Shopping Center Financial Workshop

Financial Workshop 2012
• Basic Accounting
• Investment Fundamentals
• Investment Performance
• Shopping Center Finance
• Case Discussion
• Investor Relations
Instructor:
Robert Scholem, CPM®, CSM, CRX
Property Management Education Series

Improve Field and
Corporate Processes
PROGRAMS
Collect and Analyze Information
STAKEHOLDER
COMMUNICATION
Develop Additional
Services
Department Work Streams
PROCESS
Improve and Develop Common Standards
FOUNDATION
BUILDING
VALUE
CREATION
PEOPLE
Develop Core Competencies
EXPENSE MANAGEMENT INCOME GENERATION

Business Areas and Core Initiatives
Business Areas Core Initiatives
• Property maintenance
• Field inspection / audits
• Tenant relations
• Emergency response
• Vacancy profiles
• CAM / CAPEX budgeting
• Policies / best practices
• Competency assessment
• Training and development
• Property analytics
• Vendor management
• UMS
• Gateway
• Building efficiency
retrofits
• Rate optimization
• On-site energy
production (Solar, etc.)
• Tenant EMS
Field Operations
Deliver best-in-class tenant experience while cost
effectively managing and maintaining our
properties.
Corporate Services
Support improved field operations and services by
developing effective people and processes.
Energy Services
Create and manage energy initiatives that reduce
expense or generate additional income.
• Trash / recycling
• Storage trailers
• HVAC maintenance
Tenant Services
Create and manage non-energy initiatives that
reduce expense or generate additional income.
• Other services

Accounting Basics
 General Ledger: is a series of pages in a notebook for
entering receipts and expenses by account.
A separate ledger is maintained for each account. An
account is a series of items paid regularly, and grouped by
activity or purpose.
 Balance Sheet, Assets and Liabilities: is a statement of the
financial position of a firm or property; normally calculated
at the end of a fiscal period.
Asset: something owned by or owed to the business.
Liability: something not owned by the firm, but something
for which the firm is responsible.
Such as: debt, loans, bills, mortgages
 Owners’ Equity: is the difference between the Assets and
Liabilities.

Basic Accounting Principles
Cash Accounting
 Is a system of making
entries into accounts when
bills are paid and
expenditures are made.
Accrual Accounting
 Is an accounting system in
which income and expenses
are entered into the books
when they are due.
Cash Flow
The site manager’s performance overall is based on the ability to
meet the following goals:
 Generate income; both gross and net
 Meet budget projections for income and expenses
 Control expenditures while maintaining the physical integrity of the
property
 Satisfy the owner’s financial goals for the investment

Cash Flow Calculation
Gross potential rental income
- Vacancy and rental loss
+ Miscellaneous income
= Effective gross income
- Operating expenses
= Net operating income (NOI)
- Debt service
- Capital expenses
= Cash flow

Net Operating Income (NOI)
A key value found on the Cash Flow Model is
net operating income (NOI). NOI is important
because the assumptions and judgments made in
calculating NOI have great impact on the
ultimate decision to invest in a given property
and at what price. Lenders use NOI to
determine loan amount, investors look at NOI
to determine what they will pay, and appraisers
use it to determine market value.

Managers and the Bottom Line
 Empty space reduces the amount of effective
gross income.
 Prompt collections policy reduces potential late
fees or interest on bills or delayed maintenance.
 Lack of good maintenance may adversely impact
tenant retention, and thereby income
 Careful record keeping for sound budgeting.
 Accurate forecasting and pacing maintenance to
minimize variances from budget.

Investments
What is an investment ?
 An investment is an expenditure of money for
income or profit; capital outlay.
 Investments are dynamic in nature.
 Some investments produce guaranteed income
while others fluctuate depending on market
conditions.
The Four Investor Questions:
1. How much money goes into the investment?
2. When?
3. How much money comes out of the investment?
4. When?

