Real Estate Investment Trust (REIT) Is a company, owning??, manages or provides the necessary finances for real estate, which generates income. In accordance with the law, ninety percent of income real estate trusts must distribute income from securities among the owners of shares. What properties to look at when choosing and what are the methods for evaluating REIT?
Highlights:
- REITs must pay more than ninety percent of their income as dividends to stockholders - this is the reason why older people love this tool.
- You can leave book price indicators for other assets, it is better to use net asset price instead
- Any real estate trust is best to conduct a top-down and bottom-up study. Top-down causes will include an increase in the number of residents and jobs, and in ascending - income from rent and funds from operating work.
How REIT Real Estate Trusts Earn
Almost all REITs lease premises or land and collect rent, and then distribute this income as dividends among the shareholders.
Mortgage REIT (also called mREIT) do not own real estate, but provide it with the necessary finances. These trusts profit from interest on their investments., Enabling?? home purchase loans, mortgage-backed securities and other related assets.
To call ourselves a real estate investment trust REIT, the company is obliged to comply with certain provisions of the Tax Code and comply with the rules:
- Invest more than seventy-five percent of all assets in real estate, cash or US Treasury
- Earn more than seventy-five percent of gross rental income, interest on loans for the purchase of housing or income from the sale of real estate
- Pay a minimum of ninety percent of taxable income in the form of dividends to shareholders every year
- Be a company and run by a board of directors or trustees
- The trust must have at least 100 owners of shares after the first year of existence
- A maximum of fifty percent of the shares may be owned 5 or the least persons
If the company receives REIT status, then stops paying tax on the income of companies.
REIT types
There are a number of different REITs, who specialize in owning:
- certain apartment buildings
- regional shopping centers
- office buildings
- holiday homes and hotels.
Some are diversified, and some do not lend themselves to classification - for example, REIT, who only invests in golf courses.
MReit Real Estate Mortgage Trusts stand out. These REITs provide loans secured by real estate, but usually they do not own or operate real estate. Mortgage REITs require separate analysis. These are more likely financial companies, who use multiple hedging instruments to manage their interest rate, not funds with rental flow.
We will focus on the analysis of classic real estate trusts.
REIT is a mixture of dividend stocks and real estate. Difference in analysis from, for example, dividend aristocrats, consists in the peculiarities of property accounting.
Traditional indicators, such as earnings per share (EPS) and P / E are not eligible for REIT assessment.
FFO and AFFO are our friends in this difficult business.
A simple example:
Investment trust "Romashka" buys a building for $ 1M. Accounting will require depreciation on this building. Let's assume, that we will distribute depreciation to 20 years by linear method, that is, every year we will write off $ 1M / 20 = $ 50,000.
What will happen on the balance sheet and income statement(OPU)?
Let's take a look at the simplified balance sheet and income statement above. At the 10th year in our balance sheet remains $500,000 building value - book value = $ 1M original cost less accumulated depreciation in $500,000 (10 years x $50,000).
In our income statement $190,000 expenses are deducted from $200,000 income, and $50,000 just refer to the 10th deduction for depreciation.
FFO
Depreciation is a non-monetary expense, and our trust does not physically spend money in the 10th year.
. The idea is, that depreciation unfairly lowers our bottom line, because the building has often not lost half of its value in the last 10 years. The FFO index corrects this perceived distortion., excluding depreciation charges + somewhat different (-gains on sales).
AFFO
REIT FFO operating income is closer to cash flow, than net profit, but still does not reflect cash flow.
In the example above, we have not taken into account the cost of acquiring a building of $ 1M anywhere at all., that is, capex. But it would be nice to have an indicator, which includes such amounts.
The calculation of capital expenditures gives an indicator, known as adjusted FFO (AFFO).
Net worth (ARE NOT)
The balance of the "Romashka" trust clearly suggests another common REIT metric - the value of net assets. (ARE NOT). In year 10, the book value of the building was only $500,000, because half of the original cost has been amortized. Therefore, the carrying amount and related key figures, as P / B, pretty much useless for a REIT.
Calculating NAV requires a somewhat subjective valuation of REIT assets. In REIT "Romashka", the building generates operating profit in the amount of $100,000 (revenue $200,000 minus $100,000 operating expenses). One method is, to benefit from operating income based on market rate. If we consider, that the current market rate for this type of building is 8%, then our estimate of the cost of the building will be $ 1.25M ($100,000 in operating profit / 8% -nay rate = $ 1.25M).
This market value estimate replaces the carrying amount of the building.. Then we would deduct the mortgage debt, to get net worth. Assets less debt equal to equity, where “net” net worth means net debt. The last step is to divide the NAV by the number of shares, to get NAV per share, And, voila-la, here it is our intrinsic value and understanding, how many conventional bricks of a shopping center belong to a shareholder.
If the NAV per share is much higher than the quotes, either this is a chance to become a winner or ... the market knows something.
When you choose stocks, you sometimes hear about top-down or bottom-up analysis.
Top-down analysis starts with an assessment of the economic outlook and focuses on a trendy theme or sector. For example, population aging trend, to which pharmaceutical companies go for billions of dollars in profits.
Bottom-up analysis focuses on company-specific gears. In the case of REIT, these are contracts with tenants and the presence of a railway near the warehouse..
REITs are explicitly required as top-down, and bottom-up analysis.
From the point of view from top to bottom, REIT trusts can be affected by all, what affects the supply and demand in real estate. Population growth and new jobs, interest rates and more.
Raising interest rates often coincides with economic recovery, what is good for a REIT, because people spend money, and businesses rent more space. Raising interest rates is good for apartment trusts, since people prefer to remain renters, rather than buying new houses. On the other hand, REITs can often take advantage of lower interest rates, reducing your interest expenses and thereby increasing your profitability.
Since REIT trusts buy real estate, prepare for high levels of debt.
Be sure to compare REIT debt levels with industry averages or debt ratios for competitors.
Capital market conditions are also important, namely the institutional demand for shares of REIT trusts. In the short term, this demand may outweigh the fundamentals. For example, REIT shares performed well in 2001 year and first half 2002 of the year, despite weak fundamentals, because money spilled over into the entire asset class.
At the private investor level in REITs, you want to see revenue growth prospects, and rental income, and revenue from related services and FFO.
Look for the trust's unique rental strategy and rent increase opportunities.
How REIT Trusts Can Save
Typically, REITs seek to grow through acquisitions and achieve economies of scale through the takeover and digestion of underperforming real estate..
Large-scale savings are achieved in terms of reducing operating costs as a percentage of revenue. But acquisitions are a double-edged sword. If the REIT fails to improve rental rates and / or raise rents, there is a danger of constant impulsive acquisitions to stimulate growth.
Mortgage debt also plays a big role, so it's worth looking at balance sheet and debt-to-equity ratio.
In practice, it's hard to say, when the leverage becomes excessive. It is important to weigh the ratio of fixed to floating rate debt. In the current low interest rate environment, those trusts, which only use floating rate debt, under attack when rates start to rise.
