - VNO Digital Realty Trust - DLR W.P. Carrey - WPC

Health Care REITs


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


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

Hotel REITs


Industrial REITs


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


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 Space per Worker


Office/Industrial REITs


Stable CF from industrial hedge more volatile CF from office

Liberty Property Trust – LRY Duke Realty – DRE PS Business Parks – PSB

Multifamily REITs


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


Trailer parks Land is rented Equity Lifestyle Properties – ELS Sun Communities – SUI UMH Properties – UMH

Retail REITs


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


From grocery-anchored to power centers Kimco Realty – KIM Federal Realty Investment Trust – FRT DDR – DDR

Mall REITs


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


15-20 year leases with extensions Most defensive sector Realty Income – O Cole Real Estate Investments – COLE National Retail Properties – NNN

GGP Five-Year Return


Self Storage REITs


Highly fragmented One Month Leases Default rates Public Storage – PSA Extra Space – EXR Sovran – SSS

Self Storage Five–Year Returns


Timber REITs


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


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


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


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


External Growth Acquisitions Development and expansion Non-rental revenue

Internal + External Growth = FFO Growth

Funds From Operations


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%

FFO Multiples


Adjusted Funds From Operations (AFFO)


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


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)

AFFO Multiples


Dividends and Taxation


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

Historical Payout Ratio


Net Asset Value (NAV)


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

Capital Structure


Unsecured Debt Structure


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


Equity REITs Total Return


REIT Historical Returns


2014 YTD Performance


REIT 101

Questions?


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: presentation by milos milosevic at george washington university, refa d.c

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