Types of Investments
 Loan Type Investments:
Rate of Return: Stated
Investor Position – Loan
Examples:
Bonds
Mortgages
Land Contracts
Securitized Debt
 Equity Investments:
Rate of Return: Variable
Investor Position – Ownership
Examples:
Stocks
Partnership interests
Collectibles
Real Estate

Investment Characteristics
 Liquidity: The ability to convert an asset to cash quickly,
without loss of principle.
 Marketability: The ability to convert the asset to cash
quickly, at any price.
 Leverage: The use of borrowed funds to finance a portion
of the purchase price of an investment.
 Management: The cost of monitoring an investment.
 Tax Impact: The effect of federal income tax laws on the
income, profits, or losses from an investment.
 Rate of Return (yield): A measure of investment
performance.
 Risk: The possibility of losing either the principle invested
and/or the potential income from the investment.

Risk Management
 Risk analysis: The process of evaluating alternative investments
based on their level of risk.
 Diversification: Investing in multiple investments with varying
risk levels reduces the chance that all investments will be affected
by the same turn of events.
 Insurance: Protection against costs incurred by external events.
 Shifting risk: Leases can be structured to shift exposure of
increased costs.
 Forms of Ownership: Investors can structure ownership to limit
losses to their capital.
 Due diligence: The process of examining a property and all
related materials to reduce risk.

Valuing Real Estate Investments
Types of Value:
1. Investment Value: Value to a specific investor
2. Insurable Value: Value of those portions of physical
property
3. Assessed Value: Established by tax assessor
4. Liquidation Value: Price resulting from a forced
sale
5. Replacement Value: Value of a substitute property
6. Market Value: “The most probable price a property
would bring in a competitive and open market”

Appraisal Approaches to Market Value
 Sales Comparison Approach:
This approach equates the value of a property to prices that
buyers have historically paid for similar properties, or
“comparison shopping”.
 Cost Approach:
Considers the current cost of reproducing a property minus
accrued depreciation; which includes: physical
deterioration, functional obsolescence, and external
obsolescence.
 Income Approach:
Is based on the premise that a correlation exists between
the income a property produces and its value.

Direct Capitalization
Direct capitalization is a process of converting a one-year of
stabilized NOI into a market value of a property.
Investors use this method to determine investment value.
Direct Capitalization (IRV) Formula:
I where: V = Market Value
V = I = First year NOI
R R = Capitalization Rate

Using Cap Rates
Example: What value should I use for a property?
Local retail property A sells for $9,500,000 with a NOI of
$665,000; what is the Cap Rate:
$665,000 ÷ $9,500,000 = 7.00 %
Local retail property B sells for $7,750,000 with a NOI of
$550,250; what is the Cap Rate:
$550,250 ÷ $7,750,000 = 7.10 %
Local retail property C is for sale with a NOI of $625,000; what
should we value the property?
If we take the average Cap Rate of 7.05%:
$625,000 ÷ 7.05% = $ 8,865,248 value
If we want a value based on a 8% return:
$625,000 ÷ 8.00% = $ 7,812,500 value

Direct Capitalization (Cap Rate)
 Investors use Direct Capitalization to determine Investment Value
 Appraisers use Direct Capitalization to determine Market Value
Advantages:
Simplicity of calculation
Accounts for Vacancy and Credit Loss
Disadvantages:
Does not account for financing and impact of taxation
Only looks at a one year forecast
Utilizing the IRV formula :
Income (NOI) X Cap Rate = Investment Value
Value works inversely to Rate; so the higher the Cap Rate, the lower the
property value. Consequently, the lower the Cap Rate, the higher the
property value.

Income Approach to Market Value
Direct Capitalization:
Is the process of converting a
one-year stabilized NOI into a
market value of the property.
Using V = I/R
Deriving value using Cap Rate:
1. Use comparable sales with
known NOI to calculate a cap
rate (R);
2. Divide property NOI (I) by the
cap rate (R) to determine the
value (V)
Discounted Cash Flow:
This model determines property value
by discounting the following values
to a present value:
NOI for all years until sale
Sale proceeds
Applying Discounted Cash Flow
1. Develop forecast of each year NOI
2. Estimate sales reversion
3. Determine appropriate discount rate
4. Solve for Present Value (PV)
A discount rate is not the same as a capitalization rate. A discount rate is used to
convert a specified future income stream for a given period plus the sale proceeds
into a present value or internal rate of return (IRR).
An overall capitalization rate (cap rate) is computed by dividing the NOI of a recent
sold comparable by its sale price.

