TITLE

TITLE

REIT Accounting Its an Art Not a Science Carl T. Berquist Deputy Director of Arthur Andersen (AA) Real Estate and Hospitality Services Group (REHSG) Worldwide Head of AA Southeastern U.S. REHSG and Metropolitan Wash., D. C. REHSG Practice National Association of Real Estate Investment Trusts (NAREIT) - Associate Board Member Carl T. Berquist Experience

Initial and Secondary Public Offerings Assisting in various private real estate capital raises Financial modeling, projections, strategic planning Overview REITs Market Performance Indicators FFO AFFO FAD EBITDA Debt to Market Cap Performance Analysis Application of Accounting Policies

Real Estate Investment Trust (REIT) Assets are primarily composed of real estate held for the long term Income mainly derived from real estate Pays out at least 95 percent of taxable income to shareholders One level of taxation Mutual fund for real estate REIT Rules Income Tests Asset Tests

Widely Held 95% Distribution Requirement How Many REITs Are There? Over 300 U.S. REITs, 216 Publicly Traded 168 33 15 Annual Total REIT Security Offerings $ Billions 70 60 50 40

30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 Year-end Market Capitalization $ Billions 180 160 140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998

REIT Advantages and Disadvantages Disadvantages Advantages No corporate income taxes paid Liquidity and access to capital Public market pricing Expert management

Strong institutional investor interest Paying out 95%+ of net income reduces internal capital for growth Pay-out requirements force dependence on healthy capital markets Operating businesses must be owned and operated outside of the REIT

Being placed into REIT Box limits potential investor universe Growth opportunities Lower debt levels Market expectations limit leverage Corporate governance GAAP accounting issues

Independent analyst review Attractive returns Dissecting the REIT Income Statement Revenues XXXX Operating Expenses (XXX) EBITDA XXX Interest Expense (XX) Funds From Operations XXX Depreciation & Other (XXX) Net Income

XXX Debt Principal Amortization (XX) Normalized Cap Exp (XX) Tenant Improvements (XX) Depreciation & Other XXX Funds Available for Distribution XX Funds From Operations (FFO) Net income (GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures

Evolution of FFO NAREIT white paper Net income not a satisfactory measure Conventional P/E multiples not meaningful FFO/Share equivalent to EPS Definition varied in practice Key benchmark statistic Used to compare to peers Key FFO Measurement Benchmarks

Growth Rates Payout Ratios (Dividends/FFO) FFO Multiples Growth Rates Done on a Per Share Basis Compared to Peers Quality of Earnings Core vs. Accounting Gimmicks Accretive Acquisitions Payout Ratios Safety of Dividend

Retained Captial FFO Multiples Similar to PE Ratio Drives Share Price Share Price/FF0 per Share = Multiple The Industry Average is 10 - 12 Times Several Subjective Variables Management

Business Strategy Leverage Quality of Earnings Dividend Growth Payout Ratio Maximum price a REIT can pay for $10 million in FFO and not be dilutive Company FFOMultiple Breakeven Purchase Price Cap Rate A 10.7x $107mill 9.3% B 10.2 x

C D 9.6 x $102 mill $96.0 mill 9.8% 10.4% E 9.1x 6.9 x $91.0 mill $69.0 mill 11.0% 14.5% Adjusted Funds From Operations (AFFO)

FFO adjusted for straight-lining of rents, as well as a reserve for recurring capital expenditures (including tenant improvements) Similar to FAD Funds Available for Distribution (FAD) Another Type of Payout Ratio Dividend / FAD Highlights Safety of Dividend Shows Ability to Grow Dividend The Lower the %, the Greater the

Ability to Grow More than 100% Shows the Dividend Cannot be Sustained Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) EBITDA/Interest Coverage Ignores capital structure The higher the ratio the greater the ability to grow Can always purchase EBITDA Debt to Market Capitalization

Total Debt / (Debt + Equity Capitalization) The Lower the Ratio, the Greater the Ability to Grow Acquisitions can be leveraged Expansions can be financed Reduced Refinancing Risk Stock Price Quality Earnings Growing FFO Strong Management Well Defined Growth Strategy Low Debt to Market Cap

Ability to Execute Accounting Gimmicks Capitalization vs. expense Straight-lining of rental revenue Tenant improvement costs vs. rental rates Off balance sheet financing Off balance sheet ventures One time transactions FFO adjustments

deferred finance fees percentage rent preferred returns unusual items Clarkson Acquisition reserves Leverage (Mark-to-Market) FAD pay out ratio Clarkson The company continued its innovative policy of renovating apartments to fit specific tenant needs and notes that this is a growing source of revenue for the future.

