21 Matching Term(s) Found:

Cost of Capital: Variously defined as the weighted average of the cost of equity and debt capital employed by a REIT. Unfortunately, an incorrect definition of this term is often commonly used, which equates the cost of equity capital to the REIT's current dividend yield or FFO yield. A company's "true" cost of capital is the investor's expected rate of return on his/her investment.

Dividend Reinvestment Program: Most, though not all, REITs offer these.

downREIT: A side benefit of the UPREIT structure is that operating partnership units can be used as currency to acquire properties from owners who would like to defer taxes that would come due if the property(ies)were sold or swapped for stock. In response to this advantage of the UPREIT structure, a number of non-UPREITs have created so-called downREITs. This makes it possible for them to buy properties using downREIT partnership units. The effect is the same, however, the downREIT is subordinate to the REIT itself, hence the name.

DRIP: Most, though not all, REITs offer these.

FFO: Equal to a REIT's net income after the addback of real estate depreciation and amortization (not including the amortization of deferred financing costs). This is the measure of REIT operating performance most commonly accepted and reported by REITs, conceptually analogous to net income of nonreal estate companies. The principal reason for the addbacks is that real estate assets tend to appreciate, making an income statement that includes GAAP historical cost depreciation a misleading indicator of REIT profitability.

Funds From Operations: Equal to a REIT's net income after the addback of real estate depreciation and amortization (not including the amortization of deferred financing costs). This is the measure of REIT operating performance most commonly accepted and reported by REITs, conceptually analogous to net income of nonreal estate companies. The principal reason for the addbacks is that real estate assets tend to appreciate, making an income statement that includes GAAP historical cost depreciation a misleading indicator of REIT profitability.

Implicit 12-Month Total Return: This is calculated by adding the company's year-over-year growth rate and its current stated annual dividend. This is a ""guesstimate of total return potential that is widely used. Some industry veterans criticize this guesstimate of total return because, among other things, it fails to take into account potential changes in multiples. As long as investors recognize its potential shortcomings, implicit 12-month total returns can serve as a useful screening tool when putting together a REIT portfolio.

Implied Cap Rate: Net operating income (NOI) divided by a REIT's total market capitalization (the sum of its equity market capitalization and its total outstanding debt).

Interest Coverage Ratio: Simplify referred to as the company's coverage ratio, it's the ratio of EBITDA to interest expense. Increasingly viewed as the best means of comparing and assessing REITs' financial Leverage among REITs.

NAV: When evaluating public companies, investors generally focus on price-to-book ratios as one valuation measure. Unfortunately, price-to-book ratios are inappropriate for REITs insofar as a company's book value, which is based on historic cost figures, may not accurately reflect the earnings capacity of otherwise well-maintained assets. Also, the balance sheet consolidations accompanying IPOs were often pursued using different accounting conventions, resulting in an apples-to-oranges comparison between companies. Thus, many analysts prefer to use net asset value as a surrogate for book value, which is appropriate insofar as book value is meant to represent an entity's liquidation value.

Net Asset Value: When evaluating public companies, investors generally focus on price-to-book ratios as one valuation measure. Unfortunately, price-to-book ratios are inappropriate for REITs insofar as a company's book value, which is based on historic cost figures, may not accurately reflect the earnings capacity of otherwise well-maintained assets. Also, the balance sheet consolidations accompanying IPOs were often pursued using different accounting conventions, resulting in an apples-to-oranges comparison between companies. Thus, many analysts prefer to use net asset value as a surrogate for book value, which is appropriate insofar as book value is meant to represent an entity's liquidation value.

Positive Spread Investing: Defined as when a REIT buys a property that has a higher initial yield than the current yield on the REIT's capital. For example, a REIT buys a property yielding 11% (property net operating income divided by the all-in cost of the property) at a time that its debt is borrowed at 8% interest and its equity is trading at an FFO yield (inverse of its FFO multiple) of 10%. If the REIT is funded half with equity and half with debt, it realizes a 200 basis point (11% minus 9%) positive spread.

Real Estate Investment Trust: A real estate investment trust is a private or public corporation (or trust) that enjoys a special status under the U.S. tax code that allows it to pay no corporate income tax so long as its activities meet statutory tests that restrict its business to certain commercial real estate activities. Most states honor this federal treatment and do not require REITs to pay state income tax. By law, REITs must pay out 90% of their taxable income.

REIT: A Real Estate Investment Trust is a real estate company or trust that qualifies under tax provisions as a pass-through entity that sells shares and holds a portfolio of real estate assets under professional management. A REIT is exempt from corporate taxes

REIT: A real estate investment trust is a private or public corporation (or trust) that enjoys a special status under the U.S. tax code that allows it to pay no corporate income tax so long as its activities meet statutory tests that restrict its business to certain commercial real estate activities. Most states honor this federal treatment and do not require REITs to pay state income tax. By law, REITs must pay out 90% of their taxable income.