Investment Value
Sales Comparison Approach
This method determines a property’s
worth relative to other comparable
properties that have been recent sold in
the market; in terms of price per square
foot or unit.
Price/square foot
X Total square feet of building
Investment value
Pros: Investor can compare the per square
foot costs of an existing property to
current land and construction costs.
Can compare old and new properties.
Cons: Disregards the income of a property
thus investment performance. Lacks
sufficient comparables for specialized
properties.
Gross Rent Multiplier
The investment value of a property is
determined using the “gross rents’ an
investor anticipates the property will
produce at EOY 1 (or potential rental
income (PRI)) multiplied by a given
factor (GRM).
Gross rent multiplier X
Forecast 1st year PRI = Value
Pros: Its simplicity; little information
required
Cons: Simplicity also limits its reliability
since it does not take into account;
vacancy loss, operating expenses,
financing, and tax impacts.

Internal Rate of Return (IRR)
The IRR for an investment is the percentage rate that each dollar earns each year while it
remains in the investment.
Represents the “Return On” portion of the investment and is expressed as an annual
percentage rate.
 In order to have a POSITIVE IRR, there must be a complete return of the initial
investment.
 This can be from either the periodic cash flows, or from the sale of the property, or from
both
 If there is NOT a complete return of the initial investment, the IRR will be NEGATIVE
 A return EQUAL to the initial investment yields an IRR+ZERO
Pros: Common investment measure
Incorporates entire Cash Flow Model
Answers 4 basic investment questions
Cons: Measures “internal” rate only
Does not account for reinvestment
May understate the true initial cost of the deal

Net Present Value (NPV)
The NPV is a measurement of how much more or less an investor
can pay in order to achieve a desired yield in relation to a given
initial investment and corresponding IRR.
The NPV of an investment is the sum of the present values of all
future cash flows, netted against (added to) the initial investment.
 A Negative NPV indicates: The investment generates a yield that
is LESS than the investor’s desired yield.
The investor would have to pay that much LESS for the
investment in order to achieve the desired result.
 A Positive NPV indicates: The investment generates a yield
GREATER than the investor’s desired yield.
The investor could pay that much MORE for the investment
and still achieve the desired yield.

Cash Flow Worksheet
Cash Flow Analysis Worksheet
Property Name: Pine Grove S/C Square Footage: 53,040 Mortgage Data
Amount:
Purchase Price: 7,100,000
$ Interest Rate:
Acquisition Costs (+): 71,000 Amortization Period
Loan Fees/Costs(+): 125,000 Loan Term
Mortgages (-): (3,786,435) Periodic Payment
Initial Investment: 3,509,565
$ Annual Debt Service
Operating Year
1 2 3 4 5 6 7 8
Income:
Base Rent 749,887 759,935 769,898 775,858 776,634 777,426 778,234 779,058
Less; Vacancy/Credit Loss 5.00% % (37,494) (37,997) (38,495) (38,793) (38,832) (38,871) (38,912) (38,953)
Effective Rental Income 712,393 721,939 731,403 737,065 737,803 738,555 739,323 740,105
Common Area Reimbursement 34,749 35,791 36,865 37,971 39,110 40,284 41,492 42,737
Insurance Reimbursement 41,580 42,827 44,112 45,436 46,799 48,203 49,649 51,138
Real Estate Tax Reimbursement 174,903 180,150 185,555 191,122 196,855 202,761 208,844 215,109
Other Income
Sub 251,232 258,769 266,532 274,528 282,764 291,247 299,985 308,984
Gross Operating Income 963,625 980,708 997,935 1,011,593 1,020,567 1,029,802 1,039,307 1,049,090
Expenses: psf
Common Area 0.66 35,100 36,153 37,238 38,355 39,505 40,691 41,911 43,169
Insurance 0.79 42,000 43,260 44,558 45,895 47,271 48,690 50,150 51,655
Real Estate Tax 3.33 176,670 181,970 187,429 193,052 198,844 204,809 210,953 217,282
Management 0.71 37,494 37,997 38,495 38,793 38,832 38,871 38,912 38,953
Ground Lease 2.84 150,874 150,874 150,874 150,874 150,874 150,874 150,874 150,874
Total Expense 8.34 442,138 450,254 458,593 466,968 475,326 483,934 492,800 501,932
Net Operating Income 521,487 530,454 539,342 544,625 545,241 545,868 546,507 547,158
Mortgage Interest 213,156 209,102 204,807 200,257 195,436 190,328 184,916 179,183
Cost Recovery/Depr. 39yr 145,641 145,641 145,641 145,641 145,641 145,641 145,641 145,641
Capital improvements 0 0 0 0 0 0 0 0
Leasing Commissions 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
Taxable Income 157,690 170,711 183,894 193,727 199,164 204,899 210,950 217,333
Tax Liability (Savings) 34.00% % 53,614 58,042 62,524 65,867 67,716 69,666 71,723 73,893
Annual Debt Sevice 281,326 281,326 281,326 281,326 281,326 281,326 281,326 281,326
Funded Reserves
Cash Flow before Taxes 240,161 249,128 258,016 263,299 263,915 264,542 265,181 265,832
Tax Liability (Savings) 53,614 58,042 62,524 65,867 67,716 69,666 71,723 73,893
Cash Flow after Taxes 186,546 191,086 195,492 197,432 196,199 194,876 193,458 191,938

