1i. You have been presented with the following set of financial statements for National Property Trust, a REIT that is about to make an initial stock offering to the public. This REIT specializes in the acquisition and management of warehouses. Your firm, Blue Street Advisors, is an investment management company that is considering the purchase of National Property Trust shares. You have been asked to prepare a financial analysis of the REIT.
a. Develop a set of financial ratios that will provide Blue Street Advisors with useful information in the evaluation and comparison of National Property Trust with other REITs.
b. Your research also indicates that the shares of comparable REITs specializing in warehouse acquisitions in the same regions are selling at dividend yields in the range of 8 percent. Price multiples for these REITs are about 12 current FFO. What price range does this suggest for National shares? What does this price range imply about the amount of dividend that National would have to pay to be in line with comparable REITs?
c. What is the NAV for National Property Trust assuming that a blended capitalization rate of 10 percent would be applicable for the properties owned by Blue Street Advisors?
1ii. What are the general requirements regarding income, investments, and dividends with which a REIT must comply to maintain its tax-exempt status?
2i. Robust Properties is planning to go public by creating a REIT that will offer 1 million shares of stock. It is currently trying to develop a pro forma set of financial statements. Robust is faced with a number of questions about its handling of some accounting and financial disclosure issues.
The management of Robust Properties has asked you to prepare preliminary pro forma financials for the next three years. Specifically, you should have (1) a beginning balance sheet, (2) operating statements for each of the next three years, and (3) all relevant financial ratios for year 1 results only. Robust will pay all financing fees, tenant improvements, and lease commissions upon commencing operations. It would like to pay a minimum dividend of $4.00 per share.
In preparing your pro forma operating statements, Robust wants you to consider the effects of reporting in the following two ways:
a.What would EPS, FFO, and ROC be under both approaches? How should Robust think about its accounting policy?
2ii .What are the three principal types of REITs?
3i. Atlantis REIT expects an income of $8.00 per share. This includes a deduction of $2.00 per share for depreciation. Atlantis did not have any gains from the sale of real estate. Its properties are mainly apartments, and you believe that apartments are currently selling on average at about an 8 percent cap rate. Atlantis has 1 million shares outstanding and its balance sheet shows liabilities of $40 million. Comparable REITs have FFO multiples of about 10. Atlantis is expected to pay a dividend during the next fiscal year of $6.00 per share and to increase those dividends at about 2 percent per year in the future. Investors in REITs like Atlantis usually expect a return of about 12 percent.
a.What is the FFO and value per share based on an FFO multiple?
b.What value per share is indicated using a dividend discount model?
c.What is the value per share implied by the net asset value of the properties?
3ii. List and characterize equity REITs based on their investment objectives.
4.What is the difference between earnings per share (EPS), funds from operation (FFO), and dividends per share?
5.Explain how an investor in an equity REIT may receive a current dividend, part of which may be tax-deferred.
6.What are some important lease provisions of which investors should be aware when analyzing the financial statements of REITs?
7.What is a mortgage REIT?