《REIT valuation》.pdfVIP

REIT valuation Real estate capital markets (RE740) (a) Basics Basics  Real Estate Investment Trusts 1. buy, sell and hold real estate assets on behalf of a diffuse shareholder base 2. manage these and other assets 3. are not taxed at the corporate level  Three basic types: equity, mortgage, hybrid  Can be public or private  UPREITs (U for “umbrella”) hold positions in corporations that invest in real estate, including other REITs Brief history  REIT act, 1960: REITs may be treated as untaxed, pass-through entities provided they satisfy a number of requirements  Current requirements include: 1. 75% of holdings in RE, cash, or US paper 2. 75% of income must come from rents, dividends, mortgage interest, gains from the sale of qualifying assets or holdings in other REITs 3. 90% of taxable income must be distributed to shareholders* 4. At least 100 shareholders 5. Top 5 holders cannot hold more than 50% of shares  1986 tax reform removed two big downsides of REIT structure: 1. Management activities were severely restricted 2. Other forms of incorporations (LPs, especially) enjoyed preferential depreciation rules  1991 Kimco Realty IPO ushered in a new era for REITs Market capitalization of Public REITs Historical 12-month returns (e-REITs) (a) Financial metrics Standard ratios  REITs prepare the same accounting statements as all corporations hence standard financial management principles apply  As usual, a quick snapshot of financial situation should center on: 1. Profitability and market ratios (EPS, ROIC, operating margin…) 2. SGA/Revenues (!!!!! = the cost of operating as a REIT) 3. Leverage ratios (D/E, DCR…) 4. Payout ratios and dividend yields Principles of valuation  Firm value = Value of Operating Assets + Value of Non