Cap Rate and IRR
EOY Cash Flows + Sale Proceeds
0 ($2,909,565.00)
1 $186,546.00 + $0.00
2 $191,086.00 + $0.00
3 $195,492.00 + $0.00
4 $197,432.00 + $0.00
5 $195,199.00 + $0.00
6 $194,876.00 + $0.00
7 $193,458.00 + $5,266,766.00
8 $0.00 + $0.00
9 $0.00 + $0.00
10 $0.00 + $0.00
0.00%
$3,711,290.00
14.14%
Internal Rate of Return
Pine Grove S/C 8% Cap analysis
Annual NPV and IRR Calculations
NPV Discount Rate
Net Present Value
EOY Cash Flows + Sale Proceeds
0 ($3,509,656.00)
1 $186,546.00 + $0.00
2 $191,086.00 + $0.00
3 $195,492.00 + $0.00
4 $197,432.00 + $0.00
5 $195,199.00 + $0.00
6 $194,876.00 + $0.00
7 $193,458.00 + $5,266,766.00
8 $0.00 + $0.00
9 $0.00 + $0.00
10 $0.00 + $0.00
0.00%
$3,111,199.00
10.76%
Annual NPV and IRR Calculations
Internal Rate of Return
Pine Grove S/C 7% Cap analysis
NPV Discount Rate
Net Present Value

Effects on Cap Rates
 Market Conditions/Economy
 Location
 Cost of Money (Interest Rates)
 Tenant Mix
 Occupancy
 Property Condition
 Available Parking
 Comparable Sales