States Tenant improvements Income from joint ventures Internal development costs Straight-lining of rents American Reserves Other adjustment Performance Indicators Original Company

FFO 1998 1997 %Inc. PER SHARE FADPayout 1998 1997 1998 EBITDA 1997 %Inc. Debt-To-Mkt-Cap Clarkson 0.79 0.60 32% 102

96 1.56 1.09 43% 60% States 0.48 0.42 14% 91 90 0.80

0.62 29% 48% American 0.38 0.32 19% 91 96 0.45 0.40

13% 19% Adjusted Company PER SHARE FFO 1998 1997 %Inc. Clarkson 0.69 0.60 States 0.44 American 0.34

FADPayout 1998 1997 1998 EBITDA 1997 %Inc. Debt-To-Mkt-Cap 15% 120 96 1.56 1.09 43%

60% 0.42 5% 98 90 0.80 0.62 29% 48% 0.32 6%

116 96 0.45 0.40 13% 19% American As Reported 1998 Funds FromOperations Deduct "Other" Adj. Adjusted FFO Mortgage Principal Pay-downs Normalized FF&EReplacement Normalized Capital Expenditures Funds Available for Distribution FFOPer Share

FADPayout 15,386 As Adjusted 1998 (1,023) (822) (546) 12,995 15,386 (1,456) 13,930 (1,023) (1,919) (546) 10,442 0.38 91

0.34 116 States As Reported 1998 Funds FromOperations Tenant Improvements Adj. Internal Leasing Costs Adjusted FFO Mortgage Principal Pay-downs Capital Expenditures and TI Funds Available for Distribution FFOPer Share FADPayout 6,155 As Adjusted 1998 (407) (106)

5,642 6,155 (100) (380) 5,675 (407) (31) 5,237 0.48 91 0.44 98 Clarkson As Reported 1998 Funds FromOperations Mark-to-Market Acquisition Reserves Adj. Adjusted FFO

Mortgage Principal Pay-downs Capital Expenditures and Ten. Imp. Funds Available for Distribution FFOPer Share FADPayout 23,080 As Adjusted 1998 (2,457) (2,802) 17,821 23,080 (2,100) (805) 20,175 (2,457) (2,802) 14,916

0.79 102 0.69 120 REIT Accounting Its an Art Not a Science Summary There is no easy answer Understand the numbers Research is critical

Recently Viewed Presentations

  • NAME_________________ GROUP PHYLUM CHARACTERISTICS VERTEBRATE HR_____ CNIDIRIA MOLLUSCA

    NAME_________________ GROUP PHYLUM CHARACTERISTICS VERTEBRATE HR_____ CNIDIRIA MOLLUSCA

    Blood enters the atrium and flows to the ventricle. Fish Heart The ventricle is a thick-walled, muscular chamber that is the actual pumping portion of the heart. The ventricle pumps blood into the bulbus arteriosus. Fish Heart The bulbus arteriosus...
  • Archetypes - Midland Independent School District

    Archetypes - Midland Independent School District

    Character Archetypes. The Devil Figure: Offers worldly goods, fame or knowledge to the protagonist in exchange for possession of the soul. (Satan, Hitler) Evil Figure with the Ultimately Good Heart: redeemable devil figure saved by the nobility or love of...
  • River Basin Authority - Rajasthan

    River Basin Authority - Rajasthan

    Contd-----averting intervention, soil conservation, enrichment of soil moisture, ensuring water availability for community use, sustaining lively status of rivers and streams for longer duration in post monsoon era, development of flora and fauna thereby adding and sustaining bio diversity and...
  • NDOP: A Framework for Prayer - Home - Free Church of Scotland

    NDOP: A Framework for Prayer - Home - Free Church of Scotland

    Adoration. Come, let us bow down in worship,let us kneel before the Lord our Maker;for he is our God and we are the people of his pasture,the flock under his care.(Ps 95:6-7). On coming to the house, they saw the...
  • 幻灯片 1 - University of Rochester

    幻灯片 1 - University of Rochester

    Inoue, et al., "Organic Thin-file transistors with high electron mobility based on perfluoropentacene," Japan Society of Applied Physis, Vol. 44, No. 6A pp. 3663-3668, 2005 Gao Z Q, Lee C S, Bello I, Lee S T, Chen R M, Luh...
  • Trabajo Grupal 1

    Trabajo Grupal 1

    Clostridium botulinum Producen esporas que deforman el bacilo, productor del botulismo y resiste altas temperaturas de calor. Paenibacillus Su nombre significa "casi bacilo", provoca una de las enfermedades más importantes de la apicultura afectando las abejas conocida como Loque americana.
  • How to Market SBS to help grow your

    How to Market SBS to help grow your

    This learning track helps with moving forward and tracking progress. (32 weeks) A Business Plan For Yourself - Use this learning track to start heading down the right track - action oriented and focused on the vision for your business...
  • Economic Notes - Weebly

    Economic Notes - Weebly

    Business Cycles. An economic expansion is a period of economic growth measured by a rise in real GDP. In the expansion phase, the economy enjoys plentiful jobs, a falling employment rate, and business prosperity. The peak is the height of...