REITS Part 2. Mini Investment Class by the OKI Tri-State Chapter

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1 REITS Part 2 Mini Investment Class by the OKI Tri-State Chapter Courtesy Cincinnati Model Investment Club Based on Original Presentation by Gretchen and Jim Hurt Revised by Sandy and Bob Lowery From material provided by Herb Barnett, Director, NAIC Computer Group

2 Disclaimer The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting National Association of Investors Corporation ( BI ) or the National Investors Association, or the OKI Chapter Board. The views expressed are those of the instructors and do not necessarily represent those of BetterInvesting, or OKI. Investors should conduct their own review and analysis of any company of interest before making an investment decision. 2

3 More Characteristics of Real Estate Investment Trusts (REIT) 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. 3

4 Investment Concerns Equity REITs own the properties. Mortgage REITs own a portfolio of mortgages. Hybrid REITs are a combination of the above. 4

5 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. 5

6 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. 6

7 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 7

8 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 8

9 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. 9

10 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. 10

11 Quarterly Revenue Add Rental Income and Other Income to get Total Revenue 11

12 Quarterly Revenue Rental Operations $191,350 Service Operations $11,435 Interest Income $1,508 Sale of Land $4,629 Total Revenues $207,572 12

13 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. 13

14 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. 14

15 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. 15

16 For more ways to learn: Contact the OKI Chapter Board for a One Hour Classes to Clubs (We Bring OKI Classes Directly to Your Club) Or Attend One of our OKI Special Events or Edufests Cincinnati: Mary Thomas Mcthomasp@fuse.net Dayton: Gene Senter EMIDDLE42@aol.com Columbus: Dianne Jordan dijord00@aol.com 16

17 And... Don t Forget The OKI Online Classes Learn From The Comfort Of Your Own Home - For Details: Refer To Your Printed OKI Newsletter Or Visit The OKI Website: 17