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Model Club Agenda
9:30 Call to Order,Welcome Guests
9:35 Recording Partner’s Report
9:40 Financial Partner’s Report
9:50 Old Business
9:50 New Business
9:50 Education Segment
10:15 Stock Study
10:55 Portfolio Review
11:10 Investment Decisions
11:20 Future Stock Presentation
11:30 Adjourn
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REITs
Part 2
Real Estate Investment Trusts
James Hurt
Cincinnati Model Club
(from material provided by Herb Barnett,
Director, NAIC Computer Group)
Where We Left Off Last
Month
Next month:
Will discuss
More about Investment Concerns
Quarterly Data
FFO vs. EPS
More Characteristics of
REITs
Must have at least 75% of their
total investment assets in real
estate.
Must receive at least 75% of their
gross income from rents or
mortgage interest
Have no more than 20% of assets
consist of stocks in taxable REIT
subsidiaries.
Investment Concerns
Equity REITs own the properties.
Mortgage REITs own a portfolio of
mortgages.
Hybrid REITs are a combination of
the above.
Investment Concerns
Self-managed REITs are Equity
REITs that also manage and
operate the properties.
Self-managed REITs tend to
provide better total return and
liquidity with less risk.
REITs and Interest Rates
The stock price of a REIT moves
somewhat like a bond.
As interest rates rise there is a
downward pressure on the stock
price of a REIT.
EPS for Manufacturing
Sales
Minus
Cost of Goods Sold
Minus
Overhead *
Minus
Taxes
Equals Net Profit
Net Profit divided by
number of shares outstanding
equals Earnings Per Share
* Overhead includes depreciation and
amortization
FFO
Funds From Operations
FFO per share start with the
Net Income and add back in real
estate depreciation and
amortization (excluding deferred
financing costs).
This number is then divided by the
number of shares outstanding to
determine the FFO per share
Why Use FFO
We substitute Funds from
Operations for Earnings because
real estate tends to appreciate, not
depreciate.
Many people feel that, for this
reason, Funds from Operations is a
better indication of profitability.
Value Line provides a line of FFO
per share numbers for annual data.
Quarterly Data
Value Line provides neither
Revenues nor FFO for each quarter.
Use the data in the 10Q that the
company files with the SEC and
calculate your Quarterly Revenues
and FFO from those numbers.
Quarterly Revenue
Add Rental Income and Other
Income to get Total Revenue
Quarterly Revenue
Rental Operations $191,350
Service Operations
$11,435
Interest Income
$1,508
Sale of Land
$4,629
Total Revenues
$207,572
Quarterly Funds from Operations
Net Income
$32,886
Depreciation & Amortization
$52,397
Total
$85,283
Divide this number by the number
of diluted shares outstanding.
Quarterly Funds from Operations
Sometimes a company will give you the
quarterly Funds from Operations in the 10Q.
Dividing this number by the diluted shares
outstanding may give you a more conservative
amount.
Conclusions
A REIT is a different type of
investment.
Like Banks, you have to do some
calculations on your own to
understand a REIT.
There will not be a lot of price
appreciation in a REIT, you buy for
the income.