Download Why a REIT? - International Financial Law Review

Real Estate Investment Trusts
Anna T. Pinedo, Morrison & Foerster
Thomas A. Humphreys, Morrison & Foerster
Halle Benett, UBS Investment Bank
© 2009 Morrison & Foerster LLP All Rights Reserved
Why a REIT?
2
Real Estate Investment Trusts
• A REIT is an investment vehicle designed to allow
investors to pool capital to invest in real estate assets
• Publicly traded investment vehicle
• Pass-through entity for U.S. federal income tax purposes
• Can be classified into three categories:
• Equity REITs
• Mortgage REITs
• Hybrid REITs
3
Real Estate Investment Trusts
• Equity REITs
• “Real” REITs that directly own, invest in, or acquire, manage, or
develop real property
• Derive revenue from income generated by rents
• Include shopping mall, apartment complex, commercial office,
hotel and other similar REITs
4
Real Estate Investment Trusts
• Mortgage REITs
• Invest indirectly in real property through investments in
mortgages, CMBS, RMBS, etc.
• Generate income from interest earned
• Hybrid REITs
• A combination of equity and mortgage interests in properties
5
Real Estate Investment Trusts
• Capital Structure
• Equity
• Common
• Preferred
• Debt
• Subordinated
• Senior
• Management
• Internal
• External
6
Why Invest in REITs
• Access
• Provides retail investors with an opportunity to participate in real
estate investments
• Tax advantages
• Highly liquid
• Dividend-paying
• Professionally managed
7
Mortgage REITs
8
History of Mortgage REITs
• Construction loan REITs formed by several major banks
in the 1960s and 1970s
• Example: Chase REIT
• Made loans to developers, other real estate owners
• When the real estate market went into a downturn, many
construction loan REITs went bankrupt in the mid-1970s as the
loans soured
9
History of Mortgage REITs
• Next wave of mortgage REITs began cropping up in the
1980s
• Examples: Strategic Mortgage Investments, Inc., Countrywide
REIT, Capstead Mortgage Corporation
• Mortgage REITs sold off the 90% senior interests in loans
originated by the REIT while retaining a 10% subordinated
interest. IRS granted PLRs allowing nonrecognition on the sale
of senior interests. PLRs later revoked after reconsideration of
technical issues.
• Mortgage REITs shifted to borrowings through CMOs. CMOs
were treated as borrowings rather than sales for US federal
income tax purposes.
• 1986 Act created “REMIC”s, intended to be the sole vehicle for
securitizing mortgages. REITs may also securitize mortgages
(old-style CMOs), but limitations exist on “excess inclusion
income”
10
History of Mortgage REITs
• In the 1990s, mortgage REITs boomed. Large REITs,
such as American Home Mortgage, Impac, and others,
created successful businesses originating and
securitizing residential and commercial mortgages.
• A few REITs suffered in the mid-1990s, including, for
example, Mortgage Realty Trust, which filed for
bankruptcy in 1995, and Crimi Mae, which filed for
bankruptcy in 1998.
11
History of Mortgage REITs
• During the early 2000s, many mortgage REITs expanded
into subprime lending.
• Beginning in early 2007, such mortgage REITs began to
feel the heat. The financial crisis wiped out an entire
segment of these REITs.
• Examples: American Home Mortgage Investment Corp.,
New Century Financial Corporation, and People’s
Choice Financial Corporation, among others.
12
Today
• At least 14 mortgage REITs have filed registration
statements to raise capital in the last several months
• General Investment Strategies
• Invest in high quality securities
• Originate mortgage loans
• Invest in distressed debt
13
REIT Market Update
Mortgage Finance
Price Change
YTD
3 Month
(%)
(%)
Price/EPS
2009E
2010E
(x)
(x)
Price/
Book
Tang.
(x)
Book (x)
Ticker
Share
Price
($)
Market
Cap
($mm)
LTM
(%)
Chimera Investment Corp.
CIM
3.49
2,339
10.8
1.2
(2.5)
(11.0)
7.8
6.5
1.07
1.07
9.2
5.0
Redwood Trust Inc.
RWT
13.94
1,080
(0.2)
(6.5)
(14.2)
(5.2)
46.5
7.6
1.35
1.35
7.2
5.0
PennyMac Mortgage Investment
PMT
18.41
308
na
na
(2.1)
(2.5)
73.6
6.1
0.92
0.92
na
10.0
Invesco Mortgage Capital Inc.
