REITs

Real Estate Investment Trusts

James Hurt

Cincinnati Model Club April 2004

(from material provided by Herb Barnett, Director, NAIC Computer Group)

Definition of REIT

• Corporation or business trust

• Must pay out 90% of its net income to shareholders

• Exempt from Federal Taxes

REITs• Business is to buy (and sell),

manage, and maintain real estate for rent or lease

• May specialize in one kind of real estate or diversify with different kinds of property

• May be in one region of the country or in various parts of country

Categories of REITs

• Apartments• office buildings• industrial properties• shopping malls• outlet malls• storage facilities

Investment Characteristics

• Moderate growth potential• Income stocks

– Dividend is a large portion of the Total Return

• Low correlation between REITs and the broader market

• High debt levels - 50 to 70% not uncommon

Kimco Realty Corp.

Moderate Growth

Kimco Realty Corp.

High Payout Ratio and High Yield

Investment Characteristics

• We are investing in the real estate property and in management capabilities of the REIT

• Self-managed REITs tend to provide better total return and liquidity with less risk

Potential Problems

• Sensitive to outside economic forces– Interest rate changes– Health of the economy– Demographic changes

• Sensitive to the Real Estate Cycle– Each segment has its own cyclical

pattern

Slide produced by Herb Barnett, NAIC Computer Group

Tight R.E. Market

Rent Increases

Increased Profits

Over-building

Excess Capacity

Renter’s Market

Pressure on Rents

Reduced Profits

Less Construction

Reduced Capacity

Demand

Supply

Real Estate Cycle

Data Entry using V. L.

• For Total Revenue (Sales) add Rental Income and Other Income

• Instead of EPS use Funds from Operations (FFO) per share

• For the Tax Rate enter 0.• Do not use the V. L. Quarterly

Data.

Value Line Data you should use

FFO per share

Rental Income +

Other Income

0% Tax Rate

OPS Data

• For Revenues OPS uses Interest Income + Non-Interest Income.

• OPS uses EPS instead of FFO for Per Share Data.

• OPS does provide Quarterly Data (Revenues and EPS) for PERT.

Next Month

• Will discuss– More about Investment Concerns– Quarterly Data– FFO vs. EPS