Real Estate Investment Trusts
History
•Began in 1880
• Special tax status occurred in 1960
• Allowed for passive investment in RE
• Construction to equity
•Public REIT’s are exchange traded
–Trade similarly to closed end mutual funds
• Growth and Income Fund
–Income distribution
–Gain distribution
REIT Qualifications
•75% of all assets must be mortgages, RE equity, cash or gov't securities
•90% of taxable income must be distributed
•75% of income derived from rent, mortgages, and gains from sale of RE
•Real property must not be held primarily for sale in the ordinary course of business
(30% income in one year)
REIT Types
•Equity
–Move from residential to industrial/office
• Mortgage
–Many invest in Mortgage Backed Securities
–Avenue for small investors
• Hybrid
–Combination of debt and equity
•UPREIT (Umbrella Partnership REIT)
–REIT holding control of a LP
–Allows conversion of LP interests to REIT shares
REIT Expansion
• Growth of existing portfolio
• Limited cash for purchase of assets
• Growth comes via the capital markets
–Issue more stock (only open end funds)
•IPO vs. Seasoned Equity Offering
–Use debt financing
• Stock issuance impacts distributions
Measuring REIT Income
•GAAP Income
–Not as appropriate since includes Depreciation and Amortization deductions
•FFO (Funds From Operations)
–Net Income (GAAP) + Depreciation + Amort. of Leasing Exp. + Amort. of TI’s – Gain
(Loss) from unusual events
•FFO Multiple
–Share Price / FFO per share
–REIT may be overpriced if multiple is higher than average
Income Growth
• Existing properties
• Acquisitions
–Property
–Share swapping in partnerships
• Development
–Reducing risk
–Work with established developer
• Financial Engineering
– Short term ARM acquisitions give higher ROI
Why invest in REIT’s?
•RE investment (diversification)
•Income growth
•Professional management
–Vertical Integration (economies of scale)
•Liquidity
•Limited liability
•Available to small investors
Information on REIT’s
•The National Association of Real Estate Investment Trusts
http://www.nareit.org/home.cfm