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REIT 101: Presentation by Milos Milosevic at George Washington University, REFA D.C.
- 2. What is a REIT REIT 101 Milos Milosevic2 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
- 3. Types of REITs REIT 101 Milos Milosevic3 (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
- 4. Public vs. Non-Traded and Private REITs REIT 101 Milos Milosevic4 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
- 5. Qualifying to be a REIT REIT 101 Milos Milosevic5 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
- 6. Qualifying to be a REIT REIT 101 Milos Milosevic6 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
- 7. REIT Structure REIT 101 Milos Milosevic7
- 8. REIT Structure – UPREIT and OP Units REIT 101 Milos Milosevic8
- 9. Leases REIT 101 Milos Milosevic9 Net Lease Net Double Net NNN Gross Lease Full-Service Lease
- 10. Trading Volatility REIT 101 Milos Milosevic10
- 11. Property Cycle REIT 101 Milos Milosevic11
- 12. Economic Drivers of Real Estate Demand REIT 101 Milos Milosevic12
- 13. REIT Sectors in FTSE NAREIT Index REIT 101 Milos Milosevic13 REIT Sectors in the FTSENAREIT 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% Diversified 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% Infrastructure 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
- 14. REIT 101 Milos Milosevic14
- 15. Diversified REITs REIT 101 Milos Milosevic15 Two or more types of commercial property Vornado Realty Trust - VNO Digital Realty Trust - DLR W.P. Carrey - WPC
- 16. Health Care REITs REIT 101 Milos Milosevic16 NNN or Modified Gross Leases Medial office buildings, Clinics, Labs Exposure to Medicare and Medicaid changes VENTAS – VTR HCP – HCP Health Care REIT – HCN
- 17. Hotel REITs REIT 101 Milos Milosevic17 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
- 18. Hotel REITs REIT 101 Milos Milosevic18
- 19. Industrial REITs REIT 101 Milos Milosevic19 NNN or Modified Gross Leases Distribution warehouses, light manufacturing, R&D Low volatility Prologis – PLD DCT Industrial Trust – DCT First Industrial Trust – FR
- 20. Office REITs REIT 101 Milos Milosevic20 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
- 21. Office Space per Worker REIT 101 Milos Milosevic21
- 22. Office/Industrial REITs REIT 101 Milos Milosevic22 Stable CF from industrial hedge more volatile CF from office Liberty Property Trust – LRY Duke Realty – DRE PS Business Parks – PSB
- 23. Multifamily REITs REIT 101 Milos Milosevic23 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
- 24. Manufactured Homes REITs REIT 101 Milos Milosevic24 Trailer parks Land is rented Equity Lifestyle Properties – ELS Sun Communities – SUI UMH Properties – UMH
- 25. Retail REITs REIT 101 Milos Milosevic25 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
- 26. Shopping Center REITs REIT 101 Milos Milosevic26 From grocery-anchored to power centers Kimco Realty – KIM Federal Realty Investment Trust – FRT DDR – DDR
- 27. Mall REITs REIT 101 Milos Milosevic27 Regional or super regional Anchors sometimes own the space Simon Property Group – SPG General Growth Partners – GGP Macerich – MAC Taubman Centers – TCO
- 28. Triple – Net REITs REIT 101 Milos Milosevic28 15-20 year leases with extensions Most defensive sector Realty Income – O Cole Real Estate Investments – COLE National Retail Properties – NNN
- 29. GGP Five-Year Return REIT 101 Milos Milosevic29
- 30. Self Storage REITs REIT 101 Milos Milosevic30 Highly fragmented One Month Leases Default rates Public Storage – PSA Extra Space – EXR Sovran – SSS
- 31. Self Storage Five–Year Returns REIT 101 Milos Milosevic31
- 32. Timber REITs REIT 101 Milos Milosevic32 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
- 33. Infrastructure REITs REIT 101 Milos Milosevic33 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
- 34. Mortgage REITs REIT 101 Milos Milosevic34 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
- 35. Earnings REIT 101 Milos Milosevic35 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.