IVR
19.94
199
na
na
(0.3)
(2.0)
14.6
6.2
1.02
1.02
–
4.0
5.3
(2.7)
(2.3)
(3.9)
30.5
6.3
1.04
1.04
7.2
5.0
Company
1 Week
(%)
Dividend
Yield (%)
Long-Term
EPS Growth
(%)
Non-Agency REITs
Median—Non-Agency REITs
Agency REITs
Annaly Capital Management
NLY
16.91
9,347
21.1
6.6
0.4
(3.1)
6.2
5.8
1.02
1.03
14.2
5.0
MFA Financial Inc.
MFA
7.42
1,651
37.4
26.0
0.3
(3.5)
6.9
5.9
1.06
1.06
11.9
3.0
Hatteras Financial Corp.
HTS
28.10
1,017
32.0
5.6
(0.8)
1.5
5.8
5.6
1.08
1.08
15.7
5.0
Capstead Mortgage Corp.
CMO
13.16
909
34.3
22.2
(1.5)
(0.4)
5.7
5.5
1.07
1.07
17.6
4.5
Anworth Mortgage Asset Corp.
ANH
7.13
742
28.9
10.9
(5.4)
(7.6)
5.8
5.5
0.97
0.97
18.0
1.0
American Capital Agency Corp.
AGNC
26.00
502
44.4
21.7
14.1
(9.5)
4.3
5.5
1.17
1.17
23.1
5.0
Cypress Sharpridge Investments
CYS
13.35
242
na
na
0.8
(1.0)
5.8
5.3
0.98
0.98
–
na
New York Mortgage Trust Inc.
NYMT
6.08
57
211.8
176.4
3.1
(21.3)
5.7
4.5
1.24
1.24
15.1
na
Median—Agency REITs
34.3
21.7
0.3
(3.3)
5.8
5.5
1.07
1.07
15.4
4.8
Overall Median
32.0
10.9
(0.6)
(3.3)
6.0
5.7
1.06
1.07
14.2
5.0
Overall Mean
46.7
29.3
(0.7)
(5.5)
15.7
5.8
1.08
1.08
12.0
4.8
Note:
Market Data as of October 30, 2009
14
REIT Market Update
Mortgage Finance
Company
Share
Price
($)
Ticker
Market
Cap
($mm)
LTM
(%)
Price Change
YTD
3 Month
(%)
(%)
1 Week
(%)
Price/EPS
2009E
2010E
(x)
(x)
Price/
Book
Tang.
(x)
Book (x)
Dividend
Yield (%)
Long-Term
EPS Growth
(%)
Commercial Mortgage REITs – 2009 IPOs
Starwood Prop Trust Inc.
STWD
20.13
979
na
na
na
(0.9)
nm
9.9
nm
na
na
10.0
Colony Financial Inc.
CLNY
19.45
285
na
na
na
(2.0)
na
na
na
na
nm
na
CreXus Investment Corp.
CXS
14.18
253
na
na
na
(1.0)
na
na
nm
na
na
na
Apollo Comm Real Estate Fin
ARI
17.91
188
na
na
na
(2.3)
na
na
nm
na
na
na
––
–
–
(1.50)
–
–
–
–
–
10.00
(1.4)
(1.4)
4.9
nm
0.19
na
11.3
na
(22.3)
nm
nm
0.14
0.15
–
–
Median – 2009 IPOs
Commercial Mortgage REITs – Pre 2009 IPOs
NorthStar Realty Finance Corp.
NRF
3.53
241
(35.7)
(9.7)
iStar Financial Inc.
SFI
2.09
208
81.7
(6.3)
Gramercy Capital Corp.
GKK
3.14
157
110.7
145.3
118.1
12.1
nm
nm
0.21
0.57
–
na
Newcastle Investment Corp.
NCT
1.92
102
(52.6)
128.6
195.4
(16.5)
na
na
nm
nm
–
na
Anthracite Capital Inc.
AHR
0.72
57
(79.2)
(67.7)
24.1
(13.3)
4.1
nm
0.16
0.16
–
na
Arbor Realty Trust Inc.
ABR
2.00
51
(42.4)
(32.2)
10.5
(18.0)
nm
nm
0.19
0.19
–
na
Capital Trust Inc.
CT
1.96
43
(71.9)
(45.6)
23.3
(18.3)
nm
nm
0.13
0.13
–
na
JER Investors Trust Inc.