Impacts on Shopping Center Value
Workshop on Income and Expenses on Value
Cash Flow Analysis Worksheet
Property Name: River Plaza Square Footage: 35,291 Mortgage Data
Amount:
Purchase Price: 10,980,000
$ Interest Rate:
Acquisition Costs (+): 400,000 Amortization Period
Loan Fees/Costs(+): 180,000 Loan Term
Mortgages (-): (8,300,000) Periodic Payment
Initial Investment: 3,260,000
$ Annual Debt Service
Operating Year
1 2 3 4 5 6 7 8
Income:
Base Rent $811,914 $814,908 $837,142 $849,412 $852,554 $859,625 $877,972 $881,271
Less; Vacancy/Credit Loss 5% (40,596) (40,745) (41,857) (42,471) (42,628) (42,981) (43,899) (44,064)
Effective Rental Income 771,318 774,162 795,285 806,941 809,927 816,643 834,073 837,207
Common Area Reimbursement 93,698 96,509 99,404 102,386 105,457 108,621 111,880 115,236
Insurance Reimbursement 9,529 9,814 10,109 10,412 10,724 11,046 11,378 11,719
Real Estate Tax Reimbursement 111,167 114,502 117,937 121,475 125,119 128,873 132,739 136,721
Other Income 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500
Sub 216,893 223,325 229,949 236,773 243,801 251,040 258,496 266,176
Gross Operating Income 988,211 997,487 1,025,235 1,043,714 1,053,728 1,067,683 1,092,569 1,103,383
Expenses: psf
Common Area 2.95 104,108 107,232 110,449 113,762 117,175 120,690 124,311 128,040
Insurance 0.30 10,587 10,905 11,232 11,569 11,916 12,274 12,642 13,021
Real Estate Tax 3.50 123,519 127,224 131,041 134,972 139,021 143,192 147,488 151,912
Management 4% 1.12 39,528 39,899 41,009 41,749 42,149 42,707 43,703 44,135
Operational 0.02 706 727 749 771 794 818 843 868
Total Expense 7.89 278,449 285,987 294,480 302,823 311,056 319,681 328,986 337,977
Mortgage Interest 576,978 567,799 557,956 547,402 536,085 523,950 510,937 496,984
Cost Recovery-Improvements 39 yrs 230,770 230,770 230,770 230,770 230,770 230,770 230,770 230,770
Capital Improvements 0 0 0 0 0 0 0 0
Leasing Commissions
Taxable Income (97,986) (87,069) (57,971) (37,281) (24,183) (6,718) 21,877 37,652
Tax Liability (Savings) 34% Tax Rate (33,315) (29,604) (19,710) (12,675) (8,222) (2,284) 7,438 12,802
Annual Debt Sevice 703,952 703,952 703,952 703,952 703,952 703,952 703,952 703,952
Funded Reserves
Cash Flow before Taxes 5,810 7,548 26,803 36,939 38,720 44,050 59,632 61,454
Tax Liability (Savings) (33,315) (29,604) (19,710) (12,675) (8,222) (2,284) 7,438 12,802
Cash Flow after Taxes 39,125 37,151 46,513 49,615 46,942 46,334 52,194 48,653
Value: Cap Rate @ 7.00% 10,139,463 10,164,284 10,439,355 10,584,159 10,609,599 10,685,746 10,908,337 10,934,378

WHAT IS A REIT?
• Real Estate Investment Trust (REIT): A company that owns and for the most part operates income-
producing real estate (Examples: apartments, office buildings, warehouses, shopping centers, etc.)
• Formed in 1960 when congress passed the Real Estate Investment Trust Act
This allowed small investors to have access to commercial real estate by owning shares of a
REIT stock
• Can be either publically traded, non-exchange traded, or privately held
Investor benefits diversification & liquidity
• REIT industry trade organization is National Association of Real Estate Investment Trusts (NAREIT)
www.reit.com
But management of assets was not permitted until 1986 Act
FOR INTERNAL USE ONLY - NOT FOR EXTERNAL DISTRIBUTION

THE EVOLUTION OF THE REIT INDUSTRY
US REIT BY GROWTH AND MARKET CAP
Source: NAREIT
KEY POINTS:
–REITs own approx. $730 billion of commercial real estate Approx. 10%-15% of the overall commercial real estate market
–2009/2010 – Avg. about 98 equity offerings $25B
–REIT investor acceptance 15 REITs currently in S&P 500 (Kimco April 2006)
1960 – Initial
formation of the
REIT Industry
1971 – Market
Cap $1.5B
1986 – Tax
Reform Act:
REITs integrate
property mgmt.
2001 - REIT
Modernization Act:
Allowed REITs to
boost earnings
through TRS
2006 – Market
Cap: $400B
2010 – Market
Cap $391B
1991 – Modern
REIT Era: Kimco
leads the way!
1992 – Formation
of UPREITs and
DownREITs
2008 –
Economic
Recession

THE REIT STRUCTURE
•Why be a REIT Tax election
•Primary benefit :
• Do not pay any corporate income tax $ taxed at investor level
•REITs must adhere to several compliance requirements:
• Distribute at least 90% of taxable net income as dividends to shareholders
• Derive at least 75% of gross income from real estate income
• Have at least 75% of assets in real estate
• Have a minimum of 100 Shareholders
• No more than 50% of shares be held by 5 or fewer individuals
• Have no more than 25% of assets invested in stocks of TRS
•Additionally:
• Can generate additional revenue through taxable REIT subsidiary (TRS)
• TRS allows REITs to engage in ancillary business activities