- 36. Earnings REIT 101 Milos Milosevic36 External Growth Acquisitions Development and expansion Non-rental revenue Internal + External Growth = FFO Growth
- 37. Funds From Operations REIT 101 Milos Milosevic37 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%
- 38. FFO Multiples REIT 101 Milos Milosevic38
- 39. Adjusted Funds From Operations (AFFO) REIT 101 Milos Milosevic39 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
- 40. AFFO and CAD REIT 101 Milos Milosevic40 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)
- 41. AFFO Multiples REIT 101 Milos Milosevic41
- 42. Dividends and Taxation REIT 101 Milos Milosevic42 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
- 43. Historical Payout Ratio REIT 101 Milos Milosevic43
- 44. Net Asset Value (NAV) REIT 101 Milos Milosevic44 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
- 45. Capital Structure REIT 101 Milos Milosevic45
- 46. Unsecured Debt Structure REIT 101 Milos Milosevic46 REIT Operating Partnership Property Property Property Secured Debt (Mortgage) Secured Debt (Mortgage) Secured Debt (Mortgage) PropertyPropertyPropertyProperty Unencumbered Pool Unsecured Debt (Bonds and Bank Debt) OP Units Holders
- 47. 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 REIT 101 Milos Milosevic47
- 48. Equity REITs Total Return REIT 101 Milos Milosevic48
- 49. REIT Historical Returns REIT 101 Milos Milosevic49
- 50. 2014 YTD Performance REIT 101 Milos Milosevic50
- 51. REIT 101 Questions? REIT 101 Milos Milosevic51
- 52. 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 Milosevic52
Editor's Notes
- 161/202/90% of EMC publicly traded as of YE 2013. mortgage reit like banks that lend exclusively to real cre developers and landlords. May have a focus on particular types of loans (ie. first mortgages, distressed property mortgages, mezzanine financings). Operate like “virtual banks,” borrowing cheaply short term and using the proceeds to buy long-dated mortgages.
- 10-15% for broker/dealer commissions. Stocks don’t fluctuate. Trade on NAV – like mutual funds. Minimum holding periods. Liquidation after 10 years or IPO. Private – equity injection from institutonal investors.
- Umbrella Partnership/Operating Partnership Units. 1992 TCO. OP-shares is taxable event. Same dividends. OP units for property – “like-kind exchnage” since they’re nottraded so its not a tax event. Many invesors, low tax basis so big tax event. Upon transferred to descendands its market to the market value of reit stocks so the base is reset.
- Different leases – different CF. Main Taxes Insurance. Net – R+ M. Double Net – R +T +I. Full Service – office buildings, esc. Clauses, reimbursements. Gross Lease – between NN and Full; tenant pays for CAM.
- Simple way of measuring riskiness. CRE is a lagging indicator(depends on the length of the lease). Chart helps predict how reits may trade.
- We want to show one of key features of cre – lagging indicator. Because of this there is a disconnect between reit prices and underlying fundamentals. 98-99 tech boom, 04-06 yields, 08-09 residential crisis, 13 – interest rate scare.
- Off + Multi = local employment. Industrial + retail = population growth. Healthcare – age of population. Defensive – community shopping + NNN
- Equity market capitalization does not include operating partnership units or preferred stock. Health care highest barriers to entry.
- Equity REITs are 90.7% of the All REIT Index, Mortgage REITs 9.3%. 26 Home Financing and 15 Commercial Financing Mortgage REITs.
- VNO – Office, retail Toys R Us. DLR – San Fran; data centers, industrial, office. WPC – investment manager and advises and sponsor reits office, industrial, student housing, hotel cinemaplex, debt financing for other REIT
- Senior/Assisted living, rehabilitation centers. Chicago, Long Beach, Ohio.
- Labor expense – high fixed costs. Before 2001 REITs leased their properties to managers – got base level of lease revenue; conflicting operating strategies. REITs – maximize revenue, managers – maximize operating margins. 08 -63% vs -41%; 09- 63% vs 21% -3% GDP
- Step-ups with leases. Historical occupancy 88-92%;renewal 65%. Critical to supply chains. Supply tends to stay in line with demand. Demand correlates with cons spending and GDP. 6-9 months to build. PLD – SF; FR – Chicago.
- FS Lease – 5 to 7 yrs with extensions. Reimbursement revenue for operating expenses depending on the agreement. TIs are prevalent. Periodic oversupply which affects rents and occ. Demand is local (employment picture) and can change quickly.
- 21%/ 33%
- Duke – Indianapolis; PS – CA
- Rents highly correlate with employment trends. Viewed as a defensive play more because of agency financing (inexpensive lines of credit) than demand factors. EQR – Chi; UDR - Colorado
- Chaper – popular for retirees and low income workers. Newer ones have pools and modern amenities. Stable annuity, sticky tenants – high costs to move.