JRT
0.55
3
(98.1)
(94.1)
48.6
(3.5)
na
na
0.16
0.16
–
na
Realty Finance Corporation
CRTYZ
na
na
na
Na
na
na
na
na
na
na
na
na
(62.2)
(38.9)
(15.9)
4.1
–
0.16
0.16
–
–
Median – Pre 2009 IPOs
Note:
(14.0)
36.4
Market Data as of October 30, 2009
15
Historical Valuations
Price to NTM Earnings—Last 10 Years
Dividend Yield—Last 10 Years
30.0
20.0
18.0
25.0
16.0
14.0
20.0
13.5%
(% )
(x)
12.0
15.0
10 yr Avg:
9.2x
10.0
10.0
10 yr Avg:
10.2%
8.0
6.0
6.0x
5.0
4.0
2.0
0.0
1999
2001
2003
2005
2007
0.0
1999
2009
2001
2003
2005
2007
2009
REIT Median¹
Source: FactSet
Note:
1 Median includes Annaly Capital, Anworth Mortgage, Capstead Mortgage, MFA Financial and Redwood Trust
16
Historical Valuations
Price to Book—Last 10 Years
2.00
1.80
1.60
1.40
(x)
1.20
10 yr Avg: 1.10x
1.02x
1.00
0.80
0.60
0.40
0.20
0.00
1999
2000
2002
2003
2004
2005
2006
2007
2008
2009
REIT Median¹
Source: FactSet
Note:
1 Median includes Annaly Capital, Anworth Mortgage, Capstead Mortgage, MFA Financial and Redwood Trust
17
REIT Registrations
REITs Currently in Registration
Initial
Filing
Date
Current
Filing
Date
Issuer
8/28/09
8/28/09
Marathon Real Estate Mortgage Trust
8/28/09
Deal
Value
($mm)
Manager
Asset Class Focus
Incentive
Fee?
300
Marathon Asset Management
Residential
Yes
10/21/09 Brookfield Realty Capital Corp.
500
Brookfield
Commercial
Yes
7/29/09
9/2/09
500
Transwestern
Whole Mortgage Loans &
Subordinated Debt
Yes
7/27/09
10/30/09 Bayview Mortgage Capital LLC
500
Bayview Asset Management (Blackstone)
Diversified
Yes
7/17/09
9/29/09
400
Ladder Capital Finance Holdings (UBS DRCM,
TowerBrook and GI Partners)
Commercial
No
7/14/09
10/08/09 Ellington Financial LLC
200
Ellington Management Group
Diversified
Yes
7/13/09
7/13/09
AG Financial Investmen
t Trust Inc
300
Angelo Gordon & Co. (GE Capital)
Diversified—PPIP
Yes
7/08/09
9/18/09
Foursquare Capital Corp
500
AllianceBernstein
Diversified—PPIP
Yes
6/12/09
10/6/09
Western Asset Mortgage Capital
500
Legg Mason
Diversified—PPIP
Yes
5/21/09
7/29/09
Sutherland Asset Management Corp
250
Waterfall Asset Management
(M.D. Sass—Macquarie)
Residential—Non-Agency MBS
No
8/15/08
11/7/08
CWCapital Realty Trust Inc
250
CW Financial Services
Commercial
Yes
6/04/08
6/04/08
Petra Real Estate Opportunity Trust
200
na
Commercial
Na
4/25/08
9/22/09
Madison Square Capital Inc
200
Highland Financial Holdings Group
Residential—Agency MBS
No
2/29/08
5/30/08
Point Asset Management Inc
250
FII Holdings
Diversified
Yes
2/12/08
5/15/09
MFResidential Investments Inc
250
MFA Mortgage Investments
Residential—
Non-Agency MBS
No
5/11/07
6/28/07
Marathon Real Estate Finance
Inc
200
Marathon Asset Management
Commercial
No
Transwestern Realty Finance Inc
Ladder Capital Realty Finance Inc
18
Recent REIT IPOs
Completed
IPO Size
($mm)
Gross
Proceeds
($mm) 1
IPO Date
Issuer
Manager
Asset Class Focus
Incentive Fee?
9/23/09
Apollo Commercial Real
Estate Finance
Apollo Global Management
200
210
Commercial Loans
No
9/23/09
Colony Financial Inc
Colony Capital
250
293
Commercial Loans
Yes
9/16/09
CreXus Investment Corp.