REIT INVESTOR ADVANTAGES
1. For public traded REITs Liquidity
*Investors buy/sell shares more easily than through traditionally real estate investments
2. Manageable portfolio diversification Not limited to any specific real estate class
3. Low initial investment vs. traditional real estate investment – Kimco trading in the $18 per share range
4. Shareholder not personally liable for debt incurred by REIT
5. Does not pay corporate income tax
6. Distribute at least 90% of taxable income as dividends to shareholders (dividend yield valuation
consideration)
Since 1995 April 2011
Equity REITs 5.9% 3.3%
10-Yr Treasury
Bond
4.7% 3.3%
S&P 500 1.8% 1.9%
Average Dividend Yield
Source: NAREIT, Bloomberg

TYPES OF REITS
REIT
(Real Estate Investment Trust)
Equity REIT:
Owns and operates income
producing assets. This
represents 90% of all
REITs.
Mortgage REIT:
Lends money to an owner
of real estate and does not
have direct ownership of an
asset. This represents
approx. 9% of all REITs.
Hybrid REIT:
A cross between a equity
and mortgage REIT and
represents approx. 1% of all
REITs.

US REIT BREAKDOWN (BY MARKET CAP)
Source: NAREIT
Retail
Regional Malls
10.6%
Shopping Centers
9.1%
Apartments
12.5%
Office
12.2%
Industrial
4.8%%
Lodging/Resorts
5.2%
Mortgage
8.6%
Mixed
2.9%
Timber
6.3%
Health Care
12.6%
Diversified
9.1%
Manufactured Homes
0.7%
Self Storage
6.2%

EQUITY REIT SECTORS
Property Type/ Top REITs Income Drivers Avg. Lease Duration
Hotel/ Lodging:
• Host Hotels & Resorts
• Hospitality Properties Trust
Room Rates
Occupancy levels
Daily
Self Storage:
• Public Storage
• Shurgard Storage Centers
Household Units, Size, and Income
Population and Economic Growth
Month – to – Month
Apartments:
• Equity Residential
• Avalonbay Communities
Employment 6 – 12 Months
Industrial:
• ProLogis
• AMB Property
Increase in flow of goods
Expansion in storage requirements
6 Years
Retail:
• Kimco Strips
• Simon Property Group Malls
Retailer demand
Consumer spending
3 – 5 Years (Strips)
7 – 10 Years (Malls)
10+ Years (Anchor)
Office:
• Boston Property
• SL Green Realty
Office Job Growth
Economic Conditions
5 – 7 Years (Suburban)
10 – 12 Years (Central Business District)
Health Care:
• HCP
• Ventas Inc.
Aging Demographics
Proximity to Oldest Daughter
Proximity to Nearest Hospital
10 – 15 Years
Source: BofA Merrill Lynch Global Research

 Sector Retail (Shopping Centers)
 History Started in 1958 | 1991 IPO that initiated modern REIT era;
NYSE-listed for ~20 years; S&P 500 in 2006
 Dividend $0.18 quarterly | $0.72 annually, ~3.9% yield (03/31/11)
 Shopping Center Properties 948 properties; 137.5M | 89.0M sq. ft. (gross/pro-rata)
 Geographic Footprint 44 states, Puerto Rico, Canada, Mexico and South America
 Occupancy (pro-rata) 5-year average: 94.2% | High: 96.3% (12/31/07) | Low: 92.3% (6/30/09)
 Enterprise Value $12.6B (03/31/11)
 Credit Rating Investment Grade  BBB+ | BBB+ | Baa1 (S&P | Fitch | Moody’s)
 FFO Guidance Range $1.17 - $1.21 per diluted share (Recurring FFO)
 First Call Consensus $1.20 per diluted share
LARGEST SHOPPING CENTER OWNER
AND OPERATOR IN NORTH AMERICA

REIT RETURNS
1. Total return profile of a REIT stock includes stock price appreciation as well as dividend
yield
2. REITs outperformed the bigger market over longer periods of time (10, 15, 20 year spans)
39.5%
5.2%
3.0%
11.8% 11.0% 12.0%
22.6%
2.2% 2.9% 2.6%
6.9%
8.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
1-Year 3-Year 5-Year 10-Year 15-Year 20-Year
Historical Compound Annual Total Returns: REITs vs. S&P 500
NAREIT Equity S&P 500
Source: NAREIT
REIT Return
Profile
Equity
Growth through
acquisitions,
developments,
redevelopments
Bond
Receive steady
stream of income
through lease
structures