- Tenant gets billed for CAM. May receive percentage rents. Blackout provisions for small tenants. Neigh. And comm centers amongst most defensive investments – 89-94% historical occupancy. Anchors draw traffic. April 09;$27 B unable to refinance fin crisis and collapse of the CMBS market. Pershing Square Ackman and Brookfield Asset management
- Neigh. And comm centers amongst most defensive investments – 89-94% historical occupancy. Anchors draw traffic
- Regional 400-800k SF. Super – over 800k. 1-3 anchors. Choice of anchors is crucial. largest real estate bankruptcy April 09;$27 B unable to refinance fin crisis and collapse of the CMBS market. Pershing Square Ackman and Brookfield Asset management
- Drug stores, fast food, cinemas. Bond like security but missing on rising rents.
- 11% owned by top ten operators. 18.7 months average lease term. 30% from commercial (small internet companies, pharma), military and students. Rents fluctuate with season and demand and employment. Scarcity of capital for small guys, internet marketing + improvement. Big guys – 3rd generation properties.
- Unlike office buildings trees become more valuable as they grow older. gazillions of acres of trees. And tends to rise and fall in value along with the going price for timber. Dependent on housing industry. acres of timberland and real estate It owns and operates two specialty cellulose mills.
- 2 REITs – other Power REIT is 14MM market cap.
- Rising bond yields have wrecked the book value of the REITs’ mortgage holdings. going forward, a steeper yield curve is actually good, as it increases the spread between the borrowing rate and the lending rate.
- NOI is profitability of properties on stand-alone basis. Know what percentage comes from the organic growth – crucial as new capital for acquisitions might not be available or too expensive. Doesn’t require new debt nor equity. Lack of standardized reporting. FFO some might detail the FFO in the IS and some might in the notes.
- TRS, advisinjg, developemnt for fees, JVs, investing in other companies (JCP and Toys R Us), mezz loans
- Properties appreciate because of rise in value of land, rising rents, increased construction costs, property upgrades. Sales of undepreciatted properties (and) are included. JVs – partnerships in which reit owns less than a controlling interest. High P/FFO – defensive (apts;man. Homes) or high growth potential (malls, hotels in expansion). Lower multiple – loner leases with more predictable CF and cant capitalize on growth (NNN, healthcare). Price multiple to earnings growth ratio – how much do you pay today for company’s expected growth.
- FFO – overly rosy picture of earnings. Recurring capex – actual or 2-3 years average. Carpeting, heating, lighitng, dishwashers, stoves etc needs to be replaced and losses value over time. LCs and Tis are capitalized but don’t add to property’s value – real expense. It accounts for one time events (debt prepayment, preferred redemption).
- One time items – debt prepayment or preferred redemption
- Ordinary – business activities (rents). Capital losses are not passes to investors as they’re not LPs. Returns – if they distribute more than 100% of taxable income. They lower investors base in stock. Jan/Feb press release. VNQ yield of 4.01 -2.75 = 126 bps over 10year. Leases are view as operating expense – paid in bankruptcy and lease term fee after. 08-09 2/3ds suspended dividends to preserve cash. Lower leverage – safer (after debt and preferred). FFO (future) >1 – not good. Higher than industry average not safe.
- 72% LT average. Low leverage key to dividend safety.
- Second major method of share valuation. Cash NOI adjusted for straight line rents
- 1. Unsecured NOI/Interest 2.0x 2.Unsecured NOI/Debt Service 2.0x. Unencumbered Leverage and corporate leverage <60%. EBITDA/Interest + Preferred
- MC of 670BN established class but remain an alternative investment for most investors. 200-300MM influx of funds makes a lot more difference than DJIA of $6T. Cre is a lagging indicator and while reit stocks prices are expectation of future earnings. This disconnect happens often but speically when economy is in transition mode – especially in/out recession.
- Strong performance 95-97 and 00-06. they have underperformed sometimes not fundamentals but other market forces. 98-99 tech growth stocks. Cre fundamentals was great. 04-06 rise in the treasuries yield. Reits always compared to them. 00-06 dot com bubble, accounting scandals, 9/11 – investors needed steady visible income. 08-09 residential started it but didn’t matter.
- Timber dependant on housing industry