18 - REITs - ch. 21

ucla | MGMT 170 | 2023-06-04T23:26

Table of Contents

Supplemental

Lecture

  • REIT structure
    • created by US congress in 1960 for small investors to invest in property markets wo paying corporate tax
    • REITs provide liquidity, dividends, diversification, and prof management
    • if a REIT follows the rules, it will not payu tax at entity level and tax will passthrough to shareholders for dividends (losses not pass through)
  • types of REITs
    • most are equity REITs that own properties - usually sing property type
    • rest are Mortgage REITs that own mortgages and MBS - on either resi or commercial
  • REIT qualifications
    • managed by board of directors w at least 100 shareholders
    • no more than 50% equity can be in ≤ 5 sharehjolders (5/50 rule)
    • shares must be fully transferrable and either public or private
  • distribution reqs
    • ≥ 90% of taxable income must be distributed as dividends → else corporate tax applied
  • asset reqs
    • ≥ 75% of assets must be related to real estate, govt secs, or cash
    • ≤ 20% can be in taxable REIT subsidiaries (TRS) - authorized by 1999 REIT modernization act
  • income reqs
    • ≥ 95% of gross income from real estate rents, profit on sale, mortgage interest, and dividends
  • net asset value (NAV)
    • an accounting measure of REITs net worth - not true market value due to depreciated cost
    • if REIT’s stock price reflects NAV more so than market value → may be prime takeover candidate
  • funds from operation (FFO)
    • reit income is FFO = EPS adjusted by adding back depreciation and excluding profits from asset sales (only rent and interest)
    • a measure of dividend paying ability
  • UPREITs
    • umbrella partnership reits issue operating partnership units (OP units) - convertible into REIT shares ad allow REIT to buy appreciated properties w OP units instead of cash
    • so sellers can achieve 1031 tax deferred exchange
    • capital gains tax due when OP units transferred to REIT shares
  • REIT growth drivers
    • increase NOI from existing properties (increase rent and occupancy)
    • acquire more properties
    • renovate/expand existing or on new land
    • provide property services through TRS (taxable reit subsidiaries) - leasing, property management
    • financial engineering - property debt or REIT corporate leverage

Discussion

Resources

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