KEY REPORTING METRICS
OPERATING
Occupancy %:
 This is the amount of space being occupied for a
particular area (i.e. shopping center, office building).
 Occupancy % is calculated using the occupied space
divided by total space.
Leasing Spreads:
 This is the difference between the current rent and the
prior rent on a lease.
 A spread is calculated for all comparable leases which
include renewals, options and new leases.
Same Site Net Operating Income (NOI) Change:
 This measures NOI on the same pool of properties that
were owned + operated for the entirety of both periods,
which will provide insight as to how a portfolio of assets
are performing.
FINANCIAL
A. Funds From Operations (FFO) - as defined by
NAREIT:
 Net Income (Including any impairment charges)
 - gains from sale of property
 + real estate depreciation & amortization
 (include Prorata of share of unconsolidated JV)
 = FFO
B. Recurring FFO - defined individually by REIT:
 Reported FFO
 +/- non-recurring transactional items
 + impairment charges
 = Recurring FFO
C. Adjusted FFO (AFFO) - defined individually by REIT:
 Reported FFO
 - recurring capital expenditures
 +/- adjust for straight line / adjust for FAS 141
 +/- other non-cash activity
 = AFFO

THE FOUR VALUATION METHODS
Methods Description Pros Cons
Price-to-FFO • Same as price-to-earnings
ratio
• Calculated as current stock
price/FFO per share
• Most standardized
comparison across all
REITs.
• May not be a robust proxy
for cash flow as it includes
non-cash items
• Doesn’t adjust for
differences in capital
structure
Price-to-Forward Net Asset
Value (NAV)
• Similar to using price to book
ratios
• Approximation of the
liquidation value of
underlying real estate,
before income taxes on
property sales
• Can apply different multiples
to different cash flows
• Can adjust the capital
structure to see levered vs.
unlevered
• Many assumptions needed
in the NAV calculations by
analyst
• Ignores the company’s
business enterprise
Dividend Yields • Calculated as the annual
dividend divided by the
current stock price.
• No assumptions needed
• Easily compared across all
companies and stock indices
• Need to look at AFFO
estimate and payout and
coverage ratios to determine
the quality of cash flow,
because dividend may be
set too high
Implied Cap Rates • Calculated by dividing
forward NOI estimate by
sum of equity market cap
based on today’s stock price,
plus NAV liabilities minus
NAV assets
• Reveals the real estate
returns required by capital
market
• There can be some
variations in calculating cap
rates

NET ASSET VALUE (NAV)
 Attempt to approximate the liquidation value of the underlying real estate before the
impact of taxes on property sales
 A six step method is used when attaining NAV estimates
1. Determine forward 12-month cash net operating income (NOI)
 Revenue – Operating Exp. + Other Sources of Income = NOI
2. Determine market value of assets by applying a cap rate
 Net Pro Forma NOI / Cap Rate
3. Determine value of third party income
 Apply a cap rate or multiple to a third party income
4. Determine gross market value of assets
 After adding results from steps 2 and 3 together add all
assets to the total
5. Determine net market value of assets
 Deduct liabilities from step 4 to get NAV
6. Determine NAV per share
 NAV / Diluted Shares Outstanding = NAV per share

REIT PRESENTATION SUMMARY
 REITs own and operate income-producing real estate
 REITs are not taxed at the corporate level
 REIT returns exhibit characteristics of both equities and bonds
 Three types of REITs
• Equity REIT
• Mortgage REIT
• Hybrid REIT
 Biggest sectors of REITs are in retail, health care, apartments, and office buildings
 Kimco led the way for many REITs to enter into the public market
 Three different calculations for funds from operations (FFO)
• FFO
• Normalized FFO
• Adjusted FFO (AFFO) – true cash flow
 Four different valuation methods used to calculate the value of a REIT
• Price-to-FFO
• Price-to-Forward NAV
• Dividend Yields
• Implied Cap Rates

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