REIT purgatory: REIT purgatory is not an official term, but it is one that is often used in the industry. It is quite similar to the term "in the box", when used to refer to REITs that are shut off from capital. In general, REITs are said to be in REIT purgatory when they have sustained damage to their reputation that precludes normal avenues of growth. There are several ways to get in REIT purgatory, but the best known (in no particular order) are as follows: 1. Mislead analysts and investors about FFO and dividend numbers then cut the dividend or try to explain away FFO decline as a one-time aberration. This seldom works, as it tends to leave analysts high and dry in terms of explaining how estimates were so far out of whack. 2. Load up on debt to grow for the sake of growth. If the acquisitions make sense from a portfolio or strategic perspective, then no problem, but if they do not, watch out. 3. Take actions that are not consistent with the operation of a public company. Developers are notoriously private individuals, but operators of public companies need to adopt a different perspective. There are other ways, but the general rule is that once the analysts are down on a company, the company can sink off of the institutional investor radar screen in a hurry. When this happens, it becomes almost impossible to secure financing for growth or anything else beyond basic corporate operations. These companies are often forced to "explore strategic alternatives to maximize shareholder value", industry code for "put themselves up for sale". REIT purgatory is reserved for those companies that have a long-term problem with their structure and management that consistently run their operations contrary to analyst's wishes and expectations. Sometimes the analysts are right, sometimes not. The result is that there is some potential in investing in these types of companies, but it is not a strategy for the uninitiated or the faint of heart. Aside from REIT Purgatory, there are often companies that are out of favor for a period of time, ranging from several weeks to a year. These REITs can get into trouble by increasing dividend payout ratios to unsustainable levels, creating new conflicts of interest, hiding debt in joint-ventures, overpaying for properties, issuing equity at levels that analysts believe to be below Net Asset Value, and so on. These companies are often depressed for a short period of time, largely based on one or two large investors moving out of the stock. This also offers investment opportunities, as good companies can take a beating based on short-term market phenomena. For example, Duke-Weeks Realty (DRE) recently issued equity in a private placement to a major institutional investor. Analysts and others saw the transaction as being significantly below NAV. DRE, with the best information for determining NAV, saw the transaction as slightly below NAV. The result was that Duke, who invested the proceeds in a FFO-accretive manner, traded down substantially. To sum it up, DRE issued equity at a price that was $.03-$.05 per share dilutive to current shareholders and invested the proceeds in investments that were $.25-$.30 accretive to FFO. Analysts who did not understand the transaction raised questions, and the price moved down. Not surprisingly, those familiar with the company loaded up on the downturn (which was as high as 15%) and have done well since. It pays to keep your eyes open. The key is figuring out if the REIT's problems are long-term and systematic (REIT Purgatory) or short-term. Investing in Purgatory is highly risky, while investing in REITs under short-term pressures is less risky. Both offer a chance for good returns, but the risks vary dramatically. Those who take the time to figure out which is which can do rather well.

Return of Capital: The portion of a REIT's dividend in excess of taxable income. Because REIT dividends are often higher than taxable income, principally due to depreciation, the amount by which the dividend exceeds taxable income is a return of capital to a shareholder, meaning that

Straightlining: REITs straight-line rents because generally accepted accounting principles, or GAAP, require it. Typically, a tenant's monthly rent will increase over the life of a lease; this applies to commercial properties, not usually residential properties. Straightlining averages the tenant's rent payments over the Lease's life. In other words, rental revenues are overestimated in the early years and underestimated in the later years.

Total Debt and Total Market Capitalization: Together, these measures have been used to provide an assessment of leverage. Debt-to-Total Market Cap was the most often cited measure of leverage early on in the current REIT underwriting cycle (circa 1993). There are a number of problems associated with using it for that purpose, however. Chief among those is that it doesn't provide meaningful information regarding a company's ability to service its debt.

Umbrella Partnership REIT (UPREIT): A REIT structure in which the REIT does not own a direct interest in properties, but rather in an umbrella partnership that owns interests in properties. For this reason, this umbrella partnership is generally referred to as the operating partnership. It is also common for an operating partnership in an UPREIT structure to own interests in joint ventures in addition to properties. The UPREIT has been the structure of choice in most REIT initial public offerings over the past several years, owing to the tax deferral benefits this structure offers to the company's principals. In a nutshell, the UPREIT structure allows the principals, who are transferring their properties from private ownership to public ownership via an IPO, to maintain their historical cost basis by transferring the properties to the operating partnership rather than directly to the REIT. The REIT, in turn, is the general partner of, and owns a majority interest in, the operating partnership. If the properties were transferred directly to the REIT, it would result in a stepped-up cost basis in the properties for the new public entity and trigger a taxable event for the transferring principals. By transferring the properties to the operating partnership in exchange for operating partnership (OP) units, the principal's historical cost basis is maintained. The 0P units are exchangeable on a one-for-one basis into REIT common shares and, over time, the principals can convert OP units to REIT common shares (triggering a taxable event), giving the principals the option to incur their tax liability in smaller increments.

UPREIT: A REIT structure in which the REIT does not own a direct interest in properties, but rather in an umbrella partnership that owns interests in properties. For this reason, this umbrella partnership is generally referred to as the operating partnership. It is also common for an operating partnership in an UPREIT structure to own interests in joint ventures in addition to properties. The UPREIT has been the structure of choice in most REIT initial public offerings over the past several years, owing to the tax deferral benefits this structure offers to the company's principals. In a nutshell, the UPREIT structure allows the principals, who are transferring their properties from private ownership to public ownership via an IPO, to maintain their historical cost basis by transferring the properties to the operating partnership rather than directly to the REIT. The REIT, in turn, is the general partner of, and owns a majority interest in, the operating partnership. If the properties were transferred directly to the REIT, it would result in a stepped-up cost basis in the properties for the new public entity and trigger a taxable event for the transferring principals. By transferring the properties to the operating partnership in exchange for operating partnership (OP) units, the principal's historical cost basis is maintained. The 0P units are exchangeable on a one-for-one basis into REIT common shares and, over time, the principals can convert OP units to REIT common shares (triggering a taxable event), giving the principals the option to incur their tax liability in smaller increments.