Real Estate Investment Trust (REIT):
An entity becomes REIT when it fulfills certain provisions. REIT acts as a pass through entity. REIT transfers all its earnings and capital gain directly to the shareholders. Taxes are not paid by REITs on its earnings. However, the dividend income given to the shareholders is taxed.
The list and characterized equity REITs based on the property types :
Industrial/office: It contains those REIT that holds industrial property, office and a mix of both.
Retail: These further contain regional malls, outlet centers as well as free-standing retail properties.
Residential: The real estate is further divided into multi-family apartments and the communities that manufacture homes. Some also include student housing and military housing under this category.
Diversified: It includes diverse category of properties.
Lodging/Resorts: It includes hotels, motels, and resorts.
Health care: These REITs own hospitals and other health related care and support facilities.
Self-storage: There specialty lies in the holding of self-storage facility.
Specialty: It includes variety of properties like theaters, prisons, cellular towers and many more. This segment of the industry is growing rapidly.
A real estate investment trust (REIT) is a trust that has been elected to qualify under certain tax provisions. It is a pass-through entity that distributes to its shareholders all of its taxable earnings in addition to any capital gains generated from the sale of properties.
The three principal types of REITs are equity trusts, mortgage trusts and hybrid trusts. The trust which acquires property interests is called equity trust. The mortgage trust purchases mortgage obligations and become a creditor. The combination of both equity and mortgage trust is known as hybrid trust.
The financial statements of the trust have been given in the problem. The financial ratio which would be required for the analysis is the earning per share (EPS), Net operating income (NOI), funds from operation (FFO), Return on Assets (ROA).
Assuming the dividends are 95% of the EPS, the dividends would be,
From the above calculation the dividend which the company pays is $2.15 per share and the dividend yield is 8%. Hence, the indicated price would become
The price range for the company is
Given, that the market research indicates that investors Pay (12 x FFO) for comparable REITs. Hence in this case the price would be now
The price range is
The net asset value is calculated using the formula
Substituting values in the above equation the NAV is calculated as follows:
Hence, the NAV with the blended capitalization of 10% is