Discuss the kinds of real estate securities that trade publicly
The idea
Listed real estate comes in several forms. Real estate investment trusts own, and usually operate, income-producing property and avoid corporate income tax on income they pay out, provided they distribute most of their taxable income, at least 90% under US rules, with other countries setting their own, and meet tests on assets and income. Equity REITs usually specialise by property type, such as shopping centres, offices, apartments, storage, healthcare or industrial. Mortgage REITs hold property loans or mortgage-backed securities and behave like leveraged fixed-income vehicles. Real estate operating companies are ordinary taxable companies that can retain earnings and develop or trade property freely. Residential and commercial mortgage-backed securities give debt exposure. The trap is assuming REITs are bond-like because they pay high dividends: equity REIT returns depend on rents and property values.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Argue why NAVPS, the net asset value per share, suits the valuation of listed real estate securities, and use forecast cash net operating income to estimate it
- Explain the role of FFO (funds from operations) and AFFO (adjusted FFO) in valuing REITs
- Value a REIT share by discounted cash flow, by net asset value and by relative value using price-to-FFO and price-to-AFFO multiples, and interpret the results
- Weigh the pros and cons of holding real estate via listed securities rather than private vehicles