FIDAC (Annaly)
200
268
Commercial Loans
No
8/11/09
Starwood Property Trust Inc
Starwood Capital Group
810
952
Commercial Loans
Yes
7/29/09
PennyMac Mortgage
Investment Trust
PNMAC Capital Management
(BlackRock, Highfields)
320
335
Residential—Distressed Loans
Yes
6/25/09
Invesco Mortgage Capital Inc.
Invesco Ltd. (NYSE: IVZ)
170
206
Diversified—PPIP
No
6/11/09
Cypress Sharpridge
Cypress Sharpridge Advisors LLC
100
115
Residential— Agency MBS
No
Source: Company Filings
Note:
1 Gross proceeds including over-allotment option and private placement
19
Tax Requirements
20
Taxation of REITs
• Requirements: Section 856(a)
•
•
•
•
•
•
•
Centralized management
Transferable shares
C Corporation for tax purposes
Not a financial institution or insurance company
Widely held (5 or fewer test, 100 shareholder requirement)
Income and assets tests
Distribution requirements
21
Income Test
• At least 75% of a REIT’s gross income must be:
• Rents from real property;
• Interest on obligations secured by mortgages on real property or
on interests in real property;
• Gain from the sale or other disposition of real property (including
interests in real property and interests in mortgages on real
property) which is not dealer property;
• Dividends or other distributions on, and gain (other than gain
from prohibited transactions) from the sale or other disposition
of, shares in other REITs;
22
Income Test
•
•
•
•
Abatements and refunds of taxes on real property;
Income and gain derived from foreclosure property;
Commitment fees;
Gain from the sale or other disposition of a real estate asset
which is not a prohibited transaction; and
• Qualified temporary investment income.
23
Income Test
• At least 95% of the REIT’s gross income must be
derived from:
•
•
•
•
Items that meet the 75% income test;
Other dividends;
Other interest; and
Gain from the sale or other disposition of stock or securities that
are not dealer property.
24
Asset Test
• At least 75% of the value of the REIT’s total assets is represented
by real estate assets, cash and cash items (including receivables),
and Government securities (“base securities”).
• 25% asset test. Not more than 25% of the value of the REIT’s total
assets is represented by securities (other than base securities).
• 25% asset test. Not more than 25% of the value of the REIT’s total
assets is represented by securities of one or more TRSs.
• 5%/10% asset tests: except for TRSs and base securities,
• Not more than 5% of the value of the REIT’s total assets is represented by
securities of any one issuer,
• The REIT does not hold securities possessing more than 10% of the total
voting power of the outstanding securities of any one issuer, and
• The REIT does not hold securities having a value of more than 10% of the
total value of the outstanding securities of any one issuer.
25
Distribution Requirements
• The REIT provisions do not apply to an entity for a
taxable year unless the deduction for dividends paid
during the taxable year equals or exceeds: (i) the sum of
(a) 90% of the real estate investment trust taxable
income for the taxable year (determined without regard
to the deduction for dividends paid and by excluding any
net capital gain); and (b) 90% of the excess of the net
income from foreclosure property over the tax imposed
on such income by Code Section 857(b)(4)(A) minus (ii)
any excess noncash income.
26
Prohibited Transactions Tax
• A REIT is subject to a 100% tax on net income derived
from prohibited transactions.
• Prohibited transaction means a sale or other disposition
of dealer property.
• Dealer property is: “stock in trade of the taxpayer or
other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary
course of his trade or business.”
27
Taxable REIT Subsidiary
• A REIT may enter into otherwise prohibited activities
through a TRS.
• The TRS itself is taxable as a corporation.
• For purposes of the asset tests, 25% of a REIT’s assets
can be held in TRSs.
• With respect to the income tests, the Code allows the
TRS to perform noncustomary services which would
otherwise not qualify as good income.
28
Foreclosure Property
•
Income and gain from foreclosure property is good income for both income
tests even if it would not otherwise qualify as good income. Thus, the
income cannot disqualify the REIT. However, the price for this protection is
that the REIT is subject to tax at regular corporate rates on income from
foreclosure property that does not otherwise qualify as good income under
the 75% income test.
•
Foreclosure property means any real property (including interests in real
property), and any personal property incident to such real property, acquired
by a REIT as the result of such REIT having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was default (or
default was imminent) on a lease of such property or on an indebtedness
which such property secured. Foreclosure property does not include
property acquired by the REIT as a result of indebtedness arising from the
sale or other disposition of dealer property not originally acquired as
foreclosure property.
29
Captive REITs
A
B
Assets
Taxpayer
Income
REIT
Subsidiary
Rental
Payments
Dividends
Dividends
REIT
Taxpayer
30
Captive REITs
• One use of Captive REITs has historically been to
reduce or eliminate state taxes.
• The REIT is not taxed if the state models its tax law after
federal law because of the dividends paid deduction.
• The taxpayer also attempts to receive a second
deduction in the same or another jurisdiction.
• States have been attacking these structures.
31
Corporate and
Securities Law Issues
32
Formation
• An existing company may reorganize itself in order to
qualify as a REIT
 Reorganization will depend upon the original structure
 Objective will be to have the company hold “qualifying assets”
and transfer assets that yield non-qualifying income
• A REIT may be organized as a business trust or as a
corporation
33
Formation
•
•
•
•
A new entity may be formed that qualifies as a REIT
Most REITs are organized in Delaware or Maryland
Maryland’s REIT law is the most well formed
The entity’s organizational documents will need to
contain special provisions regarding ownership limits and
transfers
34
Maryland law
• Maryland has a statute that applies specifically to REITs organized
as trusts.
• In Delaware, a REIT is required to “at all times have at least one
trustee which, in the case of a natural person, shall be a person who
is a resident of this state or which, in all other cases, has its principal
place of business in this state.” There is no such requirement in
Maryland.
• Maryland limits the liability of trustees and officers for monetary
damages in suits by or on behalf of the REIT or by its shareholders.
Maryland REIT Law permits a trust REIT to indemnify and advance
expenses to its trustees and officers to the same expansive extent
permitted for directors and officers of Maryland corporations.
35
Maryland law (cont’d)
• Maryland permits trustees, without shareholder approval,
to amend the declaration of trust to cause a trust REIT to
continue to qualify as a REIT under the Internal Revenue
Code.
• The Maryland Business Combination Act (which includes
a five-year moratorium on transactions with an interested
stockholder, and supermajority vote requirements for
business combinations thereafter) applies to a Maryland
REIT, unless it opts out of the statute. The Maryland
Control Share Acquisition Act also includes REITs and is
believed to have the lowest trigger (10%) of any state
control share acquisition statute.
36
Organizational issues
Historically, REITs have been structured in any of the
following ways:
•
•
•
•
•
as UPREITs (umbrella partnership)
as Down REITs
as paired-share REITs
as stapled REITs
as paper clip REITs
37
UPREIT (Equity)
Public Shareholders
Newly Formed
REIT
IPO Cash
General Partner
OP Units (1:1 conversion
to REIT shares)
Operating
Partnership
(L.P.)
Historic Properties
Limited Partners
(former private
real estate
partnership
interest holders)
New Properties
Taxable REIT
Subsidiary
38
UPREIT (Mortgage)
Public Shareholders
REIT
General Partner
Structure Permits Future
Acquisition of Mortgage
Portfolios on a Tax Free Basis
(But Would Defer Losses to
LPs if Loss Loans)
Mortgages
OP Units
(1:1 conversion to
REIT shares)
Limited Partners
Operating
Partnership
(L.P.)
TRS
(REO/“Far Gone” Mortgages)
39
DOWNREIT
Existing REIT
Existing Properties
Contribution
Limited Partners
Existing and
Contributed
Properties
Mortgages
TRS
(REO/“Far Gone” Mortgages)
40
The Paired-Share REIT Structure
Paired Shares Trade as Unit
REIT
Lessee Operator
Rents
Fee Simple
Ownership in
Property
(e.g., Racetrack)
Lease
Operating Income
41
External versus internal management
• External management structure usually resembles a
private equity style arrangement
 manager receives a flat fee and an incentive fee
 most incentive fees for external managers are structured with a
high water mark
42
SEC Filings
• In order to file with the SEC for an initial public offering, a
REIT will prepare and file a registration statement on
Form S-11
• The S-11 requirements differ from those for Form S-1
• In addition, REIT issuers also must consult SEC Industry
Guide 5
43
40 Act Exemption
• A REIT may qualify for an exemption under section
3(C)(5)(C) of the Investment Company Act of 1940 (the
“40 Act”):
 Available for entities primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate;
 Generally applies if at least 55% of the REITs assets are
comprised of qualifying assets and at least 80% of its assets are
comprised of qualifying assets and real estate-related assets.
 For these purposes, qualifying assets generally include
mortgage loans and other assets which are the functional
equivalent of mortgage